England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		29th November 2001

Mr Justice Patten :

Introduction

1. This is an appeal by the Commissioners of Customs and Excise against a decision of the VAT and Duties Tribunal (Chairman: Miss J.C. Gort) released on 26^th April 2001. It concerns the use of a building owned by the trustees of the Yarburgh Children's Trust ("the Trust") which was refurbished and let to the Yarburgh Community Playgroup ("the Playgroup") in 1998. It has been occupied and used by the Playgroup since then for a children's playgroup and other child related activities. I shall come to these in more detail a little later in this judgment.
2. The works to the building cost in the region of £100,000. Of this the Trust contributed some £32,000 from its own funds. The balance was provided by a grant from the National Lottery Charities Board of £50,000 and from funds raised following an appeal by the Playgroup. The building works were carried out under a contract entered into by the Trust. The Playgroup took no part in these arrangements although, as I have indicated, it did raise part of the necessary finance. VAT was charged on the services provided to the Trust by the building contractors. The Trust sought to have these zero rated under Item 2 of Group 5 of Schedule 8 to the VAT Act 1994 ("the 1994 Act") on the basis that they constituted:

"The supply in the course of the construction of

(a) a building ……………intended for use solely for a relevant charitable purpose".

3. This is defined in Note 6 to Group 5 as follows:

"(6) Use for a relevant charitable purpose means use by a charity in either or both 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."

Both the Trust and the Playgroup are registered charities but the Commissioners took the view that the supplies should be standard rated because the lease to the Playgroup constituted a business activity by the Trust and therefore failed to satisfy the statutory definition of "relevant charitable purpose". Before the Tribunal the Trust advanced two main contentions:

(i) that the lease was not an economic activity within the terms of Article 4(2) of the Sixth Directive and was not therefore business use within Note 6; and

(ii) that the use made by the Trust of the building (whether or not comprising a business) came within the definition of use as "a village hall or similarly" in Note 6(b).

4. The Tribunal decided that the grant of the lease did not constitute an economic activity so as to bring it outside the scope of Note 6(a). The purpose for which the building was designed was in the view of the Tribunal an educational one. If wrong about that the Tribunal was also satisfied that the use fell within Note 6(b). The building had, it said, been constructed by a charity for a charity for the benefit of the local community. The Trust's appeal was therefore allowed.

The Issues

5. Before me the issues for discussion have been more widely defined than perhaps they were before the Tribunal. It is accepted by Mr. Thomas who appears for the Trust that it is not enough for his client to show that the lease to the Playgroup was not in itself an economic or business activity. It is also necessary to decide whether the Playgroup's own use of the premises satisfies one or both limbs of Note 6. This issue arises in at least two ways. The Tribunal's own assessment of the lease was based in part on the stated purpose of the letting. This was described in the user clause in the lease as:

"Playgroup Building for the education and occupation of children under the age of 5 years".

The Tribunal's conclusion that the purpose of the letting was educational rather than economic or commercial depended upon taking this into account. In so doing it found in effect both that the lease was not an economic or business activity and that the Playgroup's own user did not constitute a business. In its decision the two issues are not really separated. But before me the Trust advanced an argument that the lease was at a low or concessionary rent which might in itself take it outside the range of economic activities specified in Article 4 of the Sixth Directive and therefore satisfied Note 6(a). If this is right then it still remains necessary for me to consider on Mr. Thomas' argument whether the Playgroup's own activities (viewed in isolation from the lease) also satisfy the definition of "relevant charitable purpose" by constituting non-business user or by falling within the village hall provisions in Note 6(b). This is because Item 2 of Group 5 only applies if the intended use of the building was "solely for ………..a relevant charitable purpose". All intended users of the building must therefore comply if zero rating is to be available.

6. For the Commissioners Miss Whipple drew my attention to Note 12 to Group 5 of Schedule 8 which provides that:

"(12) Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose –

(a) a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such a purpose;"

On this basis she submitted in opening that the only use which is relevant for the purposes of Note 6 is that by the Trust to whom the building services were supplied. Use by the Playgroup is not material to this issue. I accept that the question whether the supply was made in relation to a building intended for use solely for a relevant charitable purpose within the meaning of Item 2 of Group 5 falls to be determined in the first instance by reference to the use of the building made by the Trust. But if a determination of that issue involves a consideration of whether the Playgroup itself carried on a business or merely conducted a non-business charitable activity then that issue has also to be determined as part of the consideration of the lease.

7. I think that Miss Whipple ultimately accepted that Item 2 of Group 5 requires the Court to look at all the uses made of the building and is satisfied only if all those uses amount to a use of the building for a relevant charitable purpose as defined. The Commissioners' appeal will therefore succeed if either the lease by the Trust or the activities of the Playgroup constitute a form of economic or business activity and neither use falls within the village hall exception contained in Note 6(b).
8. The issues for my decision can therefore be conveniently considered in the following order:

(i) was the 1998 lease an intended use of the building by the Trust otherwise than in the course or furtherance of a business;

(ii) was the Playgroup's use of the building otherwise than in the course or furtherance of a business; and

(iii) did the intended use of the building (a) by the Trust and (b) by the Playgroup fall within the definition of "relevant charitable purpose" contained in Note 6(b) to Group 5 (the village hall provision).

