Liverpool Muslim Society v Revenue & Customs [2014] UKFTT 1080 (TC)
FTT-Tax
Liverpool Muslim Society v Revenue & Customs
[2014] UKFTT 1080 (TC) · 2014-12-04
[49]In Customs and Excise Comrs v Lord Fisher [1981] STC 238 Ralph Gibson J identified 6 indicia as to whether an activity amounts to a business for VAT purposes. They are well established and were cited with approval by Lord Slynn in the House of Lords in Institute of Chartered Accountants in England and Wales v CCE [1999] STC 398 at 404 : “ In regards to 'business' for the purposes of the 1994 Act Ralph Gibson J held in Customs and Excise Comrs v Lord Fisher [1981] STC 238 at 247 on earlier authority 'that "business" is or may be in particular contexts a word of very wide meaning', but that 'the ordinary meaning of the word "business" in the context of this Act excludes, in my judgment, any activity which is no more than an activity for pleasure and social enjoyment', though the fact that the pursuit of profit or earnings was not the motive did not prevent an activity from being a business if in other respects it plainly was. He referred (at 245) to six indicia listed by counsel for the commissioners as the test as to whether an activity was a business- was it(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 make profit from them. ” 50. Since the hearing of the present appeal the Upper Tribunal has re-affirmed that it is necessary to take into account the charitable activities of a body contending that it is carrying on a business in pursuing its charitable objects. In Commissioners for HM Revenue & Customs v Longridge on the Thames [2014] UKUT 504 (TCC) Rose J conducted an analysis of various domestic and ECJ authorities and the factors relevant to the question of whether there is an economic activity or business. In particular she considered the relevance of the fact that the price charged for a service is subsidised. She referred to C & E Commissioners v Morrison’s Academy Boarding Houses Association where the Court of Session held that Morrison’s Academy was making a taxable supply in the course or furtherance of a business even though it did not seek to make a profit. 51. In Customs & Excise Commissioners v Yarburgh Children’s Trust [2001] EWHC 2201 (Ch) Patten J was concerned with a charity providing day care facilities for children. He stated at [23]: “ … the motive of the person who makes a supply of goods or services is not relevant to and more particularly cannot dictate the correct tax treatment of that transaction … But the exclusion of motive or purpose in that sense does not require or in my judgment allow the Tribunal to disregard the observable terms and features of the transaction in question and the wider context in which it came to be carried out. This is because the transaction if looked at in isolation will not usually enable the Court to decide whether it was carried out in the course or furtherance of a business which is the test under VATA 1994 Section 4(1) or to use the language of the Sixth Directive whether it was a supply of services effected for consideration by a taxable person acting as such: i.e. by a person who is carrying out some form of economic activity: see Articles 2 and 4(1). This test necessitates an enquiry by the Tribunal into the wider picture. It will need to ascertain the nature of the activities carried on by the person alleged to be in business, the terms upon which and manner in which these activities (including the transaction in question) were carried out and the nature of the relationship between the parties to the transaction. This is not intended to be an exhaustive or particularised list. But it is clear that the questions posed by Gibson J in Lord Fisher’s case or by the Court of Session in CCE v Morrison’s Academy Boarding House Association [1978] STC 1 simply could not be answered by reference only to the fact that a service was provided at a price. That is the beginning not the end of the enquiry. ” 52. A similar conclusion was reached by Evans-Lombe J in Customs & Excise Commissioners v St Paul’s Community Project Ltd [2004] EWHC 2490 (Ch) . 53. In Longridge on the Thames , having quoted that passage from Yarburgh Children’s Trust, Rose J then stated as follows at [38]: “ The judge concluded that the ‘overwhelming impression’ gathered from the evidence was that the playgroup was not predominantly concerned with the making of taxable supplies for a consideration. The factors he considered relevant included that the fees were fixed to maintain a balance between remaining affordable and meeting its operating costs. I respectfully share Patten J’s conclusion that it is possible and indeed necessary to take into account the charitable nature of the activity as part of its ‘observable terms and features’ whilst avoiding the twin heresies of taking account of the purpose for which the activity is conducted or regarding an activity as not ‘economic’ because it is non-profit making. ” 54. HMRC’s case is that the Society is not making taxable supplies in the course or furtherance of a business. Mrs Roberts relied on the decisions in Morrison’s Academy and Lord Fisher. In relation to whether there was a business she also relied on a decision of the First-tier Tribunal in The People’s Dispensary for Sick Animals v Commissioners for HM Revenue & Customs [2012] UKFTT 362 (TC) . We do not consider that the PDSA appeal adds anything to the principles stated in the authorities cited above, although it does illustrate the application of those principles. 