England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		05/11/2004

The Hon. Mr. Justice Evans- Lombe:

1. In this case the Commissioners of Customs & Excise ("The Commissioners") appeal, pursuant to Section 11 of the Tribunals and Enquiries Act 1992, against the decision of the Manchester VAT & Duties Tribunal ("the Tribunal") released on the 28^th January 2004. By that decision, the Tribunal found that the use by St Paul's Community Project Ltd, after a recent change of name now known as the St Paul's Community Development Trust (" St Paul's"), of certain parts of premises in Birmingham for the purposes of running a day nursery, was a use which was otherwise than in the course or furtherance of a business within the meaning of note (6) to item 2 of Group 5 of schedule 8 of the Value Added Tax Act 1994 ("the 1994 Act") with the consequence that construction works carried out to those premises were zero-rated for VAT purposes. St Paul's had successfully appealed to the Tribunal against the decision of the Commissioners contained in a letter of the 4^th March 2003 whereby they decided that, because the operation of the nursery was a business activity, the construction works on that part of the building used by the nursery were subject to VAT at the standard rate.

The Background Facts

Before the Tribunal was documentary evidence supplemented by the oral evidence Dr Anita Halliday, the Chief Executive of St Paul's. In their decision the Tribunal deal with the background facts of the appeal at paragraph 3 and following as follows:-

"Few of the facts of the case were in dispute. The appellant [St Paul's] is a registered charity, established some years ago in Balsall Heath, a disadvantaged part of Birmingham. Over the years, it has developed from a small playgroup started as a largely cooperative venture by a number of parents, to a fairly large, but still local, organisation devoted to the needs of the area. The day nursery with which we are concerned is one of several activities carried on by the appellant, and is complementary to some of those activities, in particular the "Sure Start" programme (an initiative of the Department for Education and Science) which is designed to help the parents of young children return to work; the availability of a day nursery is an obviously useful adjunct to that programme. Overall, the turnover of the day nursery (in grant income and fees) represents about 10% of the appellant's total income.

Until 1979 what is now the appellant was a number of separate small organisations. They came together in that year but each had its own premises, some not very satisfactory for their purpose. In late 2000 the appellant took a lease from Birmingham City Council of the land on which it constructed the building with which we are concerned. That building now houses all its activities most of which, as the respondents agree, are charitable in nature. The construction of the building was largely funded by grants from the National Lottery Charities Board and from Sure Start. The appellant's continuing activities are supported by grants, some from central and some from local government. It also receives some further grant money from the Lottery, and some donations. It makes up the rest of the income it requires from fundraising activities and from the fees it charges to users.

We take the foregoing in part from the documents produced at the hearing and in part from the evidence of the appellant's chief executive, Anita Halliday. We accept what she told us.

The only controversial points which emerged from Dr Halliday's evidence related to the management of the nursery and to its fee structure. It is, as we accept, the appellant's aim to involve parents in the management of the nursery. Although there has been some parental involvement, it seemed to us that it was rather less than the appellant had hoped, and we have concluded that although the level of parental involvement was by no means nominal; the management committee was, in practice although not by design, dominated by the other members. On the other hand, we accept Dr Halliday's evidence that parental involvement was not confined to membership of the management committee, and that parents were involved in the day to day activities of the day nursery to a significant extent.

Dr Halliday told us (as we accept) that the grants received by the^, appellant, although often, but not always, designated for a specific purpose, were not calculated on a per capita basis. The appellant was required to make some places at the nursery available for cases identified by the local authority (some for emergency use), and there was correspondingly a requirement that a minimum number of places be provided. The appellant was also required to adhere to staffing levels prescribed by the local authority. In fact, as Dr Halliday explained, there are prescribed national standards for the staffing of nurseries, which the appellant has exceeded by employing more highly qualified staff than those standards demand. We observe too that the number of nursery places actually provided is significantly more than the minimum demanded by the local authority.

The amount of the appellant's grant income was insufficient to meet all of its costs of providing those places, and the balance (which could not be made up by fund-.raising activities) had to be found by charging fees to the parents. We accept Dr Halliday's evidence that the fees were pitched at a level which was intended to ensure that the appellant broke even, and that the exercise of calculating the amount to be charged was extremely difficult, depending as it did on the amount of grant to be expected, a prediction of the number of children who would attend the nursery and the prompt payment by parents of the fees. It was complicated too by the somewhat haphazard system by which, as Dr Halliday explained, subsidies available to individual parents (though mandated by them to the appellant) were actually paid. We are satisfied from her evidence and from the accounting information which was produced to us that, taking one year with another, the appellant did not, and did not set out to, make any profit from the nursery, either for its own sake or for the purpose of cross-subsidising the appellant's other activities. The fees charged by the appellant, at between £85 and £95 per week per child, represented only part of the cost of providing a place which Dr Halliday had calculated at £130 per week per child. By comparison, the cost of a place at a local commercial nursery was, on average, £118 per week (the highest fee she had discovered in the course of her enquiries was £145)."

2. The Nursery management committee produced a "Nursery Handbook" of which the version in circulation at the relevant time was before the Tribunal. The handbook lists the nursery staff. It is accepted that the recruitment policy of St Paul's for nursery staff was deliberately to exceed the OFSTED requirements for standards of training of staff in nursery schools and that, in consequence, staff salaries were a larger item of expense than that which would usually be incurred by a commercial nursery. The handbook sets out the admission policy of the nursery as follows:-

"Admissions

We allocate places on the following basis:

1. Balsall Heath residents (as defined by our map) with a sibling at nursery at the time of registration.

2. Balsall Heath residents (as defined by our map).

3. Children from other areas with a sibling at our nursery at the time of registration.

4. Children from other areas whose parents work in the Balsall Heath area.

5. Length of time on the waiting list.

We have eight places for zero/one year olds, eight places for one/two year olds, 16 places for two/three year olds and twenty four places for three/four year olds. Six of these places are for children referred by Sure Start Balsall Heath, and four places are kept for emergency cases. Children must live within the Sure Start Balsall Heath area to be considered for these places."

