Is a charity carrying on a business for VAT purposes?
In the recent case Longridge on The Thames (Longridge) v HMRC [2013] UKFTT 158 (TC) the First-Tier Tribunal was once again asked to consider whether the activities of a charity amounted to the carrying on of a business activity for VAT purposes. Longridge is a charity formed in 2007 to provide boating and other water-based activities and facilities for young people from its premises on the banks of the Thames. Certain courses are also available for adults.
To improve the facilities on offer, Longridge had constructed a two storey building, with the ground floor designed as a toilet and shower block and the upper floor to be used as training and meeting rooms. On the presumption that the building was to be used solely for a relevant charitable purpose, otherwise than in the course or furtherance of a business (items 2, 4 and Note 6 to Group 5, Schedule 8 VAT Act 1994), the building contractor did not charge VAT. As an aside, it transpired Longridge had not issued to the builder the zero-rating certificate as required by Note 12 (b), but HMRC made no issue of that omission in these proceedings.
HMRC claimed that the nature of the activities carried on by Longridge amounted in whole or in part to the carrying on of a business, therefore denying them the entitlement to claim zero-rating relief on the construction. On the facts of the case, Longridge was acting in "a business-like manner". It had a full-time CEO and fundraiser with a business plan; in the previous year operating income had amounted to 80% to 90% of operational expenses; it is active on a considerable scale; it is professionally run, seeking out paying customers beyond its charitable remit to subsidise its activities; and the way it provides its courses is consistent with those of a commercial provider. Income in 2010/11 was £580,000 and it was holding assets in excess of £2m.
The issue to be decided was whether, at the time the relevant construction services were supplied to Longridge, they intended to use the building for a relevant charitable purpose, or in the course or furtherance of a business.
In considering this issue, the tribunal looked to the six indicators of whether an activity amounts to the carrying on of a business as first set out in Customs & Excise Commissioners v Lord Fisher QB [1981] STC 238.
The six indicators were summarised by Lord Slynn in ICAEW v C&E Commissioners HL [1999] STC 398 at p404e as follows:
"...was the activity (a) a serious undertaking earnestly pursued; (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognised business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; and (f) such as consisted of taxable supplies of a kind commonly made by those who seek to profit from them."
Applying these indicia to the present case, while it was clear that the activities of the charity were managed in a professional and "business-like" manner, did not tell the whole story. The charges for the course fees were balanced between the need to protect the long-term viability of the charity for future generations and their affordability for the young people Longridge wishes to benefit. The most significant factor was the reliance on unpaid volunteers to carry out the activities. When taken together the factors all pointed to the intrinsic nature of Longridge's activity being in furtherance of its stated charitable objectives. It followed that the charity satisfied the criteria that enabled it to receive zero rated construction services.
The judgement considers the relevant UK and European legislation and cases familiar to the charity sector, including C&E Commissioners v Yarburgh Children's Trust Ch D 2001 [2002] STC 207 and C&E Commissioners v St Paul's Community Project Ltd Ch D 2004 [2005] STC 95, both of which concerned the activities of charities and whether they were by way of business. So in many ways, the Longridge decision is a useful guide for the charity sector when debating the factors to take into account when the thorny question is raised as to what is or isn't a business activity. Unfortunately, we will have to wait and see if this remains the case as we understand HMRC has now appealed this decision to the Upper Tribunal. Watch this space!
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