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Cite as: [2006] UKVAT V19472

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The Sheiling Trust (Ringwood Waldorf School) v Revenue and Customs [2006] UKVAT V19472 (27 February 2006)

19472

Value added tax — relevant charitable purpose-- use of a building by a charity -- whether the use of the building by a school was otherwise than in the course or furtherance of a building – whether the activity carried on by the school comprised a business for VAT purposes – no – whether charity entitled to reclaim input VAT on self-build construction – yes – Note (6) to Group 5 of Schedule 8, VATA 1994; s 35(1) VATA 1994 – appeal allowed

LONDON TRIBUNAL CENTRE

THE SHEILING TRUST (RINGWOOD WALDORF SCHOOL) Appellant

- and -

THE COMMISSIONERS OF HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: EDWARD SADLER (Chairman)

JOHN BROWN CBE FCA ATII

Sitting in public in London on 19 December 2005

Aparna Nathan, counsel, instructed by Lamport Bassitt for the Appellant

Robert Keller, counsel, instructed by the Acting Solicitor of H M Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Summary of the appeal and the decision

This is an appeal by The Sheiling Trust ("the Appellant") in relation to one of its charitable activities, the Ringwood Waldorf School situated in Dorset ("the RW School"). In 2003 the Appellant carried out building works (the construction of a classrooms building for use by the RW School) and subsequently made a claim for a refund of input tax in the sum of £12,845.40, being the VAT charged to it on the supplies of goods used by the Appellant for the purposes of those building works.

The refund claim was made under the provisions of section 35 of the Value Added Tax Act 1994 ("VATA"), which permit a refund of input tax to persons constructing buildings in certain circumstances. It is a requirement of those provisions (in so far as they are relevant to this appeal) that the building works in question must be the construction of a building for use solely for a relevant charitable purpose, which in turn means use by a charity "otherwise than in the course or furtherance of a business". The Commissioners of Her Majesty's Revenue and Customs ("the Commissioners") in their letter of 1 March 2004 to the Appellant determined that the Appellant was not entitled to make a valid claim for a refund of the relevant input tax since the activities of the RW School comprised a business activity – accordingly the condition of a refund, namely that the building should be used "otherwise than in the course or furtherance of a business", was not met. The Appellant appeals against this determination by the Commissioners on the grounds that the particular nature of its educational activities and the way in which those activities are carried out are such that it is not engaged in a business activity.

There is no dispute between the parties as to the legislation which applies in this case, nor as to the meaning of that legislation. The sole question for us to decide is whether the Appellant, in using the classrooms building for the purposes of the RW School, is using the classrooms building in the course or furtherance of a business. Since the classrooms are used in the course or furtherance of the provision of schooling and education as carried out by the RW School, we are required to decide whether the way in which the Appellant provides schooling and education at the RW School is, for VAT purposes, in the course of a business, as that concept has been explained and applied by the courts.

For the reasons given below we have concluded that the provision of schooling and education at the RW School in the particular manner as carried out by the Appellant is not, for VAT purposes, an activity carried out in the course or furtherance of a business, and that therefore the use by the Appellant of the classrooms building for the purposes of the RW School is not a use which is in the course or furtherance of a business. Accordingly, the classrooms building was constructed for use solely for a relevant charitable purpose, and the Appellant is entitled to a refund of the input tax charged to it on the supply of the goods used by the Appellant for the purposes of the works on the construction of the classrooms building. It is our decision, therefore, to allow the Appellant's appeal.

The relevant legislation

Before turning to the detailed facts we set out the legislation relevant to this appeal – it is brief and clear and its meaning or interpretation is not in contention between the parties.

The governing requirement that the scope of VAT must be viewed in the context of the carrying on of a business is set out in section 4(1) VATA:

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.

The legislation itself provides little assistance in defining what is a business or whether an activity is carried out in the course of a business: section 94(1) VATA simply provides:

In this Act "business" includes any trade, profession or vocation.

Certain activities are deemed to be the carrying on of a business, but none are relevant to the circumstances of this appeal.