Factual Background

9. Before I come to consider these issues it is necessary to say something more about the arrangements between the Trust and the Playgroup concerning the use of the building. The relevant facts as found by the Tribunal can be summarised as follows:

(1) The Trust was founded in 1925 as a charitable institution for the purpose of providing "a home for the treatment and care of children under the age of 5 years". It is currently administered under a scheme approved by the Charity Commissioners in 1983 "for the purpose of providing day care facilities for children in need thereof". The property of the Trust comprises a large Victorian building. Part of the building is divided into six flats which are rented out. The remainder of the building is divided into two parts. One part is used to provide a day nursery for up to 50 children under the age of 5. These are the children of working mothers and they remain in the nursery for the whole day. The remainder of the building provides facilities for children with special needs. These are children who are either physically or mentally handicapped.

(2) The building with which this appeal is concerned was originally a summer house in the garden of the Trust's property. By 1993 the building had become dilapidated and certain works of refurbishment were then carried out by the Trust. At that time the building was already occupied by the Playgroup under a licence. The Trust charged a licence fee of a relatively nominal amount based on the number of playgroup sessions per week that were run in the building. Despite the refurbishment works carried out the Trust was subsequently advised by a chartered surveyor that the building had become unsafe and that it was not appropriate to spend further sums of money on it. Therefore in 1996 the Trust served notice upon the Playgroup which vacated the building. The Trust was not able to afford the cost of re-building (then estimated at about £70,000) and it was for this reason that a grant application was made to the National Lottery Charities Board. As a result of this grant and from the other fund raising by the Playgroup which I have already referred to a new building was erected at a cost of approximately £100,000. Of this the Trust contributed some £32,000 from its own resources.

(3) A requirement of the National Lottery funding was that the Playgroup should enjoy security of tenure in relation to the building. It was for this reason that the earlier licence arrangements were replaced by the grant of a lease. The lease which was in evidence before the Tribunal and which is referred to in some detail in its decision has not yet been executed between the parties. But I was told by Mr. Thomas on behalf of the Trust that the legal relationship between the Trust and the Playgroup has been conducted since 1998 on the basis of this document and it is common ground that for the purposes of this appeal I should treat the lease as in existence from that date. The lease grants the building to the Playgroup for a term of 21 years at an initial rent of £2,800 per annum reviewable every three years of the term. The rent review provisions are contained in clause 3 of the lease and merely provide for an increase in the rent by reference to the percentage rise in the Index of Retail Prices between the grant of the lease and the date of review. Although the review is to be upwards only the rent review formula is not designed to produce a market rent. The other terms of the lease are however fairly standard containing as they do in clause 4.2 the usual covenant by the lessee to pay and discharge and keep the lessor indemnified against all existing and future rates taxes duties and charges and the covenant in clause 4.3 to repay to the lessor on demand a fair and reasonable proportion of the sums and expenses laid out in relation to the repair and maintenance of the building. The Tribunal found as a fact that the Trust did not seek to enforce either of these two covenants.

(4) The evidence of Mr. P.A. Lusty, the senior trustee of the Trust, which was accepted by the Tribunal was that the Trust fulfilled its obligation under the 1983 Scheme by making its buildings available for the charitable purposes I have described. The Trust did not consider that it was any of its business to accumulate funds and the rent paid by the Playgroup was regarded as nominal. The use to which the Playgroup building could be put was restricted under the terms of the lease and by the provisions of the Children Act which applied because the former summer house could only be accessed through the main building which is itself occupied by children with special needs. The ability to use it for evening functions or for fund raising activities is therefore extremely circumscribed. With this in mind the Trust had issued a document to the Playgroup (which was produced to the Tribunal) setting out the authorised use of the building as follows:

Education of pre-school children and/or their parents

Training of pre-school staff and/or volunteers

Fostering links with families within the local community

Entertainment and/or fund-raising activities.

Mr. Lusty's evidence was that the individual managers of each of the three charities involved in the use of the building were responsible for seeing that there was compliance with the Children Act. The playgroup building could not generally be used by people unconnected with the Playgroup and had to be used for purposes connected with children as opposed to adults. The only occasions on which it could be opened more generally to the public were open days when the children were not on the premises. Similarly fund raising occasions such as jumble sales were held by the Playgroup in the absence of the children.

(5) The Tribunal also heard evidence about the way in which the Playgroup was operated. The building comprised in the lease consists of two main play areas, some large cupboards, a changing area, kitchen, childrens' toilets, a disabled W.C. and a lobby. The Playgroup takes 40 children at any one time for a period of either 1 or 2 years and has some 60-70 children on its waiting list. Some of the places at the Playgroup are taken by the local authority as a priority but the remaining places are open to the general community. The Playgroup enjoys considerable support amongst local families and the Tribunal was told that some 60 families were involved in the fight to keep the playschool open when it was threatened with closure due to the state of the building. The Playgroup is run on a voluntary basis by an elected committee of parents and is governed by the terms of a written constitution. It is a member of the Pre-School Learning Alliance. The constitution it has adopted is in the Alliance's standard form. Membership of the Playgroup is divided into two groups: Family members and other members. Family members are parents or guardians of children who attend the pre-school group. Other members are other interested individuals, persons, or other bodies (other than paid employees) who are approved by the Committee and who pay the appropriate subscription. The Committee is required under the constitution to meet at least three times a year and is responsible for ensuring that the pre-school complies with its aims and is properly managed. At least 60% of the Committee members are required at the time of their election to be parents or guardians of children in groups run by the pre-school although there is power to elect individuals who are not parents if the 60% figure cannot be achieved. The aim however of the Playgroup as is evident from their published literature is to involve parents and families in the running of the Playgroup and to provide support and friendship to families within the group;

(6) For the year ended 31^st December 1998 the Trust according to its accounts had a deficit for the year of £9,423.

