Riverside Housing Association Ltd v Revenue and Customs [2006] EWHC 2383 (Ch)

[2006] EWHC 2383 (Ch)Venue Royal Courts of JusticeStrandLondon WC2A 2LLTuesday, October 3, 2006
Before
MR JUSTICE LAWRENCE COLLINS
Between
RIVERSIDE HOUSING ASSOCIATION LIMITEDAppellantTHE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMSRespondentAPPROVED JUDGMENTMiss Alison Foster QC (instructed by KPMG LLP) for AppellantMr Paul Lasok QC and Mr Ian Hutton (instructed by HM Revenue and Customs) for RespondentHearing: June 29 and 30, 2006I 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………………………………………………….(Mr Justice Lawrence Collins)Date 2006-10-03

I Introduction

[1]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.[2]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.[3]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.[4]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.”
[5]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; …”
[6]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.[7]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.” (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.”
[8]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.”
[9]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.”
[10]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. II Riverside’s activities[11]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.[12]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.[13]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.[14]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.[15]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.[16]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. III The decision of the Tribunal[17]The Tribunal’s decision can be summarised as follows.[18]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.[19]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.[20]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.[21]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.[22]The expressions “business” and “economic activity” had a wide meaning. Article 13 of the Sixth Directive contained a list of different kinds of supply which Member States must, or may, exempt from VAT. It was implicit from Article 13(A)(1)(g) that “the supply of services …. closely linked to welfare and social security work … by bodies governed by public law or by other organizations recognized as charitable by the Member State concerned” that such supplies were economic activities: if they were not, there would be no need to provide for their exemption. Article 13(A)(2)(a) went on to permit Member States to restrict the exemption to bodies which did “not systematically aim to make a profit” and which “charged prices approved by public authorities or which do not exceed such approved prices” and it followed that a body which satisfied those conditions was nevertheless making supplies in the course of a business.[23]The Tribunal distinguished Customs and Excise Commissioners v Lord Fisher [1981] STC 238 (charges for contribution to expenses of shooting not a business) and Cardiff Community Housing Association Ltd v Customs and Excise Commissioners [2000] V & DR 346 (housing association not pursuing a business). In those cases the payments were made in order to defray expenses and were set at a level which would achieve that objective alone. That was not the manner in which Riverside set its rents. Although rents were controlled (ultimately) by government policy and were artificially depressed, the evidence was that while covering the cost of providing the housing was a factor in calculating the level of the rents, it was not the determining factor. Riverside set out to, and did, make a profit even if it was retained. While in some cases the absence of a profit motive may be enough to demonstrate that there is no business activity, or is at least a strong pointer to that conclusion, that was not always the case: Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1.[24]That a high proportion of Riverside’s capital resources, and much of its income were derived, directly or indirectly from public funds and that it was subject to a greater degree of regulation than other organisations did not affect the conclusion. It was true that without state support it would not be able to carry on its activities, but that did not lead to the conclusion that its supplies were not made in the course of pursuing a business activity. The subsidies did not affect the fact that Riversidewas in the business of supplying accommodation at low cost. It was true that it was subject to a significant regulatory burden, but so too were many wholly commercial organisations, such as those trading in the financial services sector.[25]It was difficult to see how Riverside’s activities of letting houses to tenants did not amount to the “exploitation of … property for the purpose of obtaining income therefrom on a continuing basis” (Article 4(2)). The Tribunal did not agree with the tribunal in the Cardiff Community Housing Ltd case (supra) that there was no “exploitation” when the income derived had to be utilised in the business rather than put to any other purpose, such as the paying of a dividend. Even if the rents were charged at less than a market rate, they represented income derived from properties it owned. The purpose to which the income was put was irrelevant for the purposes of Article 4(2).[26]Accordingly “the inevitable conclusion is that the letting of property in return for payment is an economic activity whether or not it is pursued for social or philanthropic reasons, and that, to use the domestic term, Riverside is engaged in business. Thus Note (6) is engaged, and the new building cannot be zero-rated” (at paragraph 27).