Section 35 VATA is headed "Refund of VAT to persons constructing certain buildings", and, so far as relevant, provides as follows:

(1) Where-

(a) a person carries out works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply, acquisition or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are –

(a) …

(b) the construction of a building for use solely for a …relevant charitable purpose; …

(c) ….

…

(4) The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group….

The only note to Group 5 of Schedule 8 to VATA which is relevant to the present appeal is Note (6), which is as follows:-

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.

It should be noted that it is a condition for a refund that the carrying out of the building works must be "lawful" (which is not disputed in this case) and also that the carrying out of the building works must be "otherwise than in the course or furtherance of any business" (see section 35(1)(b) VATA). We observe that although in the Commissioners' Statement of Case reference is made to this latter condition where it is stated that the Appellant's claim fails since it does not meet this condition, this point was not argued before us – for the good reason, we presume, that it is not a tenable proposition that the constructing of buildings is itself a business activity of the Appellant.

The only point of contention between the parties concerns the condition for a refund that the works must be the construction of a building for use solely for a relevant charitable purpose (see section 35(1A)(b) VATA), as that expression is to be construed by applying Note (6) to Group 5 of Schedule 8 to VATA: that is, use by a charity (and the Commissioners do not dispute that the Appellant, in its activities of operating the RW School, is a charity) otherwise than in the course or furtherance of a business.

The findings of fact

We now turn to the facts. We had before us in evidence the following documents: the Memorandum and Articles of Association of the Appellant; the RW School prospectus, admissions policy and admission selection criteria; the "Admission Agreement" which parents are required to sign by way of acceptance of the offer of a place for their child at the RW School; the "Annual Plan" of RW School for the year ending 31 August 2005 (a statement of performance objectives and projected financial budgets); the statement of the RW School Finance Policy and the "Minimum Funding Contribution Promise Form" which parents are asked to sign each year; guidelines for Community Support Groups and for meetings of such Groups; for each of the years 2002/03 and 2003/04 a table of financial contributions made to the RW School for each child in the RW School; correspondence between the Appellant and the Commissioners dating from 1992 relating to earlier classroom building works carried out by the Appellant and to the building works which are the subject of this appeal; the East Dorset District Council planning consent for the relevant building works and the subsequent certificate of completion of those works; and web pages from the Independent Schools Guide referring to the RW School. For the Appellant we heard evidence from Mr Keir Polyblank and Mr John Frost-Evans – both of whom had prepared a witness statement and were cross-examined at the hearing by Mr Keller for the Commissioners. Mr Polybank is a trustee of the Appellant. Until 1992 he was the administrator of the RW School, and is now the project manager for building works at the RW School. Mr Frost-Evans is currently the administrator of the RW School, and held that position when the relevant building works were carried out. Their evidence related to Rudolf Steiner philosophy and principles as relevant to and applied to the operation of the RW School; the building works carried out; the policies adopted and practised at the RW School (in particular relating to admissions and finance matters); and the nature of the school community and relationships between families, the staff and the school. There were no witnesses for the Commissioners. From this evidence (and we should say that we accepted the evidence of Mr Polyblank and of Mr Frost-Evans) we found the facts as set out in paragraphs [11] to [35] below.

The Appellant is a charity and is constituted as a company limited by guarantee, whose primary object as set out in its Memorandum of Association is the advancement of education for the public benefit by the establishment and maintenance of living, social and therapeutic communities of schools and other establishments in accordance with the principles of Rudolf Steiner for the benefit of people who are to receive education, guidance, therapy or care in order to develop their educational, creative, recreational, employment and social skills, and so to enable them to lead a rewarding life. The Appellant carries out these objects through four distinct activities, of which the only one relevant to this appeal is the RW School, a day school for normal ability children.

The Memorandum of Association of the Appellant provides that all its income and property is to be applied solely towards the promotion of these specified objects, and prohibits the payment or distribution by dividend or any other means of any profit to the members of the company.