55. We do not consider that the subsidy from Liverpool City Council is particularly relevant to whether the Society is providing catering in the course or furtherance of a business. A business can still be carried on where the cost to consumers is subsidised by grants. As appears from the authorities referred to above it is relevant, although not determinative, that the provision of meals is non-profit making. Mr Omope accepted that the Society did not seek to make a profit from the provision of meals. 56. The grant received from Liverpool City Council covered the salary of a cook but did not cover the cost of food and other cooking materials. Taking that into account it is clear that the income obtained from the sale of meals did not cover the direct costs of food materials. So the Society was making a gross loss on the meals. It is probably more accurate to say that the Society subsidised the cost of meals to people attending the day centre. That is consistent with the Society’s charitable objects which include the relief of need and the provision of social welfare. 57. We note also that the President of the Society provided his services on a voluntary basis, although the extent to which he did so was not identified in the evidence. In any event, we do not consider that this is a significant factor in the context of this appeal. 58. We consider that 5 of the 6 indicia in Lord Fisher are satisfied in the present case. The remaining item on which we must focus is whether the activity of providing catering is “ predominantly concerned with the making of taxable supplies to consumers for a consideration ”. 59. The Society is providing catering services for a consideration. The amount charged is intended to be heavily subsidised so that the Society does not recover the direct costs incurred. Where individuals are unable to afford the cost of a meal they are provided with a free meal, although there was no evidence before us as to the extent to which meals were provided free of charge. 60. The income produced by the Society in relation to the sale of meals was modest compared with its other sources of income, in particular General Donations and rental income. Even if no meals had been provided free of charge, the total sales value of meals was £17,115 over a 52 month period. That equates to £76 per week or approximately 8 meals per day. If that figure is right it would suggest that the activity itself was not very significant in the context of the Society’s charitable activities generally. More likely however is that were a significant number of free meals provided. Either way it tends to support HMRC’s case that the provision of meals was not carried on by way of business. 61. In all the circumstances we consider that the Society was not supplying meals in the course or furtherance of a business. It was doing so as part of its charitable objects, providing free or subsidised hot meals and social welfare. This aspect of the Society’s activities is not predominantly concerned with making taxable supplies to consumers for a consideration. (2) General Donations – Consideration for Books and Publications 62. In T olsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509 the CJEU was concerned with the liability to VAT of sums given by passers-by to the player of a barrel organ on the public highway. The CJEU considered that there was no liability to VAT. It stated as follows “ 13. In its judgments in Staatssecretaris van Financiëen v Coöperatieve ardappelenbewaarplatts (Case 154/80) [1981] ECR 445 at 454, para 12 and Naturally Yours Cosmetics Ltd v Customs and Excise Comrs (Case 230/87)[1988] STC 879 at 886, [1988] ECR 6365 at 6389, para 11, the court stated on this point that the basis of assessment for a provision of services is everything which makes up the consideration for the service and that a provision of services is therefore taxable only if there is a direct link between the service provided and the consideration received (see also the judgment in Apple and Pear Development Council v Customs and Excise Comrs (Case 102/86) [1988] STC 221 at 237, [1988] ECR 1443 at 1468, para 11, 12). 14. It follows that a supply of services is effected 'for consideration' within the meaning of art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient. 15. In a case such as that which is the subject of the main proceedings, it is clear that those conditions are not fulfilled. 16. If a musician who performs on the public highway receives donations from passers-by, those receipts cannot be regarded as the consideration for a service supplied to them. 17. First, there is no agreement between the parties, since the passers-by voluntarily make a donation, whose amount they determine as they wish. Second, there is no necessary link between the musical service and the payments to which it gives rise. The passers-by do not request music to be played for them; moreover, they pay sums which depend not only on the musical service but on subjective motives which may bring feelings of sympathy into play. Indeed some persons place money, sometimes a considerable sum, in the musician's collecting tin without lingering, whereas others listen to the music for some time without making any donation at all. 18. In addition, contrary to the arguments of the German and Netherlands governments, the fact that the musician plays in public with a view to collecting money and actually receives certain sums in so doing is of no relevance for the purpose of determining whether the activity in question constitutes a supply of services for consideration within the meaning of the Sixth Directive. 