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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Donaldson's College v Revenue and Customs [2005] UKVAT V19258 (15 September 2005)
URL: http://www.bailii.org/uk/cases/UKVAT/2005/V19258.html
Cite as: [2005] UKVAT V19258
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- The Appellants are not a state school: and since 1992 its affairs are conducted in accordance with the Donaldson's Trust Scheme 1991 ("the Scheme"):
- Its principal object (under the Scheme) is the education of deaf children at primary and secondary school level. See paras. 17 and 25 of the Scheme.
- There is a clearly defined internal management structure, in the hands of the governing body.
- Express 'business arrangements' are stipulated in Part 11 of the Scheme and specific provision is made for the holding of meetings, the conduct of meetings and the proper and orderly recording of the decisions of the governing body etc.
- The Appellants prepare a Report by the Governors together with annual accounts of their activities.
- The Appellants also prepare business plans, an example was produced relating to the period 2004/2005.
- The Appellants are obliged to return a quarterly report which accounts inter alia for fee income from education authorities (i.e. local authorities).
- The Appellants have no obligation to take students referred to it by local authorities.
- The decision of whether or not to admit any particular pupil to the College is decided upon by the Appellants.
- There is express provision in the Scheme to enable the Appellants to charge fees.
- The level of fee paid by the local authority is set by the Appellants.
- Upon the Appellants deciding to accept as a student a pupil referred to it by the Local Authority, the Local Authority complete an Admissions form. In terms thereof, the local authority 'undertake to pay a contribution of the annual costs of the Child's education and care as set out by the Donaldson Trust.'
- The amount a local authority is asked to pay is directly related to the number of pupils it has referred to, and been accepted by, the Appellants. This is inferred from the terms of the invoice as it bears to charge for one pupil at a set rate. Two pupils would attract double the price of one etc. In any event, there is a demonstrated reciprocal relationship between the fees charged and the services provided.
- A decline in pupil numbers has resulted in a drop in income.
- On rare occasions, charges are made to parents for education provided.
- The amount of fee income from local educational authorities is substantial. In the accounts for the year to 31 March 2004, such income amounted to about £1.611 million. Grants from the Scottish Executive totalled about £1.730 million and total income was about £3.596 million. The largest single item of expenditure was salaries and wages at about £2.479 million.
- Staff are well-trained and teaching staff have the appropriate qualifications for the level and subjects they teach. Teaching is conventionally understood to be one of the professions.
19258
Economic Activity – course or furtherance of a business – Charity – Care and education of disadvantaged children – funding by central and local government controlled by central government. No profit. No competition – on facts not an economic activity.
EDINBURGH TRIBUNAL CENTRE
DONALDSON'S COLLEGE Appellants
- and -
Tribunal: (Chairman): T Gordon Coutts, QC
(Member): K Bruce Lockhart, WS
for the Appellants Colin Tyre, QC
for the Respondents Sarah Wolffe, Advocate
© CROWN COPYRIGHT 2005.
INTRODUCTORY
This appeal was made against a Decision of the Respondents determining that the Appellant was carrying on a business activity for "third party" consideration. Parties were ably represented by Counsel. One Witness was led whose credibility and reliability is accepted. Further, copious reference was made to bundles of documents from which the Tribunal could establish the following factual matters.
History and occupation of the Appellant
Historically Donaldson's College, known as Donaldson's Hospital, has operated from a well known Edinburgh landmark designed by Playfair. It was founded around 1860 by James Donaldson who had been associated with George Heriot's Hospital in Edinburgh. Heriots was originally established and endowed for the education of poor children but by 1850 did not fulfil that function, concentrating on abler pupils. James Donaldson founded the Appellant for the education of poor and deaf children. Again the passage of time has meant concentration on the deaf and now mere poverty would not be sufficient to gain entry. Indeed the concept of poor children requiring to find the cost of their education is outmoded given the provisions in the Education Acts. With medical advances the College now educates more than the profoundly deaf; the number of wholly deaf children has decreased, but the work of the College itself has expanded in relation to hearing impaired children and those who suffer from communication disorders.