The RW School was founded in 1974. Other Waldorf Schools have been founded in Britain since the 1920s, but they have been conventional fee-paying schools. The RW School was one of the first British Waldorf Schools to be founded and known as a "contribution school", that is, financially managed and funded in the manner described below. It now has about 200 pupils in a kindergarten, lower school and middle school.

In 1989 the RW School began a four-phase development programme to provide permanent school buildings on its site (replacing temporary timber buildings). The first two phases (classrooms and workshops) were completed in January 1996 and August 2002 respectively. The buildings were constructed by the Appellant on a self-build basis. In relation to the buildings constructed in each of the first two phases the Commissioners accepted that the RW School was not using the buildings in the course or furtherance of a business, and allowed the Appellant to claim a refund of the input tax charged on the building materials supplied to the Appellant.

The third phase of the development programme comprised the construction of three classrooms for use by the lower school, completed in October 2003. The classrooms were constructed by the Appellant for use solely by the RW School for the purposes of its schooling and education activities. The buildings were constructed by the Appellant on a self-build basis.

The disputed input tax refund claim which is the subject of this appeal relates to the VAT charged on the building materials supplied to the Appellant in respect of these third phase building works. The Appellant claimed the input tax refund for these building works in the sum of £12,845. On receipt of that claim the Commissioners reconsidered the matter, and notwithstanding their previous stance in relation to the building works in the first two phases of the development, they eventually determined, in their letter to the Appellant of 1 March 2004, that the Appellant was not entitled to a refund of the input tax on the grounds that it had not satisfied the condition of a refund that the buildings must be for use otherwise than in the course or furtherance of a business.

The RW School is run in strict accordance with the philosophy, principles and social precepts set out by Rudolf Steiner, the founder of Steiner Waldorf Education, a worldwide educational movement – these guide the ethos and educational approach of the RW School in its widest sense as a social/cultural community activity, and are applied not only in determining the curriculum and the methods of teaching, but also in the working practices applied to the management and administration of the RW School and to relationships between staff (teaching and non-teaching), pupils and their families. Education is seen as a social/cultural activity which must be consistent with the Steiner concept of Anthroposophy, and which should embrace the whole community and the individual within the community, so that everything that happens in relation to the RW School (curriculum, teaching, learning, management and working practices) is part of that social/cultural activity.

The Steiner philosophy sees the relationship between the individual and the community as being one of reciprocal responsibility: the RW School endeavours to apply this approach so that each individual within the RW School community (management, teaching and other staff; pupils; families) has a responsibility to act so as to contribute to and maintain the well-being and ethos of the community and the community has a responsibility to ensure that the individual benefits from what the community has to offer. The RW School has a number of "community policies" which are developed and administered by the RW School community, including the "Admissions Policy" and the "Finance Policy" referred to below.

Children are admitted as pupils to the RW School following an introductory session and interview process, and admission is dependent upon the recommendation of the Admissions Group in the RW School. Prospective parents are offered open days, introductory sessions and reading lists to ensure that they understand the educational principles and ethos on which the RW School is founded and run. Before a child is admitted, parents are asked to consider what they have learned about the nature of education at the RW School through the process of admission and to reflect on whether they really want such education for their child. Priority is given to children of staff members, children of families employed in other activities run by the Appellant, and children transferring from other Waldorf Schools. The RW School has a "Family Policy" which states as an expectation that all the age-relevant children of a family will attend the RW School, since it is the entire family that is admitted to the community rather than just the child. In addition to the "normal" education matters (curriculum, teaching methods, discipline etc) families seeking admission for their children are advised of the social, cultural and educational nature of the school community and of the expectations which will be made of them to contribute to the well-being of that community. The Admission Selection Criteria document (part of the Admissions Policy) states:

"Ringwood Waldorf School is a learning centre based on the concept of community. Thus parents do not merely 'send their children' to the school as such, but rather the family joins a learning community. It is recognised that the parents are on a learning 'journey' as much as the children. The ties and relationship between the family and the school is an essential feature of the education and because of this it is vital that parents understand the school's approach to the education and actively support it. In Waldorf Education the pedagogy, curriculum and management practices are integral to the education itself and these are informed by Anthroposophy, its concept of the universe, the world and the human being. This is the basis of the art of education and all endeavour in the school"

