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AN APOCRYPHAL STORY has it that counsel once started a case before former Master of the Rolls, Lord Denning, by declaiming 'My client is an eighty-year-old washerwoman'. He then paused before continuing, 'However, my Lord, there are other reasons for this appeal…'
Most students, encountering Lord Denning's judgments for the first time as they study contract law, admire his determination to do what he saw as right and just, even if it involved some creative interpretation of precedent. Whilst being an eighty-year-old washerwoman was not quite enough to win a case before him, it was certainly a good start. Depending on their political views, however, many students begin to revise their opinion when he applies the same approach to industrial relations, where he was widely seen as anti-union. Perhaps thinking with your heart rather than your head is not the right way to decide legal cases.
'There is no equity in a taxing statute', says the well-known maxim, and therefore tear-jerker cases should not be such a problem in revenue law. Two VAT cases in recent years, however, show that the problem can arise here too.
Yarburgh Children's Trust [2002] STC 207
The trust was a charity, with a purpose of providing day care facilities to children that needed them. The trust owned a large Victorian building, in part of which it provided those services (the rest was let to provide an income for the trust). However, in the garden there was also a summer house. A separate charity, the Yarburgh Community Playgroup, occupied the summer house under licence for a nominal fee. It was a typical local playgroup, taking children from the general community, although some priority places were taken by the local authority. The committee running the playgroup was voluntary and made up predominantly of parents, although presumably the main staff were paid as is normal.
By 1996 the building was unsafe and the trust served notice on the playgroup to quit. A successful grant application was made by the trust to the National Lottery to replace the building, and the playgroup also raised funds towards the construction. A new building was erected, and (as a condition of the lottery grant) the playgroup was granted a formal 21-year lease at an initial rent of £2,800 a year. This was significantly less than a full commercial rent.
Zero rating
The trust applied to have the costs of the construction of the new building zero rated under VATA 1994, Sch 8 item 2 of Group 5, which covers 'the supply in the course of the construction of … a building … intended for use solely for … a relevant charitable purpose'. Note 6 says that one way to meet this provision is use by a charity 'otherwise than in the course or furtherance of a business'.
Customs refused zero rating on the grounds that the grant of the lease was business use. The tribunal disagreed, and allowed the appeal; so the case came to the High Court.
There were two tests which both needed to be met if the lease of the building was not to be a business activity. The first was that the lease had to be a non-business activity for the trust, and the second was that the activities of the playgroup had to constitute a non-business activity.
Lease a business activity?
There are several precedents on what constitutes a business activity. The case of CCE v Morrison's Academy Boarding House Association [1978] STC 1 concerned a charitable association which ran boarding houses for pupils at the Morrison's Academy. For practical purposes these operated on similar rules to the houses operated by other boarding schools, with housemasters, matrons, rules about dress, prep and games; the only difference was the separate legal personality of the Association which owned the properties.
Even though the Association fixed its fees at a rate which did not make a profit, and any surplus could not be distributed to the members, the Inner House of the Court of Session decided that it was a business. If the activities are predominantly those of making taxable supplies to consumers, and especially where there are similar supplies made commercially for a profit by other businesses, then the activities will still constitute a business regardless of the lack of a profit motive.
On the other hand, in Institute of Chartered Accountants in England & Wales v CCE [1999] STC 398, it was held that merely making supplies for a fee did not constitute a business, so the membership fees charged by the ICAEW were not liable to VAT. In CCE v Lord Fisher [1981] STC 238, the organiser of a shoot for friends and relations charged them a considerable amount as their share of the expenses, but was held not to be making supplies in the course of a business — an activity which is no more than an activity for pleasure and social enjoyment is not a business.
One might have thought that the Yarburgh case fell clearly on the Morrison's Academy side of the line. However, the judge held that it was not a business activity. The lease had only come into being because the National Lottery had required it as one of the funding conditions (in order to ensure that the playgroup had security of tenure), and the rent was set at a low level. The purpose of the lease was to facilitate the use of the building by the playgroup.
Is the playgroup a business?
That would not be enough if the playgroup itself was deemed to be running a business. Again, on the principles of Morrison's Academy, it might seem that it was. Although the playgroup was not making a profit, and was run by a voluntary management committee, it is making supplies not that dissimilar to those of a commercial nursery.
But yet again, the judge found for the trust. 'The overwhelming impression' was of a co-operative venture, struggling to balance its costs with the need to remain affordable. This, the judge said, was very different from a commercial nursery — the playgroup was merely fulfilling its charitable purposes. It is hard to see how this can be reconciled with Morrison's Academy, where surely the same analysis could have been applied.
Of course, Yarburgh was a deserving case. There are two charities involved and no commercial motive at all. One quasi-public body, the National Lottery, requires a lease, but Customs and Excise say that is fatal to the case. Surely this is a case where there IS equity in a taxing statute, and the equity is to allow zero rating? Whatever the reason for the decision, the right result has been reached.
St Paul's
Unfortunately, the problem with this approach is that the decision in one case is going to be precedent, or at least persuasive authority, in another. CCE v St Paul's Community Project Ltd [2005] STC 95 is the latest case in this area.
St Paul's Community Project was a registered charity which carried on several activities from a building it owned in a disadvantaged area in Birmingham. One of them was a day nursery, partly funded by grants. The balance was made up by charging fees to the parents, pitched at a level which just covered the rest of the costs and were significantly lower than commercial rates.
The project had built a new centre to house all of its activities, including the nursery. The issue, yet again, was whether the work could be zero rated. Customs and Excise agreed that the parts of the building used for activities not financed in any way by fees were zero rated, but insisted that the part devoted to the nursery was standard rated, since the nursery was a business activity.
The main difference between St Paul's and Yarburgh's activities was that St Paul's was run by a committee which had a minority of parents as members. The co-operative element which had been stressed by the judge in Yarburgh was therefore absent. However, this did not stop the tribunal and subsequently the High Court from finding in favour of the taxpayer.
The fundamental features relied on in the case seem to be twofold:
1. The fees charged are set at levels which do no more than recover the costs which are not met by grants or other funding.
2. The activities being carried on which are alleged to constitute a business are the charitable activities which are the purpose of the organisation.
Again, it is hard to see why the same analysis should not apply to the Morrison's Academy case. It was a charity, the provision of the boarding places was its purpose. They should not, therefore, have been subject to VAT.
Implications for other charities
The reasoning in St Paul's does not mean that all activities of charities qualify for non-business treatment. Running a shop to fund the charity's work would still be a business — or at least, that is what the cases say. But would that always be true? What about a charity set up to help those in poverty in an African village by bringing the products they make over to the UK and selling them, at a mark-up that does no more than cover their costs? That would surely be directly fulfilling a charitable purpose (the relief of poverty), and should therefore be non-business.
There is certainly a strong argument on the basis of the decision in St Paul's that any school building constructed by an educational charity should qualify for zero rating — which ought to include most of the major public schools. It is therefore ironic that many attempts at avoidance in this area have concerned schools; for example CCE v Robert Gordon's College [1995] STC 1093.
In another article in this week's issue by Dave Jordan, the suggestion is made that Yarburgh is an example of Customs and Excise unfairly pursuing a charity. In this case, I disagree. Whilst each step in the judicial interpretation may seem reasonable in isolation, the cumulative effect seems to have taken the law a long way from its starting point, and arguably away from the provisions of the Sixth Directive. Perhaps it is time for the recent case law to be reviewed in a higher court.