[27]The Tribunal observed that Miss Foster QC had also argued for Riverside that alternatively Riverside could secure zero-rating for the new building on the basis that it was a public body, but that she had conceded that even if the argument that it was a public body were correct in principle, it would not lead to that result. Article 4(5) of the Sixth Directive had no direct equivalent in UK legislation. It was given effect by treating as outside the scope of VAT those supplies which were made in the course of carrying on activities described in Article 4(1). That treatment did not have the consequence that supplies to a public body and used by it in order to carry on such activities were zero rated. But they were taxable or exempted in accordance with the usual rules.[28]Although Riverside carried on activities which were in the public interest and were supported by public money, it was not a public authority in the sense meant by Article 4(5). The provision clearly contemplated government organisations which were institutions of a democratic state, and the concept of a public body was to be narrowly construed: Case 235/85 Commission v Netherlands [1987] ECR 1471; Case C-202/90 Ayuntamiento de Sevilla v Recaudadores de Tributos de las Zonas primera y segunda [1991] ECR I-4247.[29]The “other bodies” contemplated by Article 4(5) were those of a kind similar to government bodies, carrying out quasi-governmental functions, of which examples might be the Financial Services Authority and the Housing Corporation, with organisations such as the Institute of Chartered Accountants when undertaking its regulatory role. Riverside did not have a regulatory or similar role.[30]The list of bodies set out in section 33(3) of the 1994 Act was comprehensive and detailed, and none of the categories was apt to include organisations such as Riverside, nor did it come within any of the orders made in accordance with section 33(3)(k).[31]Even if Riverside could bring itself within section 33 it would only be able to recover so much of the input tax it had incurred as was attributable to its non business activities which did not include its letting of accommodation to tenants.[32]As for the argument that Riverside’s status as a public, or quasi-public, body was an indication that its activities were of a non-business character, even if it were so categorized, it would not follow that its activities were of a non-business character. Both Article 4(5) and section 33 contemplated the undertaking by the bodies to which they referred of both business and non-business activities, doing so in order to restrict the benefits they conferred to the latter.[33]It was therefore impossible to conclude that Riverside being a closely regulated body, by its own choice (no institution being compelled to become a registered social landlord), puts it in a special category, so that its activities were for that reason to be regarded as being carried out otherwise than in the ordinary course of business, nor that it was a public body within the sense intended by Article 4(5) and section 33. Accordingly, the Commissioners were right to conclude that the new building was not zero-rated. IV The arguments A Riverside[34]The Tribunal accepted:(1) Most, though not all, of Riverside’s properties were transferred to it as estates of what were commonly known as council houses and Riverside has taken over most of the local authority’s obligations as landlords on the transferred estates; the local authorities nevertheless retain some residual but significant statutory duties.(2) Riverside’s accounts show that although revenue grants represent only a modest portion of total annual turnover the true balance between publicly and privately funded income is rather different since a large majority of Riverside tenants receive housing benefit mandated to Riverside and thus the greater part of Riverside’s income is of public origin.(3) The grants are designed to enable it to provide low-cost housing meeting stipulated minimum standards of size and quality and to maintain the stock to those standards.(4) In some cases the transferred estates have a negative value since the houses are in poor condition with low rental income and the cost of refurbishment exceeds their market value. It is mainly in relation to this aspect of its activities that Riverside is expected to borrow from commercial lenders.(5) The £900,000.00 of income grant and £14 million of capital grant are intended in part to subsidise rents but more particularly to finance major repairs.(6) The raft of regulatory provisions and guidance relating not only to its use of individual grants but also to the manner in which it conducts its activities generally which Riverside must respect is extensive and minutely detailed.(7) Riverside provides for the Housing Corporation an enormous amount of detailed statistical information relating in particular to tenancies it has granted, nature, income, ethnic origin etc of tenants and rents, analysed in a variety of ways.(8) There are strict upper limits on rents they may charge which are generally significantly below the notional market rent.(9) They are subject to some constraints, greater than those to which ordinary private landlords are subject, on the remedies against tenants in breach.(10) 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 and does not distribute such profits as it earns and it is subject to a much greater degree of regulation than a company in the commercial sector but its affairs are otherwise conducted on business-like lines.(11) It owns assets of considerable value and handles substantial amounts of money, and it takes prudent steps to protect itself from interest rate fluctuations.