3. The minutes of the nursery management committee for the 24^th May 2002, in evidence to the Tribunal, dealt with admissions at paragraph 7 as follows:-

"7 Admissions criteria were discussed. 10 places are reserved for referrals from Sure Start (Respite Care = four, Special Care needs = six). Half of the remaining places at least must be for Balsall Heath residents, again to support Sure Start aims and targets. The following criteria were agreed for allocating places:

Priority to Balsall Heath residents

Next priority to siblings and children at the nursery at the time of admission

Then from children on the waiting list in order of application."

4. The handbook sets out the fees chargeable to parents. These vary depending on the age of the child and reflect the increasing costs to the nursery of looking after and educating children as there age increases.
5. The handbook sets out what will occur if parents pay their fees late. The handbook describes an accumulating programme of sanctions culminating after four weeks in the removal of the child from the nursery. It appears that this scheme was brought in at the insistence of the parent members of the management committee but from notes of the evidence given by Dr Halliday to the Tribunal which were produced to me it seems that these rules were not strictly enforced.
6. St Paul's was incorporated and first registered on 14^th June 1979. The memorandum of association contains charitable objects as follows:-

"3. The objects for which the company is established are the provision of accommodation, facilities and services for education, support, training and recreation and other leisure time occupation for children and young adults resident in Balsall Heath and the surrounding area, and where appropriate the remainder of the community, including the establishment and management of environmental projects; health services; family support services; community events; community development; capacity building; and the provision of management and administrative support to other voluntary and community groups, all being facilities:

(A) of which such persons have need by reason of their youth, poverty, social and economic circumstances, infirmity or disability; and

(B) which will improve the conditions of life for such persons by promoting their physical, mental and spiritual well-being;

In furtherance of the above objects, but not otherwise, the company shall have the following powers:

(a) To establish or to secure the establishment of schools and other educational activities, early years provision, play provision and community centres and to maintain' and manage, or to co-operate with any local statutory authority in the maintenance or management of such schools, educational activities, early years provision, play provision and community centres for activities promoted by the company in furtherance of its objects.

(b) To provide endow furnish and fit out with all necessary furniture and other equipment, and maintain and manage such buildings and other premises as may from time to time be required for the purpose of the company.

(e) To construct, maintain, and alter any houses, buildings, or work necessary or convenient for the purpose of the company…

4. The income and property of the company shall be applied solely towards the promotion of its objects as set forth in the Memorandum of Association and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to members of the company and no trustee shall be appointed to any office of the company paid by any salary or fees or receive any remuneration or other benefit in money or money's worth from the company PROVIDED THAT nothing herein shall prevent any payment in good faith by the company. "

7. It appears that the corporate affairs of St Paul's were reasonably well managed with minuted meetings of its board of directors and reports by the nursery management committee to the board. It maintained accounts which appear to have been prepared in proper form. In evidence to the Tribunal were the accounts to the 31^st March 2001 and 31^st March 2002. Also in evidence were management accounts for a period of 6 months to September 2003 which showed a figure of £52,540 in respect of fees received out of a total turnover of £1,248,806 reflecting the total turnover for all the activities conducted by St Paul's during the period.
8. The Commissioners' letter of 4^th March 2003 which I have already referred to, sets out the application of the Commissioners' policy in the allocating of VAT liability in respect of the supply of building services to St Paul's for the construction of their new building. In that letter the commissioners accept zero rating in respect of services relating to construction of parts of the building where the functions of St Paul's were accepted not to have been in any way financed by the payments of fees. By contrast the Commissioners require the payment of VAT at the standard rate in respect of that part of the building devoted to the nursery project. Their reasons for doing so are summarised in the following paragraph:-

"The funding of the Nursery was examined in detail. All parents who use this facility are charged fees. The pricing structure is based around the average local rate (of £120 per week). This is subsidised to some extent by grants received (including a grant from Sure Start) and, whilst the actual amounts paid by the parents will vary in accordance with location, age of the child and whether they are Sure Start parents i.e. referred by Sure Start, this still represents a supply in return for a consideration. I regret, therefore, that the running of the Nursery is deemed to be a business activity and VAT at 17.5% is due on the construction of this part of the building."

9. The references to Sure Start in this letter and the nursery handbook and minutes of the management committee are to a Government programme of Social Support for particularly disadvantaged areas of the country. St Paul's was a recipient of financial support for all its projects and, in particular, the nursery project benefited from this and other local authority sources. It also received charitable donations.

The Statutory background

10. The imposition of VAT in the United Kingdom is now governed by the Sixth Council Directive of the Council of the European Communities promulgated on 17^th May 1977 ("the Sixth Directive"). The recitals and articles of that directive relevant to this appeal are as follows:-

"… whereas it should be ensured that the common system of turnover taxes is non-discriminatory as regards the origin of goods and services, so that a common market permitting fair competition and resembling a real internal market may ultimately be achieved;

Whereas, to enhance the non-discriminatory nature of the tax, the term "taxable person" must be clarified to enable the Member States to extend it to cover persons who occasionally carry out certain transactions;…

Whereas the taxable base must be harmonised so that the application of the Community rate to taxable transactions leads to comparable results in all Member States…

Whereas the obligations of taxpayers must be harmonised as far as possible so as to ensure the necessary safeguards for the collection of taxes in all Member States;…

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…

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 1 shall comprise all activities of producers, traders and persons supplying services … and activities of 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."