If a child is accepted for admission to the RW School, the school and the parents enter into an "Admission Agreement", which is stated to "form the basis of the legal and social contract between the Parent(s)/guardians on the one hand and the school on the other". This sets out the basis on which parents are asked to promise their financial contributions to the school (see paragraphs [26] to [32]); requires compliance by the child with school rules; sets out the disciplinary procedures operating in the school; sets out the school's responsibilities for the welfare and education of the child; and sets out the parents' responsibilities, which include regular attendance at Parent Meetings (which are stated to be "an integral part of parent education where you will learn about the current lessons, the phases of child development and how the curriculum is designed to support this development"), and making financial contributions as promised.

Parents who have relevant social and practical skills are expected to contribute to the well-being of the school community not just by making financial contributions, but by making some contribution of those skills – for example, some may assist with teaching, some with the administration of the school, and some with the building projects undertaken by the RW School. In some instances parents continue with such contributions after their children have left the RW School.

The RW School is an independent school and receives no grant or other income from the state. For the year ended 31 August 2005 the "Projected Statement of Performance" for the RW School shows income of £548,372, expenditure of £549,476, and therefore a projected operating deficit of £1,104. Of the income, £425,772 comprises "contributions" and £28,000 comprises receipts for "materials" (both being payments made by families under the arrangements described below). The balance of the income comprises contributions from other activities carried on by the Appellant and miscellaneous donations and income. Of the expenditure, £422,820 is on learning resources (and of this sum, £394,190 is expended on teachers' salaries), £67,226 on administration, £49,930 on property management and the balance on miscellaneous expenses.

The finances of the RW School – both its funding and its expenditure - are managed according to the "Finance Policy" which was developed by the school community. The Finance Policy states that it "reflects the community responsibility to fund the school in such a way this it is financially secure and viable while at the same time meeting the agreed Community Development Goals". The Finance Policy is in accord with Steiner philosophy, which distinguishes between three types of money: contract money (legally binding agreements); purchase money (exchange of goods and services); and gift money (money given and received in freedom within the community for the support of the community by the individual and of the individual by the community).

The Finance Policy states the following as the basis of the funding of the RW School (bold type as in the original):

"Ringwood Waldorf School will receive financial contributions from parents as gifts to the whole community for the benefit of all and to enable the education and development goals to be realised. This also means that the collective contributions will constitute a fund from which all the children will be educated. The effect of this is that individual parents do not make contributions for their child only, but rather make financial gifts to the community. Contributions are known as 'Minimum Funding Contributions'. The school will seek to deepen parents' understanding of the way it works with money so that the intent of the spiritual principles may be evident in the working of this policy. The balance of freedom and responsibility will be recognised and worked with in individual families and in their financial relationship with the school and will underline all processes in the school."

The Finance Policy specifies that each year the RW School will draw up its annual plan for its educational, administrative and pastoral care objectives together with a budget to finance the annual plan. The RW School operates a zero budget each year, that is, the budget is drawn up so as to match the anticipated expenditure in the annual plan for that year with the anticipated financial promises to be made by the community for that year (together with such other income as may be provided from the other activities of the Appellant).

Pursuant to the budget, the RW School gives to each family an indicative average sum per family and per child which it would like to receive to realise the plan for that year. This amount is the "Minimum Funding Contribution". For the 2005/06 academic year this comprised two elements: the "family contribution" which was requested of all families regardless of the number of children at the RW School (specified as £2,976); and the "per child contribution" which was requested for each child (but disregarding a child in the kindergarten) (specified as £1,272). (The same principles applied in relation to the academic year in which the relevant building works were carried out.) Families are asked to consider the contributions they can make so as to enable the plan (and budget for that plan) to be achieved, having regard to these indicative average contributions. The Finance Policy states:

"It is emphasised that the Minimum Funding Contribution is only an indicative minimum across the whole school and that there is an expectation that those who can contribute more will do so and that between the 'overs and the unders' the indicative average per child is achieved."