Was the 1998 lease an intended use of the building by the Trust otherwise than in the course of the furtherance of a business?

10. The exclusion from the definition of "relevant charitable purpose" in Note 6 to Group 5 of any use of the building in the course or furtherance of a business was designed to ensure the compliance of the UK legislation on zero rating with the requirement contained in Article 17 of the Council Directive 67/228 of 11^th April 1967 (and continued in force by Article 28(2) of the Sixth Directive) that reduced rates of tax should only be maintained by member states for "clearly defined social reasons and for the benefit of the final consumer". The concept of the final consumer was held by the ECJ in EC Commission v United Kingdom [1988] STC 456 to be satisfied only where the supply is made to a person who does not use the exempted goods or services "in the course of an economic activity". These were infringement proceedings brought by the Commission against the United Kingdom and as a result of this decision the provisions of what is now Group 5 to Schedule 8 of the VATA 1994 were amended so as to introduce the qualification that building services supplied in relation to the construction of a building intended for use solely for a relevant charitable purpose should not be zero rated if the premises were to be used by the charity in the course or furtherance of a business. Previously zero rating had been available in respect of building services supplied in the course of constructing any building regardless of its intended use: see VATA 1983 Schedule 5, Group 8.
11. The reasons adopted by the Tribunal for deciding that the building supplies should be zero rated within the provisions of Group 5, Note 6(a) are set out in paragraphs 53-56 of its decision in the following terms:

"53. In considering whether the supply of the building should be zero-rated for value added tax purposes the Commissioners submitted that the Tribunal had to look at the purposes of the Appellant to decide whether the building was intended for use solely for a relevant charitable purpose. The Tribunal was invited to find that by accepting rent from the Playschool over a continuing period the supply to the Appellant was one which was a supply made in the course or furtherance of a business. The Tribunal does not consider that it is the intention of the Appellant which is relevant in the present case, it is the intended use of the building which must be looked at, and that involves the use made of it by the Playgroup, since the Appellant's only purpose in having the building constructed was to make it available to the Playgroup for its purposes. Whilst therefore the purposes of the Appellant are relevant, they must not be looked at in isolation from the purposes of the Playgroup.

54. The Tribunal accepts the Respondents' submission that the Tribunal has to give effect to the decision in the Wellcome Trust case to the effect that Article 4 must be given as broad an interpretation as possible. This is also the ratio in the Morrison's Academy case. The Tribunal also accepts that, were the purposes of the Appellant to be looked at in isolation from those of the end user it may well be the case that the fact that the Appellant is making supplies of a continuing nature, and that the sum of £2,800 per annum is not a figure which can properly be considered de minimis, the Appellant is carrying on an economic activity. The Tribunal accepts that the underlying motive of making the supplies, namely to benefit the children in the local community, is not relevant in considering whether or not the Appellant is carrying on an economic activity. However the Tribunal does consider that the motive is relevant in the context of the present case because we have to look at the purpose for which the building was constructed. It was not disputed by the Respondents that the Appellant itself is a charity, nor that the Playgroup Trust is a charity. It was not disputed that the purpose of the building was to benefit the Playgroup. The Act does not state that the supply must be made to the person who uses the building for a relevant charitable purpose, but that the building must be designed for use solely for a relevant charitable purpose. Note 6 then describes what is meant by use for a relevant charitable purpose. Nowhere in the Act does it specify that the purposes of the recipient of the supply as opposed to the use to be made of the building are the sole relevant consideration.

55. There is no evidence before the Tribunal to suggest that the use made by the Playgroup of the building is a business use, even in the wider sense of "business" which is given to the word by Article 4. The purpose for which the building is designed is an educational one.

56. For the above reasons the Tribunal considers that the supply of the services in the course of the building works should properly be zero-rated."

12. It is inherent, indeed explicit, in its reasoning that viewed in isolation from its intended purpose the letting at a rent of £2,800 might constitute an economic activity within the meaning of the Sixth Directive and therefore a business use for the purposes of Note 6(a). What however made the difference was that the building was designed or intended for use by the Playgroup for its own charitable purposes. These were held by the Tribunal to be educational and not to constitute a business user by the Playgroup. It could therefore be said that the conditions specified in Note 6(a) which concentrate on the intended use of the building were satisfied. The Commissioners seek to appeal against this conclusion on two grounds. First they say that the Tribunal was wrong to construe the letting as a non-business activity or use of the building merely because the intended user was the Playgroup. That intended user was also irrelevant given the terms of Note 12(a) which the Tribunal does not refer to. Secondly they challenged the Tribunal's finding that the operation of the Playgroup does not of itself constitute a business. I turn first to the proper characterisation of the lease.
13. Both sides to this appeal accept that the 1998 letting by the Trust constitutes a use and therefore one of the intended uses of the building for the purposes of Note 6 to Group 5. Liability to VAT on a supply of goods or services in the United Kingdom depends upon that supply being made by a taxable person in the course or furtherance of any business carried on by him: see VATA 1994 s.4(1). "Business" is defined in s.94(1) as including any trade, profession or vocation. These provisions are intended to give effect to Articles 2 and 4 of the Sixth Directive which provide as follows:

"Article 2

The following shall be subject to value added tax:

1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2 the importation of goods.