Very broadly stated the College provides such children with a language, known as British Sign Language (BSL) which they teach to equip such children to function in society.
The College, which is a charity, is governed by the Donaldson's Trust Scheme (1991). That was the result of an approval by the Court of Session of a Petition by the then Governors amending previous schemes. The College is run by Governors and the scheme itself provides for the accommodation of the above mentioned children. In addition paragraph 27 empowers the Governors to charge fees in respect of any of the services provided and to receive contributions and grants from any sources.
The present roll of the College is about 75. The pupils come from all over Scotland. They may remain until they are 19 years of age.
All the costs for each child are met, and will be met under the current method for the next 3 years, as to 60% by the Scottish Executive and as to 35% by the local authority which operates in the region from which the child comes. The remaining 5% is obtained from miscellaneous bequests and minor payments for use of facilities. Legacies are also received and use is made of the endowment fund interest.
The staff of the College are highly specialised and in certain circumstances are able to provide almost individual tuition.
The College had built an Annex on its present site and when utilising the more modern facilities thus made available it was borne in on the Governors that they were compelled to sell the Playfair building as outmoded and engage to build a new College at Linlithgow. Prudently the Appellant's tax advisers sought clarification of the tax status and liability of the Appellant in that regard. Their original query, whether they could zero-rate the new building, was expanded by the time the Tribunal hearing took place to seek a general ruling on the question of whether the Appellant supplies its services in the course of or in furtherance of a business.
The Services
These services consist in the care of the disadvantaged children, some in residential accommodation, by giving them a language and thereafter an education. The services are extremely costly.
The recipients of the services
The College operates in the state-funded sector and provides the above facilities to the disadvantaged children who come within their care. Admission to care is arranged by way of references from local authorities and admission is gained after discussion with the College and after ascertaining that the College could benefit the particular child and that its care is necessary for the development of that child. It is extremely unlikely that any child who is not seriously disadvantaged will ever be accommodated by the Appellant in view of the cost of the provision. Some children, however, the College would find it impossible to accept, because of their disorders.
The Appellant is unique. There is no competition for the provision of their services nor any likelihood of any such competition. Equally there is no prospect of, or ambition for, financial independence by the Appellant. A sample of the costs was provided to the Tribunal in relation to a child from Dundee. 35% of the cost of that child's education for a year amounted to £20,055 and the residential contribution cost an £12,810. That is but 35% of the cost. It is unsurprising therefore that no child directly accepted from a parent is in attendance. There has been one minor exception to that. In the short term a parent undertook to make good the local authority shortfall when for some reason unexplained to us funds were not forthcoming from the local authority at that time. That matter was resolved and therefore it can properly be said that all charges are publicly funded.
Applicable Legislation
i. European Community Law.
Article 2 of Title 11 of the Sixth Directive provides:
"The following shall be subject to value added tax:-
1. the supply of goods or services effected for a consideration within the territory of the country by a taxable person acting as such;
2. the importation of goods."
Title IV of the Directive provides:-
"(1) "Taxable person" shall mean any person who independently carried out in any place any economic activity specified in paragraph 2, whatever the purpose or result of that activity".
(2) The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities of the professions…"
ii. UK Law.
By Section 4(1) of the Value Added Tax Act 1994 there is provided a definition of the scope of VAT on taxable supplies on goods or services within the UK as arising,
"where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him."
Section 4)2) further provides:
"(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply."
