Court of Appeal favours HMRC in most recent case on the meaning of economic activity for charitable VAT relief

Some of you may recall the Court of Appeal decision in the Longridge on the Thames VAT case (and if not, here is a previous blog post about it). That case concerned whether the activities of the Longridge charity amounted to a economic activity for VAT purposes, sufficient to prevent the preferred VAT treatment on the construction of a training centre.

Whether or not any given activity amounts to an “economic activity” has been the subject of numerous court decisions, stretching back many years. Some had hoped that the Court of Appeal decision in Longridge might be a definitive statement of the position, providing certainty for a while, even though the charity lost that case.

However, only two years later, the Court of Appeal has ruled again in the Wakefield College v HMRC case – and the analysis this time is different to that of the Longridge case.

The new analysis

In Wakefield, the charity provided vocational courses. Some students (mainly from overseas) paid full fees, some at a discounted (subsidised) rate, and the majority paid no fee at all. About 11 per cent of students paid the discounted fees, which were set at a rate lower than the charity’s own costs in providing the courses. 

HMRC argued that the courses provided at a subsidised rate represented an economic activity, and accordingly the charity could not benefit from VAT zero-rating on the construction of a new college building.

In ruling in favour of HMRC, the Court of Appeal set out a two stage test (as distinct from the approach adopted in Longridge):

1. Is there consideration for a supply of goods and services (i.e. is there reciprocity, such that the consumer is obliged to pay an amount to receives those supplies)?
2. If so, does that amount to “remuneration” for the supply?

The second of these two tests is different from the approach adopted in Longridge. The Court of Appeal in Wakefield says that this second test requires a wide-ranging and fact-sensitive objective analysis of whether or not the charity is providing the supplies for the purposes of obtaining income on a continuing basis, and will involve looking at the overall activities of the relevant charity.

The main reasons why, adopting these tests, the charity lost its case in Wakefield were that (a) the provision of courses was its main activity, (b) subsidised fees were significant and in fact amounted to most of the income generated by the charity, (c) the fees were set at a level by reference to the costs of the putting on the courses (not the means of students to pay), and (d) the college was a typical participant in the educational market.

Why the change in approach?

One of the reasons for the differing approaches as between Longridge and Wakefield may be the ECJ decision in Gemeente Borsele (the provision of school transport services by a branch of local government, which was held not to be an economic activity), the decision for which was released between the two UK Court of Appeal decisions. 

One suspects that, given the importance of this issue and the amounts of VAT typically at stake, Wakefield will no more be the last word on this than was Longridge.