Article 4

1 "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2 The economic activities referred to in paragraph 2 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."

The letting of property is therefore expressly included if it satisfies the description of the "exploitation" of property in Article 4(2).

14. Some assistance as to the meaning of this phrase can be obtained from the decision of the ECJ in van Tiem v Straatssecretarin van Financiën [1993] STC 91 where the Court had to consider whether the grant of building rights over land for a period of 18 years subject to an annual payment of f3,000 was to be deemed an economic activity within the Article 4(2) definition. In paragraphs 18-20 of its decision the ECJ said this:

"18. Second, in accordance with the requirements of the principle that the common system of VAT should be neutral, the term 'exploitation' refers to all transactions whatever may be their legal form, by which it is sought to obtain income from the goods in question on a continuing basis.

19. Therefore, the grant by an owner of immovable property to a third party of a building right over that property must be deemed to be an exploitation of the property if that right is granted in return for a consideration for a specified period. That condition must be deemed to be satisfied when, as is the case in the main proceedings, the building rights are granted for a period of 18 years in return for an annual consideration.

20. Consequently, the reply to the first question must be that the grant by an owner of immovable property to another person of building rights in respect of that property, by authorising that person to use the immovable property for a specified period in return for a consideration, must be regarded as an economic activity involving the exploitation of tangible property for the purpose of obtaining income therefrom on a continuing basis, within the meaning of the second sentence of art 4(2) of the Sixth Directive."

15. That test is satisfied in the present case if the words "by which it is sought to obtain income" mean no more than that consideration in the form of income was agreed. The lease was granted for a consideration in the form of the rent of £2,800 per annum subject to review and the obligation to pay rent endures for the period of the lease. On the strength of this case Miss Whipple, for the Commissioners, submits that the rent need not be a market rent in order to qualify. It simply has to be paid continuously. Similarly the motive or purpose of the Trust in granting the lease is irrelevant. It is the structure and effect of the transaction itself which determines the incidence of VAT. This is said to be confirmed by the ECJ decision in the well-known case of BLP Group plc v CCE [1995] STC 424 in which it was held that the right to deduct input tax depended upon examining which goods and services had a direct and immediate link with the taxable transactions in question and that it was irrelevant to the determination of this question what was the ultimate aim pursued by the taxable person in entering into the transaction. In paragraph 24 of its judgment the ECJ said this:

"24. Moreover, if BLP's interpretation were accepted, the authorities, when confronted with supplies which, as in the present case, are not objectively linked to taxable transactions, would have to carry out inquiries to determine the intention of the taxable person. Such an obligation would be contrary to the VAT system's objectives of ensuring legal certainty and facilitating application of the tax by having regard, save in exceptional cases, to the objective character of the transaction in question."

16. Finally Miss Whipple drew my attention to Article 13A of the Sixth Directive. This is concerned with the exemption of certain business activities by charities and other non-profit making bodies. The list includes such exempt activities as the supply of services to old people's homes and services linked to sport or physical education. In Article 13B exemptions are also given to certain specified types of transaction regardless of by whom they are carried out. These include the leasing or letting of immovable property. Effect is given to these provisions in the Sixth Directive by s.31 and Schedule 9 of the VATA 1994. The Commissioners say that the exemptions are necessary in order to take out of tax transactions which would otherwise be economic activities. This is therefore said to be further confirmation that a lease granted in consideration of an annual rent would otherwise be a taxable supply.
17. Mr. Thomas, for the Trust, submitted that it was not possible to determine whether a lease was an economic activity simply by looking at the provision for the payment of rent. It was also necessary to have regard to the stated purpose of the transaction, evident from the lease itself, which in this case was the education of children under the age of 5 in the form of the Playgroup. It was also legitimate to take into account whether the lease was at a full market rent or was substantially below that level and (if so) the reasons for this. Assuming that the Playgroup's activities did not themselves constitute a business then the fact that the purpose of providing for the educational welfare of children was achieved through the medium of a lease at a rent did not make the Trust's use of the premises an economic activity. The lease could not be looked at in isolation from the circumstances and full terms upon which it came to be granted.
18. A number of examples of this allegedly wider principle were given. In CCE v Lord Fisher [1981] STC 238 the organiser of a shoot for friends and relations sought substantial contributions from those participating towards the expenses involved. Lord Fisher was assessed on the basis that the financial contributions made were consideration for a taxable supply of services made in the course of a business. Gibson J rejected this. A business did not include "any activity which is no more than an activity for pleasure and social enjoyment": see page 247h. On the facts as found by the Tribunal the learned judge was satisfied that the shoot was organised for the enjoyment of Lord Fisher's friends and not as a commercial enterprise. The contributions to expenses were no more than that. In short the arrangements lacked what in a later case the House of Lords described as an economic content.
19. In relation to something like a shoot the obvious distinction between business and pleasure may be relatively easy to draw. But a similar approach to whether a particular activity constitutes a business is said to have been applied to transactions which as a matter of ordinary descriptive language were clearly commercial rather than social. In Wellcome Trust Ltd v CCE [1996] STC 945 the trust sold a large quantity of shares which realised some £2.18bn. It sought the refund of a proportion of the VAT paid on the professional fees rendered in connection with the sale. This application was refused by the Commissioners on the ground that the share disposals were not "economic activities" within the meaning of Article 4(2)(b) of the Sixth Directive because they formed part of the normal management of trust investments and were not carried out in furtherance of any business. The trust's submissions were summarised by the ECJ in its preliminary ruling on this issue in the following terms:

