Tax Case - Reciprocity

The Court of Appeal overturned the High Court's decision in Commissioners of Customs and Excise v Church Schools Foundation Ltd.

A CHARITABLE FOUNDATION owned school properties and received grants from a related charitable company which ran the schools. In return, the foundation carried out building works on the properties. The Court of Appeal ruled against Customs' argument that the building works were done for a consideration.

Background

The Church Schools Foundation was a charitable company which owned and operated schools. In 1993, a second charitable company was formed to run the schools, while the foundation managed the school properties. In March 1993, the foundation granted a lease of the properties to the company at a market rent with a rent review clause. At the same time, it was arranged for cash surpluses which arose occasionally in the company to be transferred to the foundation.

Between 1995 and 1997, the company made four grants to the foundation totalling £4.8 million. Between 1993 and 1998, the foundation spent £25 million on capital works on the school properties which were funded by the proceeds of the sale of land, grants from the company, bank loans and rents.

Customs assessed the foundation in respect of each grant as being consideration for a supply of services. The foundation appealed.

The tribunal ruled that the grants were not consideration for a supply of services, as there was no reciprocity or direct link between the grants and the service. Customs appealed.

In the High Court, the judge found for Customs, holding that the relationship between the foundation and the company was such that the grants were paid pursuant to a legal relationship, and that reciprocity did exist. The foundation appealed.

(David Milne QC and Richard Vallat for the taxpayer; Melanie Hall for Customs.)

Decision in the Court of Appeal

Sir Andrew Morritt V-C gave the first judgment announcing first that the appeal had not been an easy one to determine. He said that both Article 2 of the Sixth Directive and section 5(2), VAT Act 1994 stated that a supply had to be 'for' a consideration. Thus it was necessary to ascertain the supply of services relied on. Customs said that the services supplied was building work obtained by the foundation for the benefit of the company. Sir Andrew said that the question then was, whether that supply was for a consideration, and if so, what.

The European Court of Justice had developed the concept of 'for' in a number of cases, including Staatssecretaris van Financiën v Coöperative Aardappelenbewaarplaats GA [1981] ECR 445, Naturally Yours Cosmetics Ltd v Commissioners of Customs and Excise [1988] STC 879 and Apple and Pear Development Council v Commissioners of Customs and Excise [1988] STC 221. In essence, there has to be a direct link between the supply of services and the consideration. Then, following Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509 and Commissioners of Customs and Excise v First National Bank of Chicago [1998] STC 850, the link was developed into the existence of a legal relationship between the supplier and the payer.

There was a legal relationship between the company and the foundation, and there was reciprocity between the donations made by the company to the foundation and the building works carried out. However, Sir Andrew considered that it did not appear to him that the works were for a consideration of the donations. He said that the donations were included in the finance for the works, and that such finance was not distinguishable from an interest-free loan from the company to the foundation. Such a loan was not 'consideration' for the works.

Looking at the facts, the foundation was under no obligation as landlord to carry out building works. However, it chose to improve its properties obtaining finance from various sources, including the donations from the company.

Sir Andrew allowed the foundation's appeal. Application for permission to appeal to the House of Lords was refused.

Lady Justice Arden agreed with Sir Andrew, saying that it defied logic to argue that the company 'remunerated the foundation for improving properties which would give the foundation the ability to charge higher rents to the company'. She said that a gift or grant was characterised by the fact that it was not given in recompense for something.

Lord Justice Buxton, however, concluded otherwise. He said that the donations were all used in the building programme, and that the implication was that the company expected something in return for the donations. Orthodox principles of VAT compelled him to dismiss the appeal.

Decision for the taxpayer

(Reported at [2001] STC 1661.)

Commentary by Allison Plager

Importantly, the case offers some clarification of what constitutes a consideration for a supply of services, the key word being 'for'. The existence of a direct link will help, but that link must, in the light of the judgment, be strong, rather than a tenuous implied link.

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