The Charity Tax Group (to which I am technical adviser) has kept a close eye on the litigation relating to Longridge, since it concerns a valuable charity VAT relief, the broadest application of which is of great benefit to many charities.
The line of case law that has allowed the zero rate for new buildings to apply, even where charities ‘sell’ their services, starting with Yarburgh [2002] STC 207, has been based on old legal precedents which have been used in the UK to determine whether or not a person’s activity is a ‘business’. The VAT relief for new buildings applies where the use of the building is (more or less) for non-business activities. The key criterion set by these cases is that one looks not merely at whether charges are made for services, but what the ‘predominant concern’ of the supplier is. If the predominant concern is making supplies for charges, it is a business. If the predominant concern is providing the activity, and making charges is merely a means to that end, it may not amount to a business.
The predominant concern test has always been difficult to understand, being somewhat circular in nature. After all, if you believe that making charges is not your predominant concern, it is because you do not regard your activity as a business, so it seems strange then to use that as the test of what is a business. It is self-suggesting. But in practice, courts have looked at the level of subsidy offered, the use of volunteer labour, and the values of the organisation, to draw these conclusions. This worked well as long as the principle wasn’t pushed too far.
But a crucial aspect was the linking of the concept of ‘business’ in UK law with that of ‘economic activity’ in EU law. It was generally accepted, probably correctly, that the two were to be regarded the same as far as this VAT relief was concerned, but this meant that the definition of ‘economic activity’ in EU law is determinative. HMRC thought that the ‘predominant concern’ test had no basis in EU law. It cited the CJEU decision of Finland (Case C-246/08) in support of this. The First-tier and Upper Tribunals were not prepared to accept that predominant concern was contradicted by this decision, but the Court of Appeal – in Longridge on the Thames v HMRC [2016] EWCA Civ 930 (reported in Tax Journal, 9 September 2016) – has decided that ‘predominant concern’ is incompatible with it. Longridge lost the case, and we face an uncertain future on the application of the relief more widely.
It seems clear that HMRC will challenge any basis for relief using the discredited test. It is possible it will also simply assert that all cases where the services carry charges (however low) must be regarded as ‘business’. But HMRC may yet preserve other traditional tests that are potentially acceptable under EU law, such as whether the activity is carried on in a generally business-like manner, whether it is open to any competition in the ‘market’, and potentially whether it is ‘earnestly pursued’. If so, this will limit application to very small charities, or those which make no charges for the activities housed in the building (whatever the scale of the resultant operation). But the issue of generation of incidental or unpredictable income (perhaps arising ‘downstream’ from the non-business activity) may be considered afresh following this decision. And charities that have planned to make charges may consider other forms of funding, such as crowd funding, or requests for donations. Will HMRC seek ways of trying to allege that these are consideration for supplies and thus still a ‘business’? Only time will tell.
And there is a real cloud hanging over charities that have issued certificates of qualification for the zero rate and which may now find HMRC looking into this. We will need to keep alert to any trend in that direction which might cause distress to a large number of charities. The Charity Tax Group would like to hear of any such cases so the issue can be monitored.
The Charity Tax Group (to which I am technical adviser) has kept a close eye on the litigation relating to Longridge, since it concerns a valuable charity VAT relief, the broadest application of which is of great benefit to many charities.
The line of case law that has allowed the zero rate for new buildings to apply, even where charities ‘sell’ their services, starting with Yarburgh [2002] STC 207, has been based on old legal precedents which have been used in the UK to determine whether or not a person’s activity is a ‘business’. The VAT relief for new buildings applies where the use of the building is (more or less) for non-business activities. The key criterion set by these cases is that one looks not merely at whether charges are made for services, but what the ‘predominant concern’ of the supplier is. If the predominant concern is making supplies for charges, it is a business. If the predominant concern is providing the activity, and making charges is merely a means to that end, it may not amount to a business.
The predominant concern test has always been difficult to understand, being somewhat circular in nature. After all, if you believe that making charges is not your predominant concern, it is because you do not regard your activity as a business, so it seems strange then to use that as the test of what is a business. It is self-suggesting. But in practice, courts have looked at the level of subsidy offered, the use of volunteer labour, and the values of the organisation, to draw these conclusions. This worked well as long as the principle wasn’t pushed too far.
But a crucial aspect was the linking of the concept of ‘business’ in UK law with that of ‘economic activity’ in EU law. It was generally accepted, probably correctly, that the two were to be regarded the same as far as this VAT relief was concerned, but this meant that the definition of ‘economic activity’ in EU law is determinative. HMRC thought that the ‘predominant concern’ test had no basis in EU law. It cited the CJEU decision of Finland (Case C-246/08) in support of this. The First-tier and Upper Tribunals were not prepared to accept that predominant concern was contradicted by this decision, but the Court of Appeal – in Longridge on the Thames v HMRC [2016] EWCA Civ 930 (reported in Tax Journal, 9 September 2016) – has decided that ‘predominant concern’ is incompatible with it. Longridge lost the case, and we face an uncertain future on the application of the relief more widely.
It seems clear that HMRC will challenge any basis for relief using the discredited test. It is possible it will also simply assert that all cases where the services carry charges (however low) must be regarded as ‘business’. But HMRC may yet preserve other traditional tests that are potentially acceptable under EU law, such as whether the activity is carried on in a generally business-like manner, whether it is open to any competition in the ‘market’, and potentially whether it is ‘earnestly pursued’. If so, this will limit application to very small charities, or those which make no charges for the activities housed in the building (whatever the scale of the resultant operation). But the issue of generation of incidental or unpredictable income (perhaps arising ‘downstream’ from the non-business activity) may be considered afresh following this decision. And charities that have planned to make charges may consider other forms of funding, such as crowd funding, or requests for donations. Will HMRC seek ways of trying to allege that these are consideration for supplies and thus still a ‘business’? Only time will tell.
And there is a real cloud hanging over charities that have issued certificates of qualification for the zero rate and which may now find HMRC looking into this. We will need to keep alert to any trend in that direction which might cause distress to a large number of charities. The Charity Tax Group would like to hear of any such cases so the issue can be monitored.