19. That interpretation is not affected by the fact that a musician such as Mr. Tolsma solicits money and can in fact expect to receive money by playing music on the public highway. The payments are entirely voluntary and uncertain and the amount is practically impossible to determine.” 63. In Church Schools Foundation Ltd v Commissioners of Customs & Excise [2001] EWCA Civ 1745 the Court of Appeal was concerned with donations to a charity by a company owned by the charity and used to fund building works to the charity’s property. It quoted the passage above from Tolsma and held that there was no direct link between the execution of the building works and the donations. At [43] the Vice Chancellor stated:[43]“ If an individual or unassociated charity makes a donation to another charity for its general purposes the implementation of those general purposes could not be a supply of services for consideration in the form of the donation. If authority were needed for such an obvious proposition it is to be found in Staatssecretaris van Financiën v Cooperatieve Aardappelenbewaarplaats GA [1981] ECR 445 and Apple and Pear Development Council v Customs and Excise [1988] STC 221 . In my judgment it makes no difference if the donation is for a specific purpose of the charity. In such a case there is no supply of services or consideration "for" that supply. Then let it be assumed that there is some relationship between the donor and the recipient charity. Of itself that cannot provide the necessary link between the supply consisting of the execution of the specific purpose and the donation. This proposition is also demonstrated by the same two cases. ” 64. HMRC relied on decisions of the VAT Tribunal in Newport County AFC Social Club Ltd (Decision 19807) and in Friends of Ironbridge Gorge Museum (Decision 5639) . Again, these decisions merely illustrate the application of the principles described above. 65. Mr Omope relied on an extract from Charities Guidance Notes published by HMRC. In particular various paragraphs giving examples of the VAT treatment where a charity makes an admission charge to view the charity’s property and also provides a book about the property where a donation is made. 66. We must decide this appeal on the basis of the law applied to the particular facts we have found. We do not consider that the guidance covers the particular factual situation we are concerned with in this appeal. In any event, it is simply HMRC’s view of the law and is not authoritative. We do acknowledge however that the examples include reference to whether what is described as a donation can be consideration for the taxable supply of a publication. We accept that the description given of “donation” is not determinative of the issue. It is necessary on the facts to consider whether something is paid as consideration for the goods supplied. In particular whether there is a direct link between the payment made and the goods supplied. 67. The absence of profit does not arise in relation to books and publications. If the donations are consideration for a supply of books and publications then the Society would make a profit. The General Donations were £383,696 and the cost of books and publications was £103,694. Subject to any stock adjustments, the Society on the face of it made a gross profit of £280,002 on books and publications. 68. It is clear to us however that there is no sufficient link between the donations and the books and publications. 69. The Society is a charity which has as one of its objects the advancement of education amongst Muslims in the North West of England. One of the ways in which it fulfils that object is to make available the books and publications. Consistent with its charitable objects it chooses to do so in a way which does not require payment. The books and publications have no set price. Whatever sums are received by way of donation cannot be related to specific books or publications. It is not a question of making a profit, selling them at cost price or selling them at a subsidised price. Rather the Society makes them freely available because they are essential reading for individuals who practise the Muslim faith. 