11. The rates of tax imposed are dealt with at Article 12 and at Article 28, that part of the Directive dealing with transitional provisions, the following appears:-

"Article 28

2. Notwithstanding Article 12(3) the following provisions shall apply during the transitional period referred to in Article 281.

a) Exemptions with refund of the tax paid at the preceding stage and reduced rates, lower than the minimum rate laid down in Article 12(3) in respect of the reduced rates which were in force on 1 January 1991 and which are in accordance with Community Law, and satisfy the condition stated in the last indent of Article 17 of the second Council directive of 11 April 1967, may be maintained…"

The transitional period has been successively extended and is still in force today. Article 28 is the basis for the zero-rating provisions of Section 30 of the 1994 Act.

12. Section 4 of the 1994 Act provides:-

"4 Scope of VAT on taxable supplies

(1) 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.

(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

30 Zero-Rating

(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section –

(a) no VAT shall be charged on the supply; but

(b) it shall in all other respects be treated as a taxable supply; and

accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.

96 Other interpretative provisions

(9) Schedules 7A, 8 and 9 shall be interpreted in accordance with the notes contained in those Schedules; and accordingly the powers conferred by this Act to vary those Schedules include a power to add to, delete or vary those notes."

13. "Group 5- Constructions of buildings etc" of schedule 8 of the 1994 Act defines building works entitled to zero-rating relevantly for this judgment at Item 2 as follows:-

"2 The supply in the course of the construction of

(a) a building designed …or intended for use solely for… a relevant charitable purpose;"

14. Note (6) to Group 5 provides:-

"(6) 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."

15. I gratefully adopt the description of the origins of Note (6) to Group 5 set out in the judgment of Mr Justice Patten in Commissioners v Yarburgh Trust [2002] STC at page 213 in this way:-

"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 compliance of the United Kingdom legislation on zero rating with the requirement contained in Article 17 of EC Council Directive 67/228 of 11^th April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (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 held by the Court of Justice of the European Communities in EC Commission v United Kingdom (case 416/85) [1988 STC 456 [1990] 2QB 130] 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 Commissioner against the United Kingdom and as a result of this decision the provisions of what is now Group 5 of Schedule 8 to the 1994 Act 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 Group 8 of schedule 5 to the Value Added Tax Act 1983)."

16. As the Tribunal correctly recognised

"The only question in issue in this appeal is whether the nursery constitutes "a relevant charitable purpose" within the meaning of this provision [item 2(a) of Group 5]. The definition of the phrase is to be found at Note (6) to the Group;…

There was no dispute that the appellant is a charity, and it was not contended on its behalf that paragraph (b) [of Note (6)] was of any application. The only remaining question, therefore, is whether the nursery as we have described it represents use "in the course or furtherance of a business." This expression is not further defined or explained in the Act: section 94(1) of the Act ("in this Act 'business' includes any trade, profession or vocation") does not help; and we derive little further assistance from the use in the Sixth VAT Directive, at Article 4, of the equivalent term "economic activity"."

17. The decision of the Tribunal, therefore, involved a two stage process. The first stage was to construe the word "business" in Note (6) to Group 5 in the light of the authorities both domestic and European. It is not in issue that the same meaning must be given to "business" as it appears in the Note as that given to "economic activity" as it appears in Article 4 of the Sixth Directive. The second stage is to apply that construction and the test produced by it to the facts of the instant case. The first stage is a matter of law; the second stage is a pure question of fact.
18. It is the Commissioners' submission that the Tribunal erred in law in their construction of Note (6), alternatively, that their conclusion that the nursery school activities being conducted by St Paul's were not a business within Note (6), and so should be zero rated for VAT purposes, was unreasonable and so perverse in the sense that no Tribunal, properly instructed in the law and acting judicially could have reached that conclusion on the facts before it. See Edwards v Bairstow [1956] AC p 14. Whether the Commissioners are correct constitutes questions of law for this court.
19. The errors of law which the Commissioners submit are to be found in the decision of the Tribunal are set out in the grounds of appeal and in written submissions submitted on their behalf by Mrs Hall QC at paragraph 9. They are:-

"(a) The Tribunal treated the fact that St Paul's fees were set at a level designed to ensure that the operation broke even as a determining factor or alternatively, attached too much weight to that factor.

(b) The Tribunal treated a business activity and a charitable activity as mutually exclusive. The proper approach in law was to ask whether St Paul's was acting in the course of a business while carrying out a charitable activity.

(c) The only reasonable conclusion available to the Tribunal on the facts was that St Paul's used the building in the course or furtherance of a business carried on by it and that accordingly the construction works were not zero- rated under Group 5 Schedule 8 of the Value Added Tax Act 1994 when read with Note (6).

(d) The Tribunal ought to have found that there was no material difference between the nursery as run by St Paul's and private commercially run nurseries with the consequence that the St Paul's was not entitled to claim the zero-rate for the construction works. The Tribunal's decision places St Paul's at a commercial advantage vis-avis other private commercial nursery providers. Such a result is not consistent with the Sixth Directive.

(e) The Tribunal failed to focus, as it should have done, on the intrinsic nature of St Paul's activity. Had it done so, the only conclusion reasonably open to it was that it was acting in the course or furtherance of a business.

(f) The Tribunal wrongly concluded that it was bound by the case of Customs and Excise Commissioners v Yarburgh Children's Trust [2002] STC 207."