[35]The Tribunal nonetheless decided that issue adversely to Riverside, by misunderstanding the concept of the surplus necessarily generated by Riverside to fund its activities of provision of housing to the needy. Further, it failed to follow the guidance in the case-law as to the characterisation of economic activity.[36]On the facts found Riverside is not carrying on a business, and its activities are those of a public authority governed by a special legal regime applicable to public authorities, as that phrase is understood under the Sixth Directive. In order to determine the true nature of a supply the court examines the nature of the transaction or activity carried out – not its motive or its purpose: West Devon BC v Commissioners of Customs & Excise [2001] STC 1282. The fact that supplies may be made for consideration, or even that the transactions are profitable is not determinative of whether they constitute economic activity; the wider context needs to be looked at to determine whether they are indicative of a business: Commissioners of Customs and Excise v Yarborough Trust [2002] STC 207. The mere fact of letting at a rent is not sufficient in itself to render that transaction an economic activity or business: Commissioners of Customs and Excise v Yarborough Trust [2002] STC 207, at para 25. “Business” in section 4 of the 1994 Act represents the phrase “economic activities” in Article 4 in the Sixth Directive. For the purposes of the Sixth Directive, in order for a transaction to be taxable, it is not sufficient that the activity is a supply of services for consideration, and it must be an economic activity: Institute of Chartered Accountants for England & Walesv Commissioners of Customs and Excise [1999] STC 398.[37]Riverside is a body “governed by public law” for the purposes of Article 4(5) of the Sixth Directive, although it is not a body to which section 33 of the 1994 Act applies. But the purpose of Article 4(5) can be achieved by recognising that Riverside is not making supplies in the course of business and allowing the provisions of Note 6 to item 2, of group 5 within Schedule 8 to the 1994 Act to take effect.[38]The regime under which registered social landlords are required to operate is plainly a special legal regime differentiating it and these transactions from the private sector. Not only how Riverside operates but how it delivers the services in question is distinguished from the private sector landlord. It is not the case that letting of property is necessarily and always a business. All supplies of a public body, meeting needs in the public interest which are governed by a special legal regime are, under Article 4(5), not economic activities and thus are non-business.[39]An entity will be a body governed by public law acting as such and thus not a taxable person where it is a body financed for the most part by state or regional or local authorities or other bodies governed by public law or subject to management supervision by those bodies, or, having an administrative/managerial/supervisory board where more than half of the members are appointed by the state: Case C-380/98 R (on the application of the University of Cambridge) v HM Treasury [2000] 1 WLR 2. Even where an entity is free to pursue other activities, if it was established for the specific purpose of meeting needs in the general interest it has the character of a body governed by public law: Case C–44/96 Mannesmann Anlagenbau Austria A.G. v Strohal Rotationsdruck GmbH [1998] ECR I –78.[40]Carrying out a state function for the protection of a particular group of people is not an economic activity: Institute of Chartered Accountants for England & Walesv Commissioners of Customs and Excise [1999] STC 398.[41]Rents are controlled by government policy and are artificially depressed; the evidence showed that it operated prudently by making a surplus and ploughing all of it into its obligations as social landlord carrying out the government’s functions.[42]The crude device of detecting a “profit” as an index of whether or not a business exists is not apt in the field of local authority and social services provision. The essential questions in these cases of public or private activity are not questions of the characterisation of moneys, whether profits, or surpluses or otherwise, but rather whether what is being carried out is a governmental or quasi-governmental activity.[43]The distinguishing criterion, which makes the supply by the public body not part of commercial activity, and thus not taxable, but rather acting as a public body in a public capacity, is whether the transaction in question itself is governed by a special legal regime applicable to public authorities – or whether by contrast the activities take effect under ordinary rules of private law. Thus, there may, of course, be activities of a public body that are plainly to be characterised as business. By the same token, where, as here, the public body acts under a special legal regime applying to public authorities, the supplies are not economic activities – they are “non-business”. B Revenue[44]“Business” is a term which appears frequently in the 1994 Act. It is the subject of a definition in section 94. There is no basis for believing that the term bears one meaning in one part of the 1994 Act and another meaning in another part. It is therefore appropriate to look at the way in which the term is used in relation to provisions of the 1994 Act other than Note (6) to Group 5 of Schedule 8.