Riverside Housing Association Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lawrence Collins |
| Judgment Date | 03 October 2006 |
| Neutral Citation | [2006] EWHC 2383 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No:CH/2006/APP/0019 |
| Date | 03 October 2006 |
[2006] EWHC 2383 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Justice Lawrence Collins
Case No:CH/2006/APP/0019
Miss Alison Foster QC (instructed by KPMG LLP) for the Appellant
Mr Paul Lasok QC and Mr Ian Hutton (instructed by HM Revenue and Customs) for the Respondent
APPROVED JUDGMENT
June 29 and 30, 2006
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic
IIntroduction
Riverside Housing Association ("Riverside") is a company limited by guarantee incorporated under the Provident Societies Act 1965. It is a charity, and a registered social landlord under the Housing Act 1996. The principal activity of registered social landlords such as Riverside (also known as housing associations) is the provision of social housing for those in need by reason of physical or mental illness or disability, age or financial disadvantage.
The issue on this appeal by Riverside from the Tribunal is whether the cost of construction of the new Midlands divisional head office in Leicester is zero-rated.
By letter dated March 28, 2001 Riverside's representatives requested approval for the issue of a certificate of zero-rating. The appeal to the Tribunal was brought against a deemed decision to refuse to permit zero-rating. Riverside appealed on the basis that the development of the two lower floors of the divisional head office qualified for zero-rating under Item 2 of Group 5 of Schedule 8 to the Value Added Tax Act 1994 ("the 1994 Act"). The Tribunal dismissed the appeal.
By section 4(1) of the 1994 Act: "VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him."
Under section 30 of, and Schedule 8 to, the 1994 Act, the supply of construction services (other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity) is zero-rated where those services are within Schedule 8, Group 5, item 2(a):
"The supply in the course of the construction of –
(a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; …"
Note (6) to Group 5 provides: "Use for a relevant charitable purpose means use by a charity in either or both of the following ways, namely – (a) otherwise than in the course or furtherance of a business; (b) as a village hall or similarly in providing social or recreational facilities for a local community". For the background to this provision see Commissioners of Customs and Excise v Yarburgh Children's Trust [2002] STC 207, para 10.
By section 94:
"(1) In this Act "business" includes any trade, profession or vocation.
(2) Without prejudice to the generality of anything else in this Act, the following are deemed to be the carrying on of a business –
(a) the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members; and
(b)the admission, for a consideration, of persons to any premises."
By Article 4 of the Sixth Directive (77/388):
"1 'Taxable person' shall mean any person who independently carries out in any place any economic activity specified in paragraph 2 whatever the results of that activity.
2 The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity."
By Article 4(5) of the Sixth Directive:
"States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.
However when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition."
Section 33 of the 1994 Act contains provision for refund of VAT to public bodies, but it enumerates in section 33(3) the bodies to which the section applies, and it is common ground that housing associations are not within any of the listed categories.
IIRiverside's activities
Riverside was formed in 1928, and now manages over 22,000 properties in 31 local authority areas. It generally holds the freehold or long leasehold of the properties which have been transferred to it by local authorities or which it has built, and lets them on assured tenancies to residential occupiers. From time to time properties are sold to tenants in accordance with "right to buy" provisions, and in addition properties become surplus to requirements and are sold.
Riverside's income is derived principally from rents received from tenants (much of which is derived from housing benefit received by them) and from grants paid by the Housing Corporation, the agency charged with the administration of public housing policy. Riverside's capital resources are derived from grants paid by the Housing Corporation, from borrowing, and from the proceeds of the sale of properties.
As at March 31, 2005 Riverside had assets of about £678 million (of which £397 million had been financed by grant), and it had long term loans of about £208 million. Its surplus for the year was £4.4 million which (as in previous years) was re-invested in its activities. Surpluses are not distributed.
Housing associations are subject to an extensive regulatory framework, which is designed to ensure that social housing is owned and managed by responsible organisations which comply with minimum prescribed standards in, for example, the condition of their housing stock and their relations with their tenants, and the public money which underwrites their activities is spent and accounted for properly.
The grants subsidise rents, but more particularly finance major repairs. Housing associations are restricted in the manner in which they may conduct their operations. There are upper limits on the rents which they may charge, which are generally significantly below the notional market rent for the properties, rather than a normal economic level. They are subject to constraints on remedies against tenants in breach of their tenancy agreements, and eviction for non-payment of rent is very much a final resort. In Poplar Housing and Regeneration Community Association Ltd v Donoghue [2002] QB 48 it was held that the role of a housing association in providing accommodation for the defendant and then seeking possession was so closely assimilated to that of the local housing authority that it was performing public functions and was therefore a functioning public authority for the purposes of the Human Rights Act 1998.
Riverside conducts its affairs in a manner different from an ordinary commercial organisation in that it has philanthropic objectives, does not set out to (and indeed cannot) maximise its profits, does not distribute such profits as it earns, and is subject to much greater regulation than a company in the commercial sector.
IIIThe decision of the Tribunal
The Tribunal's decision can be summarised as follows.
It is obvious from the wording of Note (6) that charitable purposes and business activities are not mutually exclusive, and that business activities pursued for charitable reasons have no special status; that the motive of the activity is charitable may possibly be a factor to take into account, but cannot be determinative. The restriction is designed to ensure compliance with what is now Article 28(2) of the Sixth Directive, and to respect the principle that exemptions (of which zero-rating is an example) are construed narrowly: Customs and Excise Commissioners v Yarburgh Children's Trust [2002] STC 207, at para 10.
It was common ground that section 94(1) must be construed so as to conform with the Sixth Directive, in particular Article 4(2). It was evident from the terms of the Directive that the scope of business, or economic, activities was wide, so that there must be a presumption that any supply of goods or services, in return for consideration, amounted to an economic activity.
It was agreed that the phrase "provision of social housing" was a fair summary of Riverside's relevant activities. Riverside accepted that only its making supplies of rented housing might amount to an activity pursued otherwise than in the course of business, and expressly disavowed any contention that its sales could be so described.
Mr Morris, the finance director of Riverside, referred in his witness statement to "the business" of Riverside and the word "business" was also used in the Housing Corporation's publications to describe the activities of registered social landlords. The perception of both the finance director and the regulatory body was a significant pointer where the 1994 Act, Mr Morris and the Housing Corporation were all using the word in its normal English language sense.
The expressions "business" and "economic activity" had a wide meaning. Article 13 of the Sixth Directive contained a list of...
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