20. In the course of her oral submissions Mrs Hall in my view correctly, reduced these grounds to three namely grounds (b), (c) and (f). Grounds (a), (c) and (e) all amount to the same submission, namely, that in applying the relevant law to the construction of Note (6)(a), the Tribunal arrived at an unreasonable conclusion so that this court is able to set their decision aside as a matter of law; see Edwards v Bairstow ibid.
21. I will deal with ground (b) first and paragraph 12 of the Commissioners' written submissions as follows:-

"12. It is clear from the following passages in the Tribunal's decision that it treated a business activity and a charitable activity as mutually exclusive.

"1. The question for determination in this appeal is whether a day nursery run by the appellant ... is to be regarded as a business activity, as the respondents contend or is instead a charitable activity as the appellant maintains."

"14. ... The validity of the Commissioners' stance depends on our preferring the view that this is a business rather than a charitable activity"

"If that (or something very close to it) is a charitable activity when carried on (as in Yarburgh) by a co-operative, does it cease to be charitable, and become a business activity ..."

"15. We are satisfied that the appellant's day nursery is run, not as a business, but as a charitable activity ..."

13. The correct question is whether in carrying out a charitable activity, St Paul's was carrying on a business. The fact that St Paul's is a charity was not relevant to the issue the Tribunal had been asked to determine."

22. I disagree that the quoted passages from the Tribunal's decision show that the Tribunal was applying the relevant law incorrectly. It seems to me that, in these quoted passages from the decision, the Tribunal are using the word "charitable" in its colloquial sense, namely, gift or concession in favor of a deserving or disadvantaged group, to be contrasted with "business", namely, operations directed to earning a return or profit for a business man. It seems to me that the Tribunal, in the passage which I have quoted above from paragraphs 9 and 10 of the decision correctly directs themselves as to the issue which they have to decide. The approach of St Paul's is not that its charitable status automatically means that its operations cannot constitute a "business" within the meaning of Note (6). The Commissioners highlight the reliance of the Tribunal on the judgment of Mr. Justice Patten in the Yarburgh case an authority to which I will return later in this judgment. At paragraph 29 of his judgment in that case, Mr Justice Patten points out that a charity, as part of its operations, may conduct a business designed to make money for its support and gives the example of a charity shop. Such a business would be chargeable to VAT.
23. I turn to consider ground (f). The Commissioners' criticism under this head is summarised in paragraph 16 and 17 of their written submissions as follows:-

"16 The Tribunal was wrong to be constrained by the decision in Yarburgh. It should have focused instead on the intrinsic nature of the activities of St Paul's alone. See EC v Netherlands.

17 Having regard in particular to the cumulative effect of the facts set out above, the Tribunal ought to have found that this case was distinguishable from the Yarburgh case."

24. The Commissioners' criticisms are directed to paragraphs 11 and 15 of the decision where the Tribunal say:-

"11. It is convenient to focus upon the most recent of the cases to which we were referred, Customs and Excise Commissioners v ^-Yarburgh Children's Trust [2002] STC 207, not least because (after eliminating from consideration an added complication in that case which does not arise here) it has several points of factual similarity with this case. Mr Shaw argued that it should be distinguished on those facts; Mr Thomas that the similarities between the two cases were so great that we could not properly distinguish them and, bound as we are by an authority of the High Court, we should follow Yarburgh and determine the appeal in the appellant's favour.

15. We are satisfied that there is no meaningful distinction to be drawn between this case and Yarburgh. As we have indicated, that case is binding on us, but we are in any event content to follow it. We are satisfied that the appellant's day nursery is run, not as a business, but as a charitable activity and that the building works should properly be zero-rated."

25. It is certainly correct that a significant part of the Tribunal's decision involves a comparison between the facts of the instant case and those of the Yarburgh case. However in my judgment this criticism of the Tribunal's decision is misconceived. It is a legitimate process for any court or tribunal to compare the facts of the case under consideration with those in another reported case, and, on the assumption that the court or tribunal accepts that the reported case properly applies the law, conclude that, applying that law to the case under consideration inevitably leads to the same result. The suggestion that the Tribunal ought to have distinguished the instant case from the Yarburgh case, on a comparison of the facts in the two cases, only leads back to the submission under (c) that the Tribunal's conclusions on the facts were unreasonable under the rule in Edwards v Bairstow. I should add as a postscript that Mr Thomas, who also appeared for St Paul's before the Tribunal, denies that he submitted to the Tribunal that they were bound by Patten J's findings.
26. I turn to consider the remaining question, namely, whether the Tribunal, if properly instructed in the law and acting judicially, could have reasonably reached its determination in the present case on the evidence before it: see Edwards v Bairstow ibid. This again involves two stages: the first being an examination of the law applicable to the construction of the word "business" in Note (6)(a) so as arrive at proper construction of that note and, the second being an examination of the Tribunal's decision in light of the evidence before it so as to come to a view whether its conclusion was reasonable.
27. Mrs Hall's initial submission was that the fact that the parents of the children attending the St Paul's nursery paid fees for the nursery services they received in exchange, effectively determined this appeal in the Commissioners' favour. These submissions reflected the approach of the Commissioners in their letter of 4^th March 2003 imposing VAT only on the services provided in the construction of those parts of the building, where activities took place for the benefit of children, in respect of which their parents paid fees. It is certainly true to say that the payment of fees by the parents is an important, if not the most important, consideration which the Tribunal had to take into account in arriving at its conclusion. As Mrs Hall willingly conceded, without those payments the Commissioners had no case for the imposition of VAT. However, in the light of the authorities Mrs Hall was driven in the course of argument to concede, also, that the payment of fees was not a deciding factor but only one of the factors which the Tribunal had to put in the balance in reaching its conclusion whether the St Paul's nursery constituted a "business".
28. That this concession was rightly made is best illustrated by a contrast between two authorities. In the Commission of the European Communities ("the EC Commission") v The Netherlands [1987] ECR 1471 the European Court of Justice ("ECJ") was considering a case brought by the EC Commission for a declaration that the Netherlands, in not subjecting the services performed by notaries and bailiffs to VAT, were breaching the provisions of the Sixth Directive Articles 2 and 4. Notaries and bailiffs perform official functions associated with courts of law but from which they receive fees from those on whose behalf they perform those functions. The court's conclusion was that the performance of those functions should be subjected to VAT at the standard rate. At paragraph 21 of the opinion of Advocate General Lenz he points out that Article 4 of the Sixth Directive cannot be construed restrictively as the Netherlands were contending "since VAT is…to be charged as generally as possible". He continues at paragraph 26:-