[45]The term “business”, as it appears in (for example) section 4(1) of the 1994 Act, is not an allusion to any particular kind of business, such as a business comprising the making of taxable supplies or a business comprising the making of exempt supplies. That can be seen from the fact that section 4(1) refers to “a taxable supply made by a taxable person in the course or furtherance of any business”.[46]The word “business” is therefore very general in scope and is not related in its meaning to any particular type of transaction. In that respect, it reflects the expression “economic activity” within the meaning of Article 4(1) and (2) of the Sixth VAT Directive.[47]It follows that “business” is to be construed, so far as is possible, so as to mean “economic activity”. Riverside’s reliance upon Article 4(5) of the Sixth Directive is a clear admission on its part that “business” in Note (6) means “economic activity” within the meaning of Article 4(1).[48]“Economic activity” encompasses “all activities of…persons supplying services” and the exploitation of property for the purpose of obtaining income therefrom (Article 4(2) of the Sixth Directive), including the supply of a building or parts of a building (Article 4(3)), and activities which are pursued under an obligation imposed by law in the general interest: Case 235/85 Commission v Netherlands [1987] ECR 1471, para 10.[49]The list of exempted transactions in Article 13 of the Sixth Directive (which necessarily refers to economic activities) includes “the supply of services and of goods closely linked to welfare and social security work, including those supplied by old people’s homes,…by other organisations recognised as charitable…”: Article 13(A)(1)(g). Article 13(A)(2)(a) provides that Member States may subject that exemption to conditions which include:(i) the organisations concerned may not systematically make a profit and any profits made by them cannot be distributed but must be ploughed back into the activity; and(ii) the prices charged by them may be regulated by the public authorities. Ex hypothesi, where such conditions are imposed, the activities of the organisations concerned remain economic activities.[50]Riverside’s activity is economic in nature. It involves exploiting property for consideration, and the Tribunal correctly concluded that Riverside’s activities of letting houses to tenants amounted to the “exploitation of … property for the purpose of obtaining income therefrom on a continuing basis” (Article 4(2)).[51]In the light of the legal principles there is nothing in the findings of fact made by the Tribunal which could preclude the Tribunal from concluding that Riverside’s renting of social housing is undertaken in the course or furtherance of a business.[52]It does not matter that Riverside conducts that activity under the particular conditions applicable to housing associations or for social reasons. Those conditions and reasons do not alter the nature of Riverside’s activity as being an economic activity and, hence, a business.[53]Riverside’s attempt to rely upon Article 4(5) in order to demonstrate that it is not carrying on a business is misguided. The fact that a person is a body governed by public law and engages in particular transactions (the provision of social housing) as a public authority means that, pursuant to Article 4(5) of the Sixth VAT Directive, that person is not to be considered to be a taxable person unless its treatment as a non-taxable person would lead to significant distortions of competition.[54]It does not follow that, in those circumstances, the person concerned is not making supplies in the course or furtherance of a business (or is not carrying on an “economic activity”). That can be seen from the structure of Article 4(5) itself and its relationship with the rest of Article 4.[55]If a body governed by public law engaging in particular transactions as a public authority were not carrying on an economic activity (or carrying on a business):(1) That body would not be a taxable person within the meaning of Article 4(1) in the first place and the first sentence of Article 4(5) would be meaningless and otiose.(2) The second sentence of Article 4(5) would be extremely odd: why should a body that is not carrying on an economic activity (or carrying on a business) be regarded as a taxable person (and therefore as carrying on an economic activity or business) merely because treatment as a non-taxable person would lead to significant distortions of competition (bearing in mind, in particular, that competition would normally be regarded as existing between persons carrying on economic activities)?[56]Article 4(5) provides for nothing more than an exemption from the status of “taxable person”, an exemption that applies, ex hypothesi, to persons or bodies that, in the absence of the exemption, would be regarded as having that status and must, therefore, be carrying on economic activities: e.g. Case 235/85 Commission v Netherlands [1987] ECR 1471, paras 16-23; Cases 231/87 and 129/88 Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino [1989] ECR 3233, para 11.[57]The qualifying condition for zero rating under Item 2 of Group 5 of Schedule 8 to the 1994 Act is not that the charity in question must be a non-taxable person: zero rating is available whether or not a charity has that status.[58]For the exemption in Article 4(5) to apply, two conditions must be satisfied:(i) the activities in question (here, the provision of social housing) must be carried out by a body governed by public law; and(ii) they must be carried out by that body acting as a public authority: Cases 231/87 and 129/88 Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino [1989] ECR 3233, para 12.