In the case of any family which considers that they cannot for the year in question contribute the Minimum Funding Contribution, the Finance Policy specifies that they will be asked to meet with a "Community Support Group", who will discuss the support which that family requires that year from the "Community Support Fund" (which is a notional fund calculated, for that year, by reference to the amount which it is anticipated will be contributed above the Minimum Funding Contribution by families who are likely to contribute above the average figures – i.e. the "overs"). The Finance Policy describes the process in the following terms:

"A request for community support is completed by the family prior to the meeting and it is expected that a household budget will have been prepared and be available at the meeting. Evidence of income will also be requested. The purpose of the meeting is firstly to have an annual point of consciousness about the financial responsibilities of each family to the community and secondly to make conscious and visible to the community the process and agreements required. A household budget and evidence of income is not about judgements or scrutiny rather it is about assuring the community that an annual point of consciousness has taken place and this is seen as supporting the principles of freedom and responsibility."

The outcome of this process may be that the family decides that it can contribute the Minimum Funding Contribution; or that it decides to make a contribution of a lesser amount (or no contribution at all) without further expectation; or that it decides to make a contribution of a lesser amount (or no contribution at all) but with the expectation of making up some or all of the difference in future years, perhaps extending beyond the period during which the family has a child at the RW School.

Each family is then asked to complete a Minimum Funding Contribution Promise Form for the academic year, promising to make the contribution they have indicated in the process (i.e. the indicative average, or the contribution "over" or "under" that average). For the 2005/06 academic year this Form (addressed to the RW School, and signed by the parents and on behalf of the RW School) is in these terms: "In response to your annual funding appeal for the 2005/2006 Academic Year, I/we would like to promise a Minimum Funding Contribution as follows:-", and there is then set out the amount promised as family contribution and/or per child contribution and any contribution to the Community Support Fund.

In most years the aggregate of contribution promises actually made by families falls short of the originally proposed budgeted contributions, and in those years the budgeted expenditure has been revised downwards to ensure that projected expenditure will not exceed projected income. If there were to be a substantial shortfall, such as would put in jeopardy the implementation of the annual plan for the year, then the procedure would be to call a community meeting to address the situation, with the community being responsible for determining the action to be taken, consistent with the fundamental principle that the community, and each individual in the community, shares personal and collective responsibility for the funding and financial well-being of the RW School, the community and the education of the children.

As to the expenses side of the budget, the amount of annual remuneration for each of the teaching staff of the RW School is fixed each year. There is a base salary for teachers, but subject to that the teachers form a "community budget" and individually nominate their salary after considering their own needs and personal circumstances and the needs of the school community as a whole, in a process which is the counterpart of the contributions process undertaken by families on the income side.

The Finance Policy states the following, under the heading "Co-operation":

"Because this is a community policy in that it represents an agreement with the community, then it is expected that families will co-operate with the administration of the policy. For new entrants acceptance of the policy will be a condition of entry. Accordingly if a family chooses not to co-operate with the policy then their relationship to the school and to the community may come into question. The school reserves the right to ask them to withdraw from the school under those circumstances."

The Admission Agreement entered into by parents when a child is admitted to the RW School provides as follows in relation to Minimum Funding Contributions and the Finance Policy generally:

"Parents are asked each year to fill in and promise their financial contributions to the school for the following year….Contributions represent the community responsibility to ensure the financial well-being of the school….If your child has been accepted on the basis of support from the Community Support Fund, your financial responsibilities will be limited to that….The school reserves the right to refuse to allow your child to attend the school in instances where financial responsibilities are not met, on the basis of the social contract between the family and the school such as non-cooperation with the Finance Policy which forms part of the social ethos of the school."