"25. The trust adds that it would also run counter to the principle of fiscal neutrality were VAT to be charged on the sale or purchase of shares by a professional dealer but not on those made by an investor such as the trust. VAT must be applied to all economic activities, whatever their nature, without regard to the purpose or results of the activities themselves. It is irrelevant whether the purpose or object of an economic activity is trading or investment."

20. In rejecting that submission the ECJ held that the trust was not (and could not under its constitution be) a dealer in shares. It therefore engaged in no trade. It was in no different a position from that of a private investor who confined his activities to managing an investment portfolio. The main purpose of the share sale by the trust was to diversify its investments. This did not constitute an economic activity within article 4(2). It seems to me that this reasoning requires one to look beyond the fact that the transaction in question has taken place for consideration or even that it has been profitable. The wider context needs to be looked at in order to determine whether the transaction in question is or is indicative of a business. This point was dealt with more clearly in the opinion of the Advocate General in the Wellcome Trust case. At paragraphs 18 and 19 of his opinion he said this:

"18. The purpose of the share sales, in its view, is not to obtain regular income from the trust's financial investments but rather to turn those investments into liquid funds for the purpose of reinvestment. For that reason, in the United Kingdom's view, there is also no exploitation of property within the meaning of the second sentence of art 4(2) of the Sixth Directive.

19. That is a view with which I agree. The task of the trust is to manage with maximum care the assets entrusted to it. This means that care must be taken to ensure that the assets do not decrease, but rather increase, through particularly remunerative investments where appropriate. This also means that the holdings which the appellant retains are monitored and, if there is a danger that the trust may incur a financial loss, the shares are sold and new shares acquired which may be regarded as more profitable or involving less risk. The trust thus endeavours to secure the highest possible dividends in order to maximise the money available for its essential task of furthering medical research. For this reason – as just described – it is necessary to buy and sell shares as required. This, however, is not analogous to the activity of a dealer in shares. A dealer in shares is not primarily concerned with managing assets; rather, he endeavours to make profits through buying and selling shares and engaging in risky investments and speculation. He does not acquire shares with the principal aim of securing the highest possible dividends, but rather in order to resell them at as high a price as he can secure. The activity of the trust is not comparable – indeed, it cannot lawfully be so. Rather, the activity of the trust is similar to that of a private individual managing his own assets. Although such a person will on occasion buy and sell shares, he is nevertheless – and this is not in dispute – not regarded as a person exercising an economic activity within the meaning of the Sixth Directive. It is only in respect of its extent (particularly in the case of the second share sale) that the trust's activity can be distinguished from that of a private investor."

21. Inherent in this analysis is the proposition that to deal with one's property, whether real or personal, in order better to invest it or perhaps to give effect (in the case of a trust or charity) to one's objects does not per se render that transaction a form of economic activity for VAT purposes. This is notwithstanding that the sale of the existing investments will often have been carried out in order to secure a better income for the investor elsewhere. The Advocate General seems to equate the concept of the exploitation of property with its use for the object of producing profit as part of a business activity rather than with the purpose of producing a profit or better income simpliciter. Further support for this approach is said to be contained in the decision of the House of Lords in Institute of Chartered Accountants in England and Wales v CCE [1999] STC 398. The case was concerned with the activities of a recognised professional body with regulatory functions which charged fees to those seeking to be licensed as chartered accountants in order to recoup some of its costs. It was held not to be carrying on a business. In his speech (at page 404) Lord Slynn of Hadley described the test in these terms:

"For the purposes of the Sixth Directive, it is thus not sufficient that what is done can be described as an activity of the professions for the purposes of art 4(2), nor that it was a supply of services for consideration for the purposes of art 2(1). It must still be an economic activity.

On the basis of cases like Eurocontrol [1994] ECR 1-43 and as a matter of ordinary language I do not consider that what is done here by the institute is such an economic activity. The institute is carrying out on behalf of the state a regulatory function in each of these three financial areas to ensure that only fit and proper persons are licensed or authorised to carry out the various activities and to monitor what they do. This is essentially a function of the state for the protection of the actual or potential investor, trader and shareholder. It is not in any real sense a trading or commercial activity which might justify it being described as 'economic' and the fact that fees are charged for the granting of the licenses (to be assessed overall on a break-even basis) does not convert it into one.

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.

The tribunal in this case accepted that in deciding whether an activity was a business, the first four tests referred to by Ralph Gibson J were satisfied and discussion turned first on whether there were here supplies 'commonly made by those who seek to make profit from them' and, secondly, whether 'the relevant activity is predominantly concerned with the making of taxable supplies for a consideration' (see [1995] V&DR 87 at 101-103, paras 38-44). The tribunal held that neither was satisfied and (at 104, para 47) that for similar reasons, the activity in question here was 'outside the economic circuit within which the VAT charge operates'. The Lord Fisher case is a long way from the present, but it does indicate that business, too, in its ordinary sense and for the purposes of the 1994 Act needs to be given an 'economic' content."