[59]Riverside satisfies neither condition. In Case 235/85 Commission v Netherlands [1987] ECR 1471, para 22, the European Court dismissed the argument that notaries and bailiffs were “bodies governed by public law” because, even though they might be regarded as exercising the powers of a public authority, they were not part of the public administration and carried out an independent economic activity.[60]It cannot seriously be suggested that Riverside is performing official acts on behalf of the State even if, to some extent, its activities are regulated by the State and, to some extent, its remuneration is determined by the State: renting out residential property, even to less well-off members of society, is not an official State act.[61]The Tribunal correctly found that Riverside is not a body governed by public law, but “a private sector organisation which happens to undertake functions on behalf of the state, but that does not make it a public body” (para 31).[62]In any event, the provision of social housing by it does not involve it in acting as a public authority. In order to decide whether or not a body governed by public law is acting as a public authority, it is necessary to look at the legal regime that governs its relations with its customers: Case C-446/98 Fazenda Publica v Camara Municipal do Porto [2000] ECR I-11435, para 21, where the European Court expressed the test as being whether or not the activity in question was engaged in under a special legal regime applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators; Royal Academy of Music v Commissioners of Customs and Excise, VAT & Duties Tribunal, 1994(Decision 11871, para 33); West Devon Borough Council v Commissioners of Customs and Excise [2001] STC 1282, paras 15-21.[63]The critical question is therefore whether, in its dealings with tenants, Riverside uses public powers or only those powers that it has under the usual civil law regime applicable to any private sector landlord. Riverside does not contend that the legal relationship between it and a tenant of one of its properties is what can be described as a public law legal relationship. V Conclusions[64]The question is whether the Tribunal was entitled to find that, notwithstanding that Riverside is a charity, the supply of construction services for the regional head office was not “ for … a relevant charitable purpose” because it was not “otherwise than in the course or furtherance of a business” for the purposes of Schedule 8, Group 5, item 2(a) and Note (6). What I have to consider is whether the Tribunal could reasonably conclude on the facts that Riverside’s use of the new head office was “in the course or furtherance of a business”: Edwards v Bairstow [1956] AC 14.[65]The relevant findings of fact were these:(1) Riverside lets the properties on assured tenancies to residential occupiers.(2) 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.(3) 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.(4) Surpluses are not distributed, but are re-invested.(5) 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.(6) The grants subsidise rents, but more particularly finance major repairs.(7) 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.(8) 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.(9) The “provision of social housing” was a fair summary of Riverside’s relevant activities.(10) 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.(11) 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.[66]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.”
[67]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.”
[68]Section 4 refers to “business” and Article 4 refers to “economic activity”, but it is clear that the 1994 Act must be construed so as to conform with the Sixth Directive: Institute of Chartered Accountants v Commissioners of Customs and Excise [1999] STC 398, at 402, HL, applying Case C-106/89 Marleasing SA v La Comercial Internacional de Alimentacion SA [1990] ECR 4135.[69]In Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1 the association carried on the activity of a boarding house keeper, but reserved its accommodation for students of the academy, and tried to charge rates which would result in neither a profit nor a loss. The Tribunal found that the absence of a profit motive meant that the activity was not a “business.” The Court of Session found that that was an error of law.[70]The essence of the decision is that the Tribunal was wrong in law to find that the absence of a profit motive meant that the lettings were not in the course of a business. Lord President Emslie said that the natural meaning of the word “business” was wide enough to include the deliberate carrying on, continuously, of an activity or activities, or an occupation or profession. It did not require that what is done must be done commercially, in the popular sense, or with the object of making profits. The provision of board and lodging by the association on the scale on which they conducted their operations had all the essential features of activities which were commonly carried out commercially, for profit, and the activities of the association in pursuit of its objects were only distinguishable in the respect that the commercial boarding house keepers’ normal motivation was absent, and the association regulated the lives of the boarders in term time. The sole question was, whether the board and lodgings were supplied “in the course of a business carried on” by the association. The answer was to be found by looking at the whole of the activities carried on by the association to see if those activities constituted a “business” within the meaning of the first Part of the Finance Act 1972. By providing that “business” included any trade profession or vocation, a clear hint was given that a wide meaning was intended. There was nothing in the natural meaning of the word “business” to restrict its scope to cases where the profit motive was present. It would never be possible or desirable to define exhaustively “business”, but if the activities were predominantly concerned with the making of taxable supplies to consumers for a consideration it required no straining of the language to enable one to conclude that the taxable person was in “the business” of making supplies, and that taxable supplies which he made were supplies made in the course of carrying on that business, especially if the supplies were of a kind which, subject to differences of detail, were made commercially by those who seek to profit by them.