It was agreed by parties that in this case no material difference existed between "a taxable supply made by a taxable person in the course or furtherance of any business" and services "effected for a consideration by a taxable person who is one who independently carries out any economic activity." Further provisions of VATA 1994 which apply are:-
Section 30(2) which provides that a supply of goods or services is zero-rated if the goods or services supplied are of a description for the time being specified in Schedule 8 or the supply is of a decision for the time being so specified. Item no. 2 within Group 5 of Schedule 8 relates to "The supply in the course of the construction of – (a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant purpose or a relevant charitable purpose…"
Section 96(9) of the VATA 1994 provides that Schedule 8 is to be interpreted in accordance with the notes contained in the Schedule. Note 6 to the said Group stipulates that "(6) Use for a relevant charitable purpose means use by a charity…, namely – (a) otherwise than in the course or furtherance of a business
Case Law
It is necessary to review the authorities relating to this topic, not only because they were canvassed by Counsel but, more particularly, because the Respondents advanced an argument that the cases, Yarburgh Children's Trust v the Commissioners 2002 STC 207 and Commissioners v St Paul's Community Project Limited 2005 STC 1995 were wrongly decided. It would be open to this Tribunal sitting in Scotland to refuse to be persuaded by the reasoning in those cases and to refuse to follow them they being Decisions of a single English High Court Judge, they do not bind.
The earliest authoritative Decision on the question of "business" is Commissioners v Morrison's Academy Boarding Houses Association 1977 SC 279. That being a Decision of the Inner House of the Court of Session is, of course, binding in Scotland and upon the Tribunal. Since it has been extensively cited and purportedly followed it is necessary to consider it fully and as a whole. The first important matter to note is that the taxpayer there was an Association operating as a separately registered limited company from Morrison's Academy itself, the School providing educational facilities. The Association was not a charity although its objects provided that it was non-profit making and its officials received no remuneration. The Tribunal had allowed an appeal against an assessment to tax on the basis that since the Association did not seek to make a profit and since its activities did not contain any commercial element it did not provide anything in the course of a business. The Inner House took a different view of what was required by way of factual background to keep the Association outwith the VAT tax regime. The Association was formed to provide board and lodgings facilities for pupils at Morrison's Academy. It charged parents for the facilities it provided but of the income of the Association could be utilised for the purpose of forming a fund for the establishment of foundation scholarships in connection with the Academy.
In the course of his Opinion the Lord President identified that the critical test in determining whether taxable supplies of goods or services are within the scope of the tax is whether they were made "in the course of a business carried on by a taxable person". Business, he noted, was not exhaustively defined. He said at page 284 that the natural meaning of the word "business" is wide enough to include the deliberate carrying on, continuously, of an activity or activities, or an occupation or profession. The natural meaning of the word "business" does not require that what is done must be done commercially in the popular sense or with the object of making profit. The Judges noted that the tax was a turnover tax and not a tax on profit. The Court identified the issue as being whether the board and lodgings supplied by the Association were "in the course of a business carried on by the Association". The Tribunal were held to be incorrect in concluding that no activities carried on continuously by a taxable person can ever be a business if the profit motive is absent. The view put forward by the Commissioners that profit motive was irrelevant was not in terms accepted by the Lord President. What he said was that, the absence of a profit motive per se did not mean that the activities were outwith the scope of the tax. He did not, as we understand his judgment, go so far as to say that the absence of profit was irrelevant.
The important part of the Lord President's Opinion, in the view of this Tribunal, is at the foot of page 285 where he said that what the Tribunal 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 language to enable one to conclude that a taxable person is in the business of making supplies and that the taxable supplies which he makes no 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." He concludes "I am not at all quite clear what is meant by "a commercial element" if it is something 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." He did not in terms consider the situation of an operation being carried on at a loss or only carried on by way of subsidy from public funds.