22. It seems to me that the balance of authority is against treating a transaction or activity as economic or as part of a business merely because it results in a consideration or produces income. If the test was as simple as that it is difficult to see how the distinction made in the context of the sale of shares in Wellcome could be justified. As I have already said, even the private investor buys in order to provide himself with income in the way of dividends. On this basis a lease at a rent could only automatically qualify as economic activity if lettings fall to be treated in a different way. There is no obvious reason why this should be so. Article 4(2) does of course refer to the exploitation of tangible or intangible property for the purposes of obtaining income on a continuing basis as being an economic activity but this language is in marked contrast to that (for example) of Article 13B which merely refers to the leasing or letting of immovable property.
23. I accept Miss Whipple's submission that 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. For that reason I would not adopt the precise reasoning of the Tribunal contained in paragraph 54 of its decision. 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.
24. None of this detracts from the principle of tax neutrality which forms the bedrock of the submission that the motive or purpose behind the activity under consideration is irrelevant. The commercial letting of property in order to fund the charitable activities of a particular body does not make those lettings less of a business or economic activity. That is dictated by the nature of the lettings rather than the use to which the income is to be put. It is the means rather than the end which counts. But conversely as Lord Slynn recognised in the ICAEW case an activity which is not in any real sense commercial is not converted into a business simply because fees are charged. I should make it clear that a single letting might properly be treated as a business activity even if not preceded by a course of regular lettings of a similar kind. But in cases of isolated or infrequent transactions it seems to me to be more rather than less important to identify the nature of the transaction from the overall context in which it takes place.
25. In my judgment the mere fact of the letting at a rent is not sufficient in itself to render that transaction an economic or business activity. In the case particularly of an isolated letting as opposed to one by a property company or other concern with a recognisable letting business it is relevant as I have said 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). Nowhere is this more evident than in the decision of the ECJ in EEC v France 50/87 [1988] ECR 4797. This was another set of infringement proceedings concerned with French legislation which restricted the amount of VAT which could be deducted in relation to buildings which were let. The case was concerned with the implementation of Article 17 of the Sixth Directive but its interest for present purposes lies in the Court's treatment of lettings at low rents. At paragraphs 19-21 of its judgment the ECJ said this:

"19. The French legislation on the deduction of VAT charged on let immovable property does not allow total and immediate deduction where the aggregate amount of the proceeds from the letting of the property is less than one-fifteenth of the property's value. Such legislation is therefore incompatible with the above mentioned provisions of the Sixth Directive.

20. It is true that, as pointed out by the French Republic, such legislation is necessary particularly in order to deal with lettings at low rents granted by local authorities to associations with social objects or to undertakings which have come to their areas in order to establish themselves. The result of such practices would be to allow local authorities to make subsidies which would in part be borne by the State if the principle of total and immediate deduction were upheld in such cases.

21. In that connection, however, it must be stated that in order to deal with situations such as those referred to by the French Republic, Article 20 of the Sixth Directive provides for a system of adjustment. Where, because of the amount of the rent, the lease must necessarily be regarded as involving a concession and not as constituting an economic activity within the meaning of the directive, the deduction initially made is adjusted and the time-limit for that adjustment may be extended up to 10 years."

26. In van Tiem the commercial or economic content of the transaction was not in dispute. The only real question was a more technical one as to whether the building rights granted under Dutch law fell within the concept of the exploitation of property in Article 4(2). In paragraph 18 of its decision the ECJ stated in terms that "exploitation" referred to all transactions "whatever may be their legal form". In the present appeal the economic nature rather than the legal nature of the transaction is what is in issue. On the basis of the decision in EEC v France and the subsequent European jurisprudence I am satisfied that there was material from which the Tribunal was entitled to conclude that the 1998 lease to the Playgroup, although at an annual rent, did not constitute the carrying out of an economic activity. This does not depend on motive as such but rather on recognising that this was a letting at a low rent on the terms of a lease which only came into being in order to satisfy the requirements of lottery funding. This 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. I do not accept that it amounted to the exploitation of the property for the purpose of obtaining income therefrom. On the contrary it was a relatively informal arrangement between closely connected organisations in conformity with their respective aims. The use by the Trust of the building was therefore within Note 6 to Group 5 unless it can be said that the activities of the Playgroup itself constituted a business. That is the second issue which I have to decide.

Was the Playgroup's use of the building otherwise than in the course or furtherance of a business?