[71]Lord Cameron accepted that the concept of profit or gain was absent from the meaning of the word “business”, and that the word in the context was wide enough to embrace any occupation or function actively pursued with a reasonable and recognisable continuity. The use of the words “in the course of” suggested that the supply must not be merely in sporadic or isolated transactions but continued over an appreciable tract of time and with such frequency as to amount to a recognisable and identifiable activity of the particular person upon whom the liability is to fall. The activity which was to be regarded as carrying on a business was one which must possess and exhibit a certain measure of continuity and one which was also of a certain degree of substance. An occupation did not necessarily have as one of its objects the pursuit or promotion of profit or gain and a function could be discharged without yielding a profit, nor could it be said that the word “business” was necessarily tied to such occupations or callings as were wholly commercial and pursued for the purpose of profit or gain. Indeed it was commonplace that for perfectly sound commercial reasons certain commercial undertakings could be carried on with the deliberate purpose of making neither a profit nor a gain or even in certain circumstances a loss, yet the absence of an objective of profit or gain should not and would not deprive the undertaking of the appellation of business. What had to be looked at was the activity itself, and it was essentially a business activity of a very usual and normal kind. It had every mark of a business activity: it was regular, conducted on sound and recognised business principles, with a structure which could be recognised as providing a familiar constitutional mechanism for carrying on a commercial undertaking, and it had as its declared purpose the provision of goods and services which were of a type provided and exchanged in the course of everyday life and commerce. To some extent the association was necessarily competing in the market with other persons and concerns offering precisely similar services to the same clients or customers.[72]Accordingly, “business” is a word of wide meaning, and the absence of one common attribute of ordinary businesses, trades, professions or vocations, such as the pursuit of profit, does not necessarily mean that the activity is not a business or trade etc: Commissioners of Customs and Excise v Lord Fisher [1981] STC 238, 247-248, applying Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Assn. Ralph Gibson J held that the substantial contributions which Lord Fisher sought from those invited to join shoots on his estate, were not subject to VAT. Those invited were invariably his friends and relations. He did not seek or make any profit. His purpose was to cover the costs of the shoot while making at least an equal contribution from his own pocket.[73]It was common ground in Commissioners of Customs and Excise v Lord Fisher [1981] STC 238 that, as submitted by the Commissioners there and derived in part from Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1, indicia as to whether an activity was a business included whether it was pursued with reasonable continuity, substantial in amount, conducted regularly on sound and recognised business principles, predominantly concerned with the making of taxable supplies to consumers for a consideration, and such as consisted of taxable supplies of a kind commonly made by those who seek to make a profit from them: at 245. Ralph Gibson J concluded (at 250) that the true meaning of the word “business” excluded any activity which was not more than an activity for pleasure and social enjoyment, but that did not mean that an activity carried on by a taxable person could not in law be a business if it were carried on by him for pleasure and was one from which he enjoyed social enjoyment. That it was run for profit, and the source of participants, and the intensification of activity, and use of advertising would be examples of matters which would be relevant for consideration on the question whether the shoot was run as a business. It would be difficult to think of a case in which the pursuit of profit from contributions by participants would not be decisive to show that it was a business. Parliament had entrusted to tribunals the task of examining the evidence and of determining the facts, and there need be no fear that tribunals would be unable to detect a commercial enterprise or business which might be dressed up as no more than an activity of pleasure or social enjoyment.[74]The issue in Institute of Chartered Accountants v Commissioners of Customs and Excise [1999] STC 398, HL, was whether VAT was chargeable on fees charged by the Institute for licences to persons carrying on investment business, auditors and insolvency practitioners. It was held that performing a licensing function on behalf of the State was not the carrying on of a business. It was not in any real sense a trading or commercial activity which might justify it being described as economic and the fact that fees were charged for the grant of licences (to be assessed on a break-even basis) did not convert it into one.