"26 Whilst it is true that notaries and bailiffs are appointed by the state and that their activities are regulated and supervised by the State, it must nevertheless be borne in mind that they carry on their activities independently, without being integrated into the organisation of the State. They pursue their activities for their own account and in particular they themselves collect the fees and charges due to them. They pursue their activities as members of a legal partnership or firm and do not therefore differ substantially from lawyers, accountants or tax advisors. The purpose of their activities is to generate revenue for their own account, so as to cover their overheads and provide themselves with income. To that end they supply services to third parties, on their own responsibility, thus acting independently within the meaning of Article 4 of the Sixth Directive.

Notaries and bailiffs, who pursue their activities as independent persons, therefore fall within the scope of VAT…"

29. By contrast, in the decision of the House of Lords in Institute of Chartered Accountants in England and Wales v Customs and Excise Commissioners [1999] STC 398 the House of Lords was considering a case where the ICAEW was seeking repayment or set off of input tax paid on goods and services supplied to the Institute because it constituted a body chargeable to VAT in respect of its services to the public as a professional regulatory body authorised under various statutory schemes to issue licences to persons carrying on investment business, auditors and insolvency practitioners. The conclusion of the House of Lords was that the ICAEW were not in a position to do so because the exercise of their regulatory functions, in respect of which they charged fees, did not constitute a business within section 4 of the 1994 Act and Article 4 of the Sixth Directive. Lord Slynn giving the leading speech said this at page 402 of the report:-

"If read literally, it can be argued as Mr. Andrew Thornhill, Q.C. has done, that in granting these licences for a fee, the Institute is supplying services in the course of a business, or is supplying services for consideration in the course of carrying on of an economic activity. But so far as the Sixth Directive is concerned, The Court of Justice of the European Communities has made it clear that it is not enough merely to point to the fact that there is a supply of services in return for a money payment and some loose economic connection, but that the activities must be of an "economic nature" see Polysar Investments Netherlands BV v. Inspecteur der Invoerrechten [1993] STC 222 at 238)."

30. He continues at page 404:-

"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 licences (to be assessed overall on a break-even basis) does not convert it into one."

31. Then having approved tests specified by Mr Justice Ralph Gibson in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 at 247 to which I will return later in this judgment he continues:-

"It is not necessarily sufficient (though it may often be sufficient in different contexts) that money is paid and a benefit obtained. Performing on behalf of the State this licensing function is not the carrying on of a business."

In both these cases fees were paid but in one a business was found to exist, in the other it was not.

32. It is accepted by St Paul's that the imposition of VAT, being a tax on turnover, is not dependent on the making of profits by a taxpayer, or a presumed intention by him to make profits in the future. It is St Paul's submission that the appropriate test is to be found in the judgment of the Lord President in the Inner House of the Court of Session in Customs and Excise Commissioners v Morrison's Academy Boarding Houses Association 1978 STC p1 as later developed by subsequent cases. In that case the Court of Session was considering a taxpayer company limited by guarantee and exempt as a charity from liability to income tax. In promotion of its charitable objects it owned and operated 6 boarding houses in which, during school terms, pupils of the Academy, with which it was associated, were accommodated. The company charged fees in respect of the goods and services provided for the pupils accommodated. Its affairs were managed so that neither profit nor a loss was incurred in the conduct of its activities. For the purpose of the company's liabilities to Value Added Tax it was not disputed that the company was a taxable person and that its services were taxable under the provisions of the Finance Act 1972 the predecessor of the 1994 Act. The company however claimed that the services supplied were not supplied "in the course of a business carried on" by the association within those provisions and that accordingly it was not liable to Value Added Tax on the supply of the services. The Court of Session concluded that the services were subject to VAT. At page 6 of the report the Lord President is recorded as saying this:-

"In my opinion it will never be possible or desirable to define exhaustively "business" within the meaning of section 2(2)(b). What one must do is to discover what are the activities of the taxable person in the course of which taxable supplies are made. If these activities are, as in this case, predominantly concerned with the making of taxable supplies to consumers for a consideration, it seems to me to require no straining of the language of section 2 (2)(b) of the 1972 Act to enable one to conclude that the taxable person is in the "business" of making taxable supplies, and that taxable supplies which he makes are supplies made in the course of carrying on that business, especially if, as in this case, the supplies are of a kind which, subject to differences of detail, are made commercially by those who seek to profit by them. For my part I consider that there is no justification in this case for holding that the activities deliberately and continuously pursued by the association in a business like way are not a "business" for value added tax purposes merely because the underlying motive is to assist Morrisons' Academy. Further I see no possible justification for there being any "commercial element" in these activities to bring the association's supplies within the scope of the tax. I am not at all clear what is meant by a "commercial element" if it is something different from the pursuit of profit, but if there is a difference it appears to me that all activities customarily carried on by persons actively pursuing an occupation, profession or vocation will normally possess it in the sense that what is done is done for such a return that the operation will not be conducted at a loss."