27. The Tribunal found as a fact that the use of the building by the Playgroup is restricted by the requirements of the Children Act to the running of the playgroup itself and to associated activities connected with children. The building cannot be and is not used for evening or weekend activities other than very limited fund raising activities such as jumble sales. The Commissioners' case that the Playgroup operates as a business on the premises must therefore be based on the nature and operation of the playgroup itself.
28. The Commissioner's primary argument is that the Playgroup operates a business because it charges for its services at a flat rate. The fact that these services are provided to and intended to benefit young children including those from disadvantaged backgrounds does not, it is said, alter the business nature of the operation any more than it did in CCE v Morrison's Academy Boarding House Association [1978] STC 1 where the boarding houses, although run on business lines, were intended to benefit boys being educated at the school. Once again it is necessary to concentrate on the nature of the operation rather than its purpose in order to determine whether it constitutes an economic activity.
29. I accept, as I have indicated earlier in this judgment, that the fact that an essentially business operation is intended to further the charitable objects of the body which carries it out does not of itself alter the nature of the operation for VAT purposes. A charity shop run to make a profit for the charity is a business even though its object is to benefit that charity. But in that case the shop itself is not as such a charitable activity. It is merely a form of fund raising run on a commercial basis. The operation of the Playgroup by contrast is itself charitable. This may not prevent it being treated as a business but its charitable nature does have to be taken into account in deciding whether in the words of Lord Slynn in the 1 CAEW case the Playgroup operation has an economic content.
30. Although it might be said in the present case that the Playgroup was a serious undertaking earnestly pursued with reasonable continuity and that it was conducted regularly it is evident to me as it was to the Tribunal that it is not predominantly concerned with the making of taxable supplies for a consideration. The overwhelming impression which one gets from considering the evidence before the Tribunal is that this is a co-operative venture run by trained staff with the benefit of help provided by parents under the control of a committee on which parents predominate. The evidence before the Tribunal included a pre-school information sheet which states that the playschool is not profit led and struggles to maintain the balance between remaining affordable and meeting its operating costs. Playschool fees are fixed on this basis. This seems to me to be a very different arrangement from that subsisting in the case of a commercial playgroup run for a profit which was an example which Miss Whipple put to me. An intention to trade at a profit is not of course an essential feature of a business but it is relevant to a consideration of whether the organisation in question can seriously be regarded as doing anything more than the carrying out of its charitable functions. I think that the Tribunal was entitled to conclude from the evidence before it that no business user was involved in this case.
31. This leaves me to deal with Miss Whipple's alternative submission on this point which was based on s.94(2) of the VATA 1994. This provides that:

"(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.…"

The provisions of this section were recently considered by the House of Lords in Eastbourne Town Radio Cars Association v CCE [2001] STC 606. The case concerned an association whose members all carried on business as private car hire drivers. The association was non-profit making and was run by a committee of members in accordance with its constitution and rules. It provided office premises and a communications network for the drivers who belonged. The association employed a manager, telephone operators and other staff. Each member contributed a regular amount to the association and after payment of expenses any surplus in favour of a member was carried forward.

32. The issue in the Eastbourne case was whether certain changes in the rules of the association entitled it to cancel its registration for VAT purposes on the basis that sums paid by the members under the new rules were not consideration for the services it supplied. The decision turned on the particular facts of that case but a paragraph in the speech of Lord Hoffmann is relied upon as indicating what are the badges so to speak of an unincorporated association. Once such an association is found to exist it is caught, the Commissioners submit, under s.94(2)(a) and its activities are deemed to be a business. The passage in question is paragraph 34 of Lord Hoffmann's speech where he says this:

"[34] The first condition is the existence of an association rather than simply a contractual arrangement for jointly obtaining goods and services and sharing their expense. Durham Aged Mineworkers' Homes Association v Customs and Excise Comrs [1994] STC 553, much relied upon by Mr. Smouha, illustrates an arrangement in the second category. An association cannot be defined by the emuneration of a set of necessary and sufficient conditions. What can be done is to list features which are normally present in an association. So, for example, it will usually have a set of rules which constitute a mutually binding contract between the members, a statement of its objects and provisions for its governance by a committee or committees, the admission of members and the cessation of membership (giving the association a continuity beyond its original members) and provisions (or a rule-making power) for the terms and conditions upon which members may enjoy the benefits of membership. This list of the paradigm characteristics of an association is not intended to be exhaustive. Furthermore, it is perfectly possible for contractual arrangements to lack one or more of these features and still be regarded as constituting an association. But the further the arrangements depart from those of the standard case, the less likely they are to be treated as an association for the purposes of the 1994 Act."

33. In the present case the Playgroup has a constitution which provides for it to be governed by a committee and for its property to be held by a body of trustees. The Playgroup through its committee has power to fix and collect the fees payable by children attending the playschool and to raise money for the playschool's activities. Members fall into two groups. There are family members comprising the parents or guardians of all children who attend the group. Each family is to have one vote and count as one member. Apart from these family members other interested individuals apart from paid employees are entitled to become members but not until they have paid the subscription set by the committee. Mr. Thomas pointed out that membership (even in the case of family members) post dates the provision of the services in the form of child care facilities. But that does not alter the fact that any person whose child attends the playgroup is automatically a member of the Playgroup and receives the child care services in that capacity. It therefore seems to me that the Playgroup is either an association or an organisation within the meaning of s.94(2).
34. What however is the effect of this in the present case? Mr. Thomas submitted that Article 4 of the Sixth Directive should be treated as having direct effect so as to override the provisions of s.94(2) so far as they are in conflict. This is a difficult area of law on which I have not heard any full argument and the Commissioners are not prepared to concede that Article 4 does have direct effect. However I do accept that in construing and giving effect to s.94(2) the Court is required to interpret national law in the light of the meaning and purpose of the Sixth Directive with a view to ensuring so far as possible that there is consistency between the directive and the legislation that was designed to implement it.
35. For this reason I do not accept s.94(2) should be treated as capable of converting into an economic activity a supply of services which would not otherwise be so treated. It seems to me that the legislative purpose of s.94(2) was to ensure that the activities of an association or other organisation which is not a legal person should not be excluded from the VAT regime for that reason alone. Such an association could therefore be treated as a taxable person and be capable of making a taxable supply within the meaning of ss 4 and 5(2) of the VATA 1994. Support for this view can be found in paragraph 18 of the speech of Lord Slynn of Hadley in the Eastbourne case.
36. As Lord Hoffmann observed in that case (paras 28-31) although an unincorporated association can be a "person" it can only be a taxable person if it is registered for VAT and the basis of registration is the making of taxable supplies: see sch.1, para 1. An association can only make a taxable supply if it is treated as separate from its members to whom those supplies are made. The deeming provision in s.94(2), although couched in terms of the carrying on of a business, seems to me to be no more than a legislative shorthand for saying that services provided by an association to its members on an essentially commercial basis should be treated as part of a business notwithstanding that the association has no legal existence beyond the contractual relationship between its members. It does not require a supply of services which is not inherently commercial to be treated as such. I do not therefore accept that s.94(2) has the effect of making the operation of the playgroup an economic activity.