Lord Cameron in an extensive Judgment says little which differs from the Opinion of the Lord President. He said that "business" in the Act was wide enough to embrace any occupation or function actively pursued with a reasonable and recognisable continuity. "Business" as used in the Act he said invites a wider construction than it would be natural to place upon it should the context in which it is placed relate to the imposition of a tax exigible from profits or gains. He said that the making of a profit or gain is irrelevant to the issue of liability to the tax, (page 289) and that the absence of such a purpose was irrelevant to the issue of whether the taxpayer carries on a business in making the taxable supplies. What required to be looked at was the activity itself. His Lordship found support for his view in the facts of the case which he said showed that the Association "has every mark of a business activity: it is regular, conducted on sound and recognised business principles, with a structure which can be recognised as providing a familiar constitutional mechanism for carrying on a commercial undertaking, and it has as its declared purpose the provision of goods and services which are of a type provided and exchanged in course of everyday life and commerce. Not only so, but to some extent the association if necessarily competing in the market with other persons and concerns offering precisely similar services to the same clients or customers, i.e. the parents of pupils of Morrison's Academy who may seek or require residential and boarding accommodation."
In the subsequent case of the Commissioners v Lord Fisher 1981 STC 238 the argument of Counsel for the Commissioners has provided the Respondent with a tick list of what they term indicia which were referred to in the Decision letter. The facts of that case were that the Commissioners failed to persuade the Court that the conducting of a pheasant shoot with invited guests making contributions to the cost was a business. In that argument of Counsel indicia were put forward allegedly derived from the authorities. These are found in page 154 (f-j) and are six in number. It is perhaps sufficient to say that nowhere in any of the decided cases have those six indicia been given judicial approval. On an examination of them individually they do not provide any sound basis for coming to a view, inviting as they do the conclusion that if five out of six can be scored the activities are a business. The Judge regarded, in the respectful view of this Tribunal correctly, the key question as being whether the activity was predominantly concerned with the making of taxable supplies to consumers for a consideration and that each word contained in that sentence requires to be given attention. In the course of his Opinion Gibson J acknowledged that the absence of a profit motive was not enough to preclude the finding that a person was engaged in the making of supplies in the course of a business but went on to consider the detail of the activity which he described as "no more than an activity for pleasure and social enjoyment". No doubt that was a conclusion which was specific to the facts in that case.
The Tribunal was then referred to Commissioners v the Royal Academy of Music (1994) a Decision of the London Tribunal number 11871 in which it was found, on the facts, that there was nothing to exclude the academy's provision of educational services ranking as economic activities. They provided musical education for reward, charged fees for tuition and would not be economically viable if it did not charge them (para 29).
Reference was made to Church School Foundation Limited v the Commissioners 2001 STC 1661. In that case it was found that there was no direct link between the consideration and the supply. It was found on the facts that although there was a legal relationship between the Foundation and a company in their control and in the existence of various leases, together with an obvious reciprocity between the donations made by the company to the foundation and the projects effected by the foundation the provision of funds was not a consideration "for" the works. The reality was that the foundation improved its properties with finance provided from a number of sources of which the company's donation was but one.
The authorities were reviewed by The House of Lords in Institute of Chartered Accountants in England Wales v Commissioners [1999] 1WLR 701.. The facts there were that the Institute granted licences and certificates to accountants who carried on investment business or who practised as auditors or insolvency practitioners. In doing so it acted as a recognised professional body on behalf of the State. Fees were charged on the basis of covering the Institute's costs and it was held that although a fee was charged that was not in any real sense a trading or commercial activity which was an economic activity or a business in terms of the Directive of the Statute. It might be noted that the Institute were contending for their activities being recognised as a business. The activities would have been covered by many of the above mentioned indicia in Lord Fisher. The House of Lords held that on the facts the functions of the Institute could not in any real sense be described as economic and it was observed that it was not necessarily sufficient that money was paid and benefit obtained.
In Wellcome Trust v the Commissioners [1996] STC 945 the ECJ had to consider the investment activities of the Wellcome Trust, a charitable trust, which consisted in the acquisition and sale of shares and securities with a view to maximising dividend and capital. The Trust sought to reclaim VAT on fees paid by it in connection with the disposal of certain shareholdings. It was held that the share sales were not economic activities but equivalent to the sale by a private investor of securities. The decision appeared to depend to some extent on practicalities and a possible distortion of competition between a Trustee and other investors. Again many of the indicators founded on in Lord Fisher would appear to be capable of being ticked in this situation.