[75]In the course of his speech Lord Slynn made the following points:(1) it was not enough merely to point to the fact that there was a supply of services in return for a money payment and some loose economic connection, but the activities must be of an economic nature: Case C-60/90 Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijzen, Arnhem [1991] ECR I-3111, para 11.(2) persons appointed by the State and carrying out functions regulated by the State may be taxable persons if the activity is objectively an economic activity: case 235/85 Commission v Netherlands [1987] ECR 1471, paras 8-9; Case C-202/90 Ayuntamiento de Sevilla v Recaudadores de Tributos de las Zonas primera y segunda [1991] ECR I-4247.(3) It was the inherent nature of the activity which was the vital consideration: Case C-155/94 Wellcome Trust Ltd v Customs and Excise Commissioners [1996] ECR I-3013, per Advocate General Lenz, at 3028, para 39. Lord Slynn appears to have accepted that the Tribunal’s application of the indicia in the Lord Fisher case was appropriate: [1999] STC at 404.[76]I was referred to several decisions of the European Court on both sides of the line. In particular, in Case 235/85 Commission v Netherlands [1987] ECR 1471 the European Commission brought an action under what was then Article 169 of the EC Treaty for a declaration that by not subjecting to the VAT system the services performed by notaries and bailiffs, the Netherlands had failed to fulfil its obligations under Article 2 and 4 of the Sixth Directive.[77]The European Court held that the definitions in Article 4(1) of “taxable person” and in Article 4(2) of “economic activities” showed that the scope of the term “economic activities” was very wide, and that the term was objective in character, in the sense that the activity was considered per se and without regard to its purpose or result.[78]In view of the wide definition of the term “economic activities” encompassing all the activities of the professions without any reservation in respect of professions regulated by statute, notaries and bailiffs, insofar as they provided services to private individuals on a permanent basis and in return for remuneration, carried out an economic activity within the meeting of the Sixth Directive. The fact that the activities consisted in the performance of duties which were conferred and regulated by law in the public interest was irrelevant.[79]In two recent decisions activities by charities have been held not to be in the course or furtherance of a business. In Commissioners of Customs and Excise v Yarburgh Children’s Trust [2002] STC 207 the trust was a charitable institution administered for the purpose of providing day care facilities for children in need. A new building was erected in 1998 which the playgroup occupied under a lease at an annual rent. The rebuilding works cost approximately £100,000 of which the trust contributed £32,000 from its own funds and the remainder was provided by a national lottery grant and an appeal. The lease provided security of tenure for the playgroup which was a requirement of the lottery funding. The building works were carried out under a contract entered into by the trust. VAT was charged on the services provided by the trust to the building contractors, and the trust sought to have them zero rated on the basis they constituted the supply in the course of the construction of a building intended for use solely for a relevant charitable purpose. The Commissioners took the view that the supply should be standard rated as the lease to the playgroup constituted a business activity by the trust and therefore failed to satisfy the statutory definition of relevant charitable purpose. It was held that for the purposes of Article 4(2) the economic nature, rather than legal nature, of the transaction was what was in issue. There was material from which the tribunal had been entitled to conclude that the lease, although at an annual rent, did not constitute the carrying out of an economic activity. The playschool was not profit led and struggled to maintain the balance between remaining affordable and meeting its operating costs and the fees were fixed on that basis.[80]The mere fact of the letting at a rent was not sufficient in itself to render that transaction an economic or business activity. In the case particularly of an isolated letting it is relevant to consider the wider circumstances of the grant including the identity and nature of the parties before deciding whether it falls within Article 4(2). The arrangement, far from being commercial or business-like in nature, was designed simply to facilitate the use of the new building by a second charity (the playgroup) whose activities satisfied the objects of the trust.