Did the intended use of the building (a) by the Trust or (b) by the Playgroup fall within the definition of "relevant charitable purpose" contained in Note 6(b) to Group 5 (the village hall provision)?

37. My decision on the first two issues determines this appeal in favour of the Trust but because I have heard argument on this issue it may be helpful if I set out a short summary of my conclusions.
38. Note 6(b) was intended to preserve zero rating for village halls or other buildings used for a similar purpose. The provision was needed because the operation of such buildings might be thought to constitute or involve some form of business or economic activity. To put the matter beyond doubt they have been expressly included within the zero rated categories. In Jubilee Hall Recreation Centre Limited v CCE [1999] STC 381 the Court of Appeal, against the background of the final consumer test laid down in EC Commission v UK (supra) interpreted Note 6(b) in these terms:

"It is true that the local community (assuming for this purpose that 'the community of Covent Garden ………and its neighbourhood' can aptly be described as 'a local community') are the final consumers in that they not only may use the facilities provided but that any surplus derived from use by them or others is applicable primarily for the benefit of that community. However, that is not the sense in which 'the final consumer is used by the Court of Justice. The Court of Justice had in mind the case where the final consumer either benefits directly from the supply or where it can be said that the supply is 'sufficiently close to the consumer to be of advantage to him'.

In this context the plain purpose of sub-para (b) was in my judgment to extend the relief in sub-para (a) to the case where a local community is the final consumer in respect of the supply of the services, including the reconstruction of a building, in the sense that the local community is the user of the services (through a body of trustees or a management committee acting on its behalf) and in which the only economic activity is one in which they participate directly; the obvious examples are the bring-and-buy or jumble sales, the performance of a play by local players and the like. On a strict construction, any economic activity carried on by somebody outside the local community even to raise money for the maintenance of a village hall (by, for example, letting the village hall at a commercial rate) would be outside sub-para (b). Similarly a hospital which provides free medical care and which carries on the business of selling flowers and books to visitors is outside sub-para (a). Mr. Kent explained that the commissioners exercise a reasonable administrative discretion and disregard such incidental use if it is modest in its scope.

Lightman J criticised (at 421) the formulation which had been advanced by Miss Stockton of 'something which is owned, organised and administered by the community'. I agree that that formulation adds a gloss to the words used which may be too restrictive. I prefer the tribunal's approach. Sub-paragraph (b) is intended to cover economic activities which are an ordinary incident of the use of a building by a local community for social, including recreational, purposes. The village hall is the model or paradigm of that case. Lightman J's approach, in effect, removes all meaning from the words 'as a village hall or similarly'. per Sir John Vinelott at pp 389-390;

The introduction of the concept of the village hall seems to me to have been intended to equate the activities with the kind of use ordinarily made of a village hall and thus to introduce considerations of scale and locality. For my part I think the scale of Jubilee Hall's commercial activities went well beyond the normal activities of a village hall, though from time to time village halls are used to raise money by commercial activities. Further, the beneficiaries of the zero rate are clearly not solely those who benefit from the charitable purposes." per Belham LJ at p.396.

39. It seems to me to follow from the passages I have quoted that it is not enough to show that the building in question was intended to be used for an activity which could conceivably take place in a village hall and is available to members of the local community. What needs to be shown is that the building is or fulfils the role of a village hall or other building designed for public use in the provision of social or recreational facilities for the local community. If, as in the present case, the use to which the building can be put is severely limited it is no answer to say (as the Tribunal did) that those who benefit from that limited use are members of the local community. The village hall was deliberately chosen as the obvious or paradigm example of a building which exists for the benefit of a local community being able to provide premises for a wide range of social and other activities for their benefit. The words "or similarly" were intended to include other buildings which although not village halls as such provide a centre for community activities. They qualify the words "village hall" and not the words which follow in Note 6(b). The provision of social and recreational facilities to a section of the public does not make the building a village hall or something similar. For Note 6(b) to apply the building must be a village hall or its equivalent and provide social and recreational facilities for the local community at large. The building used by the Playgroup is not generally available and does not do this. On this issue the decision of the Tribunal cannot stand.

Conclusion

40. The appeal will be dismissed.