Matters have progressed to some extent in the UK in the case of Yarburgh Children's Trust v the Commissioners [2002] STC 207 which was followed with approval by the Tribunal and High Court in Commissioners v St Paul's Community Project Limited [2005] STC 95.
The Commissioners position before us was that while acknowledging that they had not appealed either of those Decisions they maintained they were wrongly decided. We were referred to a Business Brief of theirs, 02/2005, where despite the fact that they had not appealed the Decisions which were that the intrinsic nature of the enterprise under scrutiny was not the carrying on of a business and identifying the distinguishing features as social concern for the welfare of disadvantaged children and lack of commerciality in setting fees and merely seeking to recover costs Customs stated
"VAT – Supplies of nursery and crèche facilities by a charity.
This Business Brief article is issued to clarify Customs' position on the business status of supplies of nursery and crèche facilities where those supplies are made by a charity. This issue first arose as a result of the High Court case of Yarburgh Children's Trust (see Business Brief 04/03) and has recently been tested again in the High Court case of St Paul's Community Project Ltd.
In the earlier case of Yarburgh, the Court decided that the charity was not making supplies by way of business. Despite that decision, Customs' position remained that the provision of nursery and crèche facilities in such circumstances was a business activity for VAT purposes. However, in the more recent case of St Paul's, the Court's decision has again gone in favour of the charity. The Court found that the intrinsic nature of the enterprise was not the carrying on of a business, identifying the distinguishing features as the social concern for the welfare of disadvantaged children, lack of commerciality in setting fees and the overall intention simply to cover costs.
Customs do not agree that these features point to the activities being non-business because we consider that the charity is making supplies of services for consideration in much the same way as a commercial nursery. However, taking into account all the circumstances in this case, Customs have decided not to appeal further.
This means Customs will now accept that the provision of nursery and crèche facilities by charities, along the same lines as those in Yarburgh Children's Trust and St Paul's community Project Ltd, is not a business activity for VAT purposes."
However in that Brief they reiterate the tick list which had its origin in their submission in Lord Fisher.
Yarburgh principally concerned the grant of a lease by a charitable trust to a playgroup in exchange for a rent. The Court had also to consider the issue of whether the playgroup's activities and use of the building were otherwise than in the course or furtherance of a business. The Commissioners relied on the parents being charged a flat fee. The Court considering whether the playgroup operation had any economic content concluded that it was not predominantly concerned with the making of taxable supplies for a consideration. The Judge observed "an intention to trade at a profit is not of course an essential feature of the 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. The playgroup was not on the facts predominantly concerned with the making of taxable supplies for a consideration". That was recognised as the key question. In St Paul's Community Project Ltd Evans-Lombe J fully considered Yarburgh and concluded that there was no error of law on the part of the Tribunal in that case in concluding that while many the indicia could be answered in the affirmative the provision of nursery services was not in the furtherance of a business.
That case again emphasises the importance of the dictum of Lord President Emslie that one has to regard the activity and decide whether or not it was predominantly concerned with the making of taxable supplies for a consideration. Charitable status can be considered as a factor, a matter of fact which was not before the Inner House in Morrison's Academy.
CONTENTIONS FOR THE RESPONDENTS
Applying the Law to the facts in this case, it was contended, having regard to the indicia identified Donaldson's College as acting in the course of a business. It was said that the following factors pointed to the Commissioners' Decision being correct:
The fact that activities might be engaged in on a not-for profit basis, does not preclude those activities being treated, for VAT purposes, as a business activity.