33. It is St Paul's' contention that the formula "predominantly concerned with the making of taxable supplies to consumers for a consideration" remains the appropriate test today for what is meant by the word "business" for the purposes of Note (6)(a) and economic activity for the purposes of Article 4 of the Sixth Directive. If this submission is correct it is to be observed that use of the word "predominantly" introduces an element of flexibility into the test.
34. In Customs & Excise Commissioners v Lord Fisher [1981] STC p 238 Mr Justice Ralph Gibson was dealing with a case where the taxpayer was an estate owner who had organised a syndicate shoot amongst his friends and relations whom he asked to contribute in advance of each shooting season to the costs of running the shoot which they subsequently took part in and enjoyed. The Commissioners sought to impose VAT on the provision of a service by the taxpayer to the members of the syndicate, namely, the provision in exchange for payment of various days' shooting. In the course of his judgment dismissing an appeal from the tribunal which allowed the taxpayer's appeal against assessment to VAT, Mr Justice Gibson cited and commented on the passage from the judgment of the Lord President in the Morrison's Academy case which I have set out above. He said this:-

"It was this passage which formed the basis of counsel's submissions for the Crown, coupled with the passage in the judgment of Lord Cameron to the effect that, since the making of a profit or gain is irrelevant to the issue of liability to value added tax, then it seemed to him that absence of such a purpose is equally irrelevant to the issue of whether the potential taxpayer carries on a "business" in making the taxable supplies. Since, went the argument, the absence of the purpose of profit could not prevent the running of the boarding houses from being a business in the Morrison's Academy case, so the presence of the purpose of running a private shoot for pleasure, coupled with the absence of the purpose of profit, could not prevent the organising of this shoot from being a business.

 In my judgment it is essential to have in mind, in seeking to apply these statements to any other case, that their Lordships in the Morrison's Academy case were, as I have said, dealing with an activity which was in all respects indistinguishable from the business of a boarding house keeper save for the matter of profit; they had, I believe, no intention of dealing with, or of laying down propositions applicable to, an activity, as in this case, which was in all respects indistinguishable from the private pleasures of a private shoot save for the matter of contributions to expenses.

I am moreover confident that Lord Cameron did not intend to say that in all cases the absence of the purpose of gain is irrelevant to the issue whether the potential taxpayer is carrying on a business. It seems to me that there are many activities in which a potential taxpayer may supply services for a consideration within the meaning of section 5(8) of the 1972 Act and which will be so different from the ordinary concept of "business" that the presence or absence of the purpose of gain would be highly relevant to the determination of the question whether he was carrying on a business.

I turn back to the words of the statute. This tax is to be charged only where a taxable supply is made "by a taxable person in the course of a business carried on by him". By section 45(1) "business" includes any trade, profession or vocation". It is clear, and there is much authority to support it, that "business" is or may be in particular contexts a word of very wide meaning. Nevertheless, 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.

The primary meaning of all these words, "business, trade, profession and vocation", is an occupation by which a person earns a living. It is clear that all ordinary businesses, trades, professions and vocations can be carried on with differences from this standard and norm in regularity or seriousness of application, in the pursuit or disregard of profit or earnings, and in the use or neglect of ordinary commercial principles of organisation. As the decision in the Morrison's Academy case has shown, the absence of one common attribute of ordinary businesses, trades, professions or vocations, such as the pursuit of profit or earnings, does not necessarily mean that the activity is not a business or trade etc if in other respects the activity is plainly a "business"."

35. In Wellcome Trust v Commissioners of Customs & Excise [1996] ECR 3013 the ECJ was considering the question whether article 4 (2) extended VAT to cover sales of shares and securities by an organisation which was not a dealer in shares and securities. The circumstances of the case were that the Wellcome Trust, which had charitable objects, was restricted in its powers of investment to holding shares in the Wellcome Foundation Ltd. Those restrictions were then lifted and it wished to diversify its investments in order to increase their return thereby supporting the Trust's activities. The Trust wished to be able to recover input tax associated with the sales of shares and in order to do so contended that its dealings in shares constituted a "business" within article 4. The Trust was not permitted by its constitution to conduct any business such as that of a dealer in shares. The proceedings before the ECJ resulted from a reference by a VAT Tribunal which put four questions to the court for guidance. In the result the court concluded that the Trust was not conducting a taxable activity because all that it was doing was reorganising its investments for the purpose of obtaining for itself a greater return. However the fourth question was as follows:-

"(4) In answering questions 1 and/or 2 and/or 3, is it relevant to consider whether the sale of shares and securities is the predominant concern of the activity in the course of which the sales take place; and, if so, how should such activity and its extent be defined "

36. Advocate General Lenz deals with question 4 at paragraphs 38 and 39 of his opinion in this way:-

"38 According to the appellant, this question relates to National case law on the issue whether an activity is a predominant concern. Thus, the United Kingdom also submits in its written observations that it is useful to consider, in all the questions submitted in this case, whether the activity to be assessed is of predominant concern.

The Commission, in contrast, points out that the notion of "predominant concern" is not used in the VAT Directive. Under the Directive, it is the inherent nature of the activity itself that is the vital consideration of whether the activity is or is not predominant. I also take the view that in order to determine whether an activity is an economic activity for the purposes of article 4(2) it is not appropriate to consider whether the activity is of predominant concern. To illustrate this point, I would refer to the activities of the Wellcome Trust in respect of which it is registered as a taxable person. These relate to the sale of books, photographs and so forth none in any event an activity which is of predominant concern. That not withstanding, these activities must be regarded as being economic activities for the purpose of the Sixth VAT Directive, whereas the principal occupation of the Trust, namely the management of assets cannot be regarded as an economic activity within the meaning of the Sixth Directive."