70. The General Donations received in the box placed next to the books are exactly that - general donations for the upkeep of the Centre. They are not consideration for the supply of books or publications. There is a hope that people who attend the Centre will make a donation when they take a book. It is clear that substantial donations are received in this way. There is no way of knowing whether a particular donation is accompanied by the taking of a book, and if so whether the donation is significantly more or less than the cost of the book being taken. Alternatively, whether it is simply a donation for the upkeep of the Centre as this seems to be the only way in which such donations are generally made. 71. In our view as a matter of law the position is analogous to that of Mr Tolsma. He played a barrel organ in the hope that passers-by would make a donation. The donations made were entirely voluntary. The amount donated would depend very much on the subjective motives of the passer-by who may linger to listen to the music or simply make a donation and walk quickly past. 72. In all the circumstances we are satisfied that the Society is not making a supply of books and publications because there is no consideration for such a supply. 73. We note that the Society’s treatment of the General Donations prior to Morgan Ashurst issuing the VAT only invoice is consistent with the General Donations not being consideration for a supply of books and publications. If the Society had been supplying books and publications for a consideration then that supply would have been taxable, albeit zero rated. In the absence of any agreement with HMRC the Society would have been over the threshold for compulsory registration. However it did not register for VAT. For the reasons given above, the Society was right not to register because it was not making taxable supplies. 74. The answer to the first issue therefore in relation to both catering and books and publications is that the Society was not making any taxable supplies in the course or furtherance of a business. 75. Our answer in relation to the first issue also determines the second issue. The VAT incurred by the Society was not used for the purpose of any business carried on by the Society. As such it was not input tax within section 24(1) VAT Act 1994. 76. Turning to the third issue before us, whether it was reasonable of HMRC to decide to de-register the Society for VAT purposes. That depends upon whether the Society is making taxable supplies. 77. There was a suggestion in some correspondence from HMRC that one ground upon which the decision to de-register was taken was the low level of income from meal sales. That is not a relevant factor if it was intended to suggest that a trader with a small taxable income obtained in the course or furtherance of a business may not be registered for VAT. Mr Omope was right to say that the issue is whether there are taxable supplies made in the course or furtherance of a business. For the reasons given above we are satisfied that the Society was not making taxable supplies in the course or furtherance of a business. HMRC are therefore entitled to de-register the Society. 78. Finally, HMRC contended at one stage that the VAT claimed as input tax had not been paid and by virtue of section 26A VAT Act 1994 the Society was not entitled to input tax credit. Section 26A provides as follows: “(1) Where – (a) a person has become entitled to credit for any input tax, and (b) the consideration for the supply to which that input tax relates, or any part of it, is unpaid at the end of the period of six months following the relevant date, he shall be taken, as from the end of that period, not to have been entitled to credit for input tax in respect of the VAT that is referable to the unpaid consideration or part.(2) For the purposes of subsection (1) above “the relevant date”, in relation to any sum representing consideration for a supply, is – (a) the date of the supply; or (b) if later, the date on which the sum became payable. ” 79. It is true that an amount of £105,325 remains outstanding to Morgan Ashurst. However during the course of the hearing Mrs Roberts properly conceded that for VAT purposes the payments made by the Society should be treated as including an appropriate proportion of VAT payable at that time. Hence the sum £105,325 outstanding in 2010 represented a sum of £89,816 due for the construction services together with VAT thereon of £15,509. Strictly therefore it is only the sum of £15,509 which has not been paid and could fall within section 26A. For the reasons we have given however the denial of credit under section 26A does not arise because the Society is not entitled to recover the input tax in any event. 80. In the course of argument Mr Omope relied on the fact that energy bills received by the Society had been charged VAT at the rate applicable to businesses, whereas charities and non-profit organisations are entitled to pay VAT at 5% on energy used for non-business purposes. We accept that is the case but it does not help us to decide, on the basis of our findings of fact, whether or not the Society incurred expenditure in the furtherance of a business. Whether or not the Society would be entitled to a refund of VAT paid to energy suppliers is not a matter for the Tribunal. Conclusion 81. For the reasons given above we are satisfied that the Society was not making supplies of meals in the course or furtherance of a business, and in relation to General Donations it did not receive income in consideration for supplies of books and publications. In the circumstances the Society is not entitled to be registered for VAT. In the light of our conclusions we must dismiss the appeal. 82. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JONATHAN CANNAN TRIBUNAL JUDGE RELEASE DATE: 4 December 2014