The fact that the Appellants are a charity is not relevant to the assessment of the character of the activities in which they choose to engage. Activities which are business activities do not cease to be such simply because they are pursued by a charity. Charities can be engaged in business activities whether or not those activities are peripheral to its charitable objects (e.g. the Oxfam charity shop), or are the very charitable objects for which that charity has been formed (e.g. education). The motives or objects of a person who makes a supply are not relevant to, and cannot dictate, the correct tax treatment of that supply.
CONTENTIONS FOR THE APPELLANT
Having regard to whether the Appellant's activities are in the course or furtherance of a business it was perhaps counter-intuitive to regard an entity of this kind as a business. The analysis which was carried out by the Commissioners in their Decision letter is mistaken.
On the Authorities 1) an entity would be regarded as carrying on a business if its predominant concern is making taxable or exempt supplies to consumers for a consideration 2) intention to trade at a profit is not a necessary or essential feature of a business but it is not irrelevant 3) the fact that money is paid and benefit obtained is not necessarily indicative of a business being carried on and in relating the conduct of a business to the European Commission concept of economic activity the content is the same. It is sufficient test of the activity of the entity if it is an economic activity. The check list in Lord Fisher which has been adopted is inappropriate and should be disapproved. The true test being whether the activity is predominantly concerned with providing taxable supplies for a consideration.
Both Yarburgh and St Paul's Community Project Ltd were correctly decided. The first thing to be done is to seek economic content.
On the facts of this case the following matters were contended by Counsel for the Appellants. Firstly the intrinsic nature of the Appellant's activities is to operate in the state funded sector as an independent entity but to provide education to disadvantaged children. The Appellant thereby fulfil a national need. The Appellants are funded almost entirely by public funds. Secondly it is the Scottish Executive which decides the cost split and the appropriate fee to be charged to local authorities. That matter is not either in the control of the College or the local authorities. Nor is it a subsidised supply by the local authority. Thirdly the amount charged to the local authority bears no relation to the cost of education. It is always less and distinctions are not made, the funds gathered are simply accumulated to operate the School once a joint decision has been taken that Donaldson's College is the best place for an individual child. In no sense can this be a supply to the local authority. The actings are not economic in nature and the existence of payment does not make them so. One has to look beyond mere payment. The activity is the joint funding of education of a particular class of socially disadvantaged children in the best available environment. How the fee split is arrived at is perhaps political but certainly not a matter for the Tribunal. Fourthly no fee is ever charged for an individual. Fifthly the funding operation operates on a year to year basis depending on a decision of central government. It is not businesslike and emphasises the dependency on public funding. There is no competition or any likelihood of it and no prospect or expectation of financial independence.
Accordingly it was submitted that Donaldson's College fulfils a social function, operates in the state provision of the education system by providing specialised teaching for disabled and disadvantaged children. Because costs are relieved and the local authority pay a contribution does not make Donaldson's activities an economic activity because intrinsically there is a lack of economic control. The predominant concern of the Appellant is the education of deaf children using state funding therefore the predominant concern is not economic in nature and not a business. That result coincides with first impressions and common sense.
DECISION
The Tribunal found the argument and contentions of Mr Tyre wholly convincing. They hold that the activities of Donaldson's College are not in the course or furtherance of a business in any realistic or practical sense. Donaldson's is not predominantly concerned with the making of taxable supplies for a consideration. It is predominantly concerned with providing a service which is required to be provided by the State: that is to say, the provision of education to deaf or partially hearing children and children with communication difficulties. They reject the concept of third party consideration in this context. They find that the services are not provided to the local authority, the entire exercise is for all practical purposes controlled by central government. The College provides the administrative framework for the provision of specialised services for deaf children. It is not a commercial concern and the College as such receives no consideration. The matter referred to by Counsel for the Respondents as No 15 above is of no significance in that regard and, on the facts, de minimis.
It follows that the appeal will be allowed. The matter of expenses was not raised before the Tribunal and parties are at liberty to make such submissions as they wish in writing which should suffice for the determination.
EDN/05/12