37. The full court deal with the question briefly at paragraph 40 of the judgment having already concluded that the Trust's share sales were not economic activity within Article 4. The court says:-

"40 Finally in view of the foregoing, whether or not the sale of shares and other securities is the predominant concern of the activity in the course of which the sales in question took place cannot affect the classification, for the purposes of article 4 of the Directive of the investment activity of the claimant in this case."

38. It is agued by the Commissioners that these passages from the report of the Wellcome Trust case mean that the Tribunal ought not to have considered what the predominant concern of St Paul's was in embarking upon and maintaining its nursery. All that had to be considered was the intrinsic nature of the nursery which was no different from that of the commercial nurseries which were subject to VAT and not zero-rated. I agree that whereas the passage from the opinion of the Advocate General is not entirely clear in its meaning and may have suffered in translation such appears to be the effect of paragraph 40 of the judgment. However it must be borne in mind that, in the result, this was not the basis upon which the court decided the case.
39. I have already referred to the ICAEW case in the context of the significance of the fees paid by the parents to St Paul's in respect of their children's use of the nursery facilities. Lord Slynn from whose speech I have already cited passages having cited the passage from the Advocate General's opinion in the Wellcome Trust case which I have set out above [p 403 h] also deals with the "predominant concern" test at page 404 as follows:-

"In regard to "business" for the purposes of the 1994 Act, Gibson, J. held in [Lord Fishers case cited above] 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 page 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; (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." …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 V.A.T. 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."

40. In Floridienne SA & anr v The Belgian State [2000] STC 1044 the ECJ was considering, amongst other matters, whether the provision of loans by a parent company to its subsidiaries and the charging of interest on those loans could constitute an economic activity within article 4(1). It is not necessary for the purposes of this judgment to describe how the issue arose in this case, suffice it to say that "the central crux of this case is the meaning of the term "economic activity" in Article 4 of the Sixth Directive" see paragraph 8 on page 1048 of the opinion of Advocate General Fennelly. At paragraph 36 of his opinion the Advocate General says:-

"However, I consider that, for such lending activity to be carried on on an economic basis for VAT purposes, the supposed grantor of credit must engage in the activity in question not only on an ongoing basis, a condition satisfied here, but also for commercial purposes, which, to my mind, are absent where it is clear that the sums lent were lent to subsidiaries within the same corporate group for the purposes of permitting the latter to carry on their commercial activities vis-à-vis third parties."

41. At paragraph 28 the judgment of the court states:-

"28 Where a holding company makes capital available to its subsidiaries, that activity may of itself be considered an economic activity, consisting in exploiting that capital with a view to obtaining income by way of interest therefrom on a continuing basis, provided that it is not carried out merely on an occasional basis and is not confined to managing an investment portfolio in the same way as a private investor (see, to that effect, Wellcome Trust Ltd v Commissioners for Customs and Excise…) and provided that it is carried out with a business or commercial purpose characterised by, in particular, a concern to maximise returns on capital investment."

42. It is submitted on behalf of St Paul's that the test appearing in the passages which I have quoted in the Floridienne case are examples of the application of a "predominant purpose" test although the opinion and the judgment do not describe it as such. I accept that submission.
43. In Customs & Excise Commissioner v Yarburgh Trust [2002] STC 207 Mr Justice Patten was considering a case where a charitable trust was seeking to recover VAT paid in respect of supplies of building works to the trust on the basis that those supplies should be zero rated as being intended for use solely for a "relevant charitable purpose" under item 2 of Group 5 of schedule 8 to the 1994 Act as defined in Note (6). The building in question was to be used to house a playgroup. In order for the playgroup, which was a cooperative, to obtain lottery funding it was necessary for the trust to lease the building to the playgroup thereby giving it security of tenure. 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, it therefore failed to satisfy the statutory definition of relevant charitable purpose. The tribunal allowed the trust's appeal, deciding 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 tribunal further decided that if its decision on that issue were wrong then it was also satisfied that the lease fell within Note (6)(b) as a building constructed by a charity, as a village hall or similar building, for the benefit of the local community. Mr Justice Patten dismissed the Commissioners' appeal.
44. The factual background to the case is summarised at paragraph 9 of the judgment as follows:-

"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;

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

45. At page 211 of the report the judge explained how the matter came before him procedurally as follows:-

"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 [emphasis added]". All intended users of the building must therefore comply if zero rating is to be available."

46. It is the judge's conclusion that the activities of the playgroup did not constitute a "business" within Note (6)(a) that is of relevance in the instant case.
47. As in this case the Commissioners' submission to Patten J was that the tribunal's conclusion on the facts before it was unreasonable in the Edwards v Bairstow sense. Having reviewed the authorities including the Morrison's Academy case, the Lord Fisher case, the Wellcome Trust case and the ICAEW case and concluded, on the basis of the decision in EC Commission v France [1988] ECR 4797 (to which I will come later in this judgment) that he was 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, the judge turned, at paragraph 27, to examine the playgroup's use of the building.

"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 ICA 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."