[81]In Commissioners of Customs and Excise v St Paul’s Community Project Ltd [2005] STC 95 the taxpayer was a registered charity, one of whose activities was the running of a day nursery, a project which had been undertaken for social reasons, namely to support disadvantaged and problem children. The amount of the taxpayer’s grant was insufficient to meet all of its costs of providing nursery places and the balance was found by charging fees to parents, which were significantly lower than those charged by commercial nurseries and were pitched at levels designed only to cover the costs of the nursery after grants and donations. The memorandum of association prevented distribution of any profits. Construction works were carried out, and the Commissioners decided that the running of the nursery was a business activity, so that construction works were standard rated for VAT purposes. The Tribunal decided that use of the parts of the building for running a day nursery was a use which was “otherwise than in the course or furtherance of a business” and an appeal was dismissed. Evans-Lombe J accepted (para 51) that the overall policy of the Sixth Directive required that the word “business” must be given a very wide meaning so that it was not confined to profitable enterprises or enterprises intended to be conducted at a profit. The intention or apparent intention of those conducting the enterprise in question must be disregarded. It was the intrinsic nature of the enterprise as established by evidence of what was actually being performed in order to advance it, that was important in arriving at a conclusion whether or not a particular undertaking constitutes a business. He relied in particular on the evidence that the charity was undertaking its activities to support disadvantaged families; the fees were significantly lower than those charged by commercial nurseries; and they were pitched at levels designed only to cover costs.[82]In Cardiff Community Housing Association Ltdv Commissioners of Customs and Excise [2000] V & DR 346another Tribunal held that the office of a housing association was for use otherwise than in the course or furtherance of a business. It relied in particular on the fact that the association was entirely reliant on public funds; the consideration was paid not by the tenants but by the government; the association was not able to charge a commercial rent; it was not able to choose its tenants; it was not able to fix a maximum rent; the provision of the service was below cost; unlike a commercial business it had to submit a 30 year business plan; it was not predominantly concerned with making taxable supplies for a consideration, but with providing social housing for socially disadvantaged people; its activities were not conducted according to recognised business principles; it was not concerned with exploitation of its property; it had to put the income toward providing a good standard of service and to maintenance; it could not govern its own procedures but was subject to the National Assembly for Wales.[83]It is true that there are cases on either side of the line, but I am wholly persuaded that on the evidence and in the light of the trend of the decisions the Tribunal was entitled to come to its well-reasoned decision that the activities of Riverside are in the course or furtherance of a business. I also find (should it be necessary) that I would have come to the same conclusion as the Tribunal on the facts.[84]The whole of Riverside’s very substantial activity is concerned with letting the properties on assured tenancies to residential occupiers, selling properties to tenants in accordance with “right to buy” provisions, and selling properties which are surplus to requirements. Its income is derived principally from rents received from tenants. It accepts that its sales of properties are in the course or furtherance of business or economic activity. The Tribunal was entitled to take into account the fact that 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 Tribunal was entitled to find that the following matters were not sufficient to displace the finding that the lettings were not in the course or furtherance of a business: Riverside does not set out to (and indeed cannot) maximise its profits, does not distribute such profits as it earns, but re-invests them; much of the rent paid by tenants is derived from housing benefit received by them; a substantial part of its capital resources comes from grants paid by the Housing Corporation; surpluses are not distributed, but are re-invested; housing associations are subject to an extensive regulatory framework, and there are upper limits on the rents which they may charge, which are generally significantly below the notional market rent for the properties.[85]I also accept that the Tribunal’s decision is supported by Article 13 of the Sixth Directive, which contains a list of different kinds of supply which Member States must, or may, exempt from VAT. It is implicit from the reference in Article 13(A)(1)(g) to “the supply of services …. closely linked to welfare and social security work … by bodies governed by public law or by other organizations recognized as charitable by the Member State concerned” that such supplies may be economic activities; and from the fact that Article 13(A)(2)(a) permits Member States to restrict the exemption to bodies which did “not systematically aim to make a profit” and which “charged prices approved by public authorities or which do not exceed such approved prices” that a body which satisfied those conditions could be making supplies in the course of a business. See also Case 235/85 Commission v Netherlands [1987] ECR 1471, para 11.[86]Quite apart from the fact that section 33 of the 1994 Act does not apply to Riverside, Article 4(5) of the Sixth Directive does not assist Riverside, either directly or by way of analogy. It provides an exemption only for bodies governed by public law and even then only for the activities or transactions in which they are engaged as public authorities: see Case 235/85 Commission v Netherlands [1987] ECR 1471; Cases 231/87 and 129/88 Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino [1989] ECR 3233, para 12; Case C-202/90 Ayuntamiento de Sevilla v Recaudadore de Tributos de las Zonas primera y segunda [1991] ECR I-4247, paras 19-21.[87]The appeal will therefore be dismissed.

Cited in 2 later judgments