48. It will be seen that Mr Justice Patten applied the Morrison's Academy test of "predominant concern" as explained and extended by Ralph Gibson J in the Lord Fisher case and applied by the House of Lords in the ICA case, to facts which bear more than a passing similarity to those in the present case. I have come to the conclusion that, notwithstanding the answer given by the ECJ to question (4) in the Wellcome Trust case, and with respect, he was correct to do so. It follows that the question is, was the evidence before the Tribunal in this case such that, it was not reasonable, in the Edwards v Bairstow sense, for them to conclude that the nursery activities of St Paul's did not constitute a "business" within Note (6)(a).
49. The test as formulated by Lord Slynn in the ICAEW case at page 404 of the report is, "was it [i.e. the activity] (a) a serious undertaking earnestly pursued; (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound 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. I have come to the conclusion that all save question (e) can be answered yes. The Tribunal have answered question (e) in the negative. In my judgment their reasons for arriving at that conclusion display no mistake of law and it is not demonstrated that no tribunal, acting judicially, could have reached that particular determination on the material before it.
51. Like Mr Justice Patten in the Yarburgh case, I take the view that none of this detracts from the principle of tax neutrality which was much urged upon me by Mrs Hall. That principle seeks to bring about a situation in which the treatment of businesses, for the purposes of levying VAT throughout the European Community, is the same. However it does not arise, in respect of a particular undertaking, until it has been determined that that undertaking, constitutes a taxable person. I accept that the overall policy of the Sixth Directive requires that the word "business" must be given a very wide meaning so that it is not confined to profitable enterprises or enterprises intended to be conducted at a profit at some point. The intention or apparent intention, of those conducting the enterprise in question must be disregarded. It is the intrinsic nature of the enterprise, as established by evidence of what is actually being performed in order to advance it, that is important in arriving at a conclusion whether or not a particular undertaking constitutes a business. It does not seem to me that the principle of tax neutrality assists in that process.
52. In European Commission v France [1988] ECR 4797 the ECJ was considering an infringement case. This, it was alleged, resulted from French legislation which restricted the amount of VAT which could be deducted in relation to and in particular buildings let at low rents of less than 1/15^th of the relevant properties' value. The ECJ found the relevant French legislation to infringe the Sixth Directive. The case concerned the implementation of article 17 but the approach of the ECJ, as evidenced by paragraph 20 and 21 of the judgment is of assistance in this case. Those paragraphs read:-

"20 It is true that, as pointed out by the French Republic, such legislation is necessary particularly in order to deal with lettings of 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 a time limit for that adjustment maybe extended up to ten years."

53. The Tribunal's conclusions on the facts are set out in paragraphs 13 ,14 and 15 of the decision as follows:-

"13. Mr Shaw argued that the similarities between the facts of Yarburgh and those of this case were merely superficial. There, the activity was of a playgroup; here it is a day nursery. That, in our view, is a distinction of no significance at all. Likewise his contention (as Mr Thomas pointed out, not supported by any finding of fact in Yarburgh) that the opening hours there were shorter than those here seems to us, even if correct, to be quite immaterial. He suggested that, since nothing had been said by the tribunal or by Patten J about the level of fees charged to parents, or even the manner in which that level was determined, it must be assumed that they were very modest. By contrast; he said, the appellant [St Paul's] had a much larger budget and more closely resembled a commercial operation. The assumption, even if it is valid (and, again, there is no finding of fact in Yarburgh to support it though we think it is a reasonable inference), does not seem to us to have any real merit. Rather, we think there is an essential similarity between the two cases in that fees were set at a level designed to ensure that the operation broke even. If there are differences between the two cases they seem to us to be differences of scale or degree rather than of principle.

14. There is at first sight rather more in Mr Shaw's point that the management of the playgroup in Yarburgh was wholly in the hands of a committee of parents, and its constitution expressly excluded employees, whereas here parents, as a general rule, made up a minority of the committee and it was evident that the appellant did not intend, at any time, that management should be wholly devolved to parents: While we accept that proposition (and are mindful of Dr Halliday's evidence that the budget was set by employees, albeit, approved by the committee, in the light of the appellant's resources) we have concluded that it is not, when properly analysed, a basis for distinguishing the two cases. The validity of the Commissioners' stance depends on our preferring the view that this is a business, rather than a charitable, activity. Though it cannot be said that the management of an activity is irrelevant to its character, the essential focus must be on the activity itself. In this_, case it is the not-for-profit provision of a day nursery. If that (or something very close to it) is a charitable activity when carried on (as in Yarburgh) by a cooperative, does it cease to be charitable, and become a business activity, when it is managed by those who perform it even though in every other respect. it is materially identical? In our view the answer to that question is no. The nature of the activity is unchanged. The financial constraints under which it is undertaken are identical. The level of the fees will not go up or down depending upon who is on the committee; their level is dictated by the available income and the cost of supplying the service, factors which would not change in any way if parents dominated the committee, or were its only members.

15. We are satisfied that there is no meaningful distinction to be drawn between this case and Yarburgh. As we have indicated, that case is binding on us, but we are in any event content to follow it. We are satisfied that the appellant's day nursery is run, not as a business, but as a charitable activity and that the building works should properly be zero-rated. The appeal is therefore allowed."

54. I would add the following as matters which have weighed heavily with me: -

i) The documentary evidence before the Tribunal and the evidence of Dr Halliday demonstrated that St Paul's, at the material time, was undertaking its nursery activities, amongst other activities, for social reasons, namely to support disadvantaged families in the Balsall Heath area of Birmingham, itself a deprived area, and as part of the Government's Sure Start programme. In so doing it had an admissions policy skewed in favour of disadvantaged and problem children.

ii) The fees charged were significantly lower than those charged by commercial nurseries notwithstanding that St Paul's was paying the higher salaries necessary to obtain the services of a higher proportion of trained staff, trained to a higher level of expertise than would normally be required.

iii) Those fees were pitched at levels designed only to cover the costs of the nursery after grants and donations. In any event the memorandum of association of St Paul's would have prevented distribution of any profit made.

iv) It follows from ii) and iii) above that the level of fees charged to parents of children using the facilities of St Paul's nursery amounted to a "concession" see EC v France ibid.

55. It seems to me that there was ample evidence to support the conclusion of the Tribunal and I would dismiss this appeal.