Families who in the course of the year are unable to meet their contribution promise are free to change their contribution promise. The RW School has never exercised its right to refuse to allow a child to attend the school because a family has not met its financial responsibilities by failing to co-operate with the Finance Policy. The RW School has never sought to sue a parent for any failure to honour the promise made to contribute financially to the school. Consistent with the community ethos of Steiner principles, the relationship between families and the school is seen and applied by the RW School as a social contract, not a financial or legal one.

Currently approximately half of families contribute the indicative average family and per child contributions, with the remainder contributing more or less. Each year a significant number of families make no financial contributions (in the academic year 2003/04, the families of 20 children made no financial contributions).

Families are requested to pay a "materials charge", an amount per child for his or her share of the cost (based on the previous year's expenditure by the relevant class) of class materials (paper, notebooks, pens, pencils, etc) which will be used during the year. This is in the nature of a reimbursement.

The Appellant's case

Miss Nathan's case on behalf of the Appellant is that, applying the cases which have dealt with the question of what amounts to a "business" for VAT purposes, the Appellant, in carrying out its aims and operation of the RW School cannot be said to be acting in the course of any business and in consequence the classrooms building is used for a "relevant charitable purpose" as defined. She referred first to the case of Institute of Chartered Accountants in England and Wales v CEC [1999] STC 398 ("the ICAEW case") in which Lord Slynn (at 404e) refers to the judgment of Ralph Gibson J in CEC v Lord Fisher [1981] STC 238 which listed six indicia as the test as to whether an activity was a "business" – was the activity (a) a serious undertaking earnestly pursued; (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognised business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; and (f) such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them. Lord Slynn approved the way in which the tribunal in the ICAEW case had applied these indicia to the circumstances of that case (the granting of licences for fees pursuant to a regulatory function), and concluded that the Lord Fisher case indicates "that business, too, in its ordinary sense and for the purposes of the 1994 Act needs to be given an 'economic' content….It is not necessarily sufficient (though it may often be sufficient in different contexts) that money is paid and a benefit obtained."

Miss Nathan then referred to the recent cases of CEC v Yarburgh Children's Trust [2002] STC 207 and CEC v St Paul's Community Project [2005] STC 95, both of which related to playgroup or nursery projects operated by charities in furtherance of their charitable aims, and which charged parents fees, but at rates sufficient only to meet costs and below those charged by playgroups or nurseries operating commercially and run for profit. In each case the tribunal had applied to the activities of the taxpayers the six indicia from the Lord Fisher case, and had decided that the relevant activities were not "predominantly concerned with the making of taxable supplies to consumers for a consideration" (indicium (e)), so that the activities were held not to be those of a business for VAT purposes. This approach was approved and the tribunal decisions were held to be reasonable having regard to the evidence. In CEC v Yarburgh Children's Trust Patten J states (at [23]) that in answering the question of whether activities amount to the carrying on of a business, it is not sufficient to enquire simply whether a service was provided at a price (the primary contention of the Commissioners in that case) – the tribunal "will need to ascertain the nature of the activities carried on by the person alleged to be in business, the terms upon which and manner in which these activities (including the transaction in question) were carried out and the nature of the relationship between the parties to the transaction."

Miss Nathan developed her case by reference to principles laid down by decisions of the European Court of Justice. She argued that in order for there to be a supply of services for consideration (a prerequisite for an activity to be a business for VAT purposes), there must be a direct link between the supply and the consideration; a legal relationship between the supplier and the recipient pursuant to which the supply is made and the consideration given; and reciprocity, in terms of a correlation between the value of the supply and the value of the consideration given for the supply.

As to the "direct link" requirement, she referred to the well-known case of Apple and Pear Development Council v CEC (Case 102/86) [1988] STC 221, and also to Naturally Yours Cosmetics Ltd v CEC (Case 230/87) [1988] STC 879 where at paragraphs 11 and 12 of the decision it is stated that there must be a direct link between the service provided and the consideration received if the supply of a service is to be taxable under the appropriate Directive. As to the requirement that there must be a legal relationship between the supplier and the recipient, she referred to Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509, which concerns the case of a street barrel organ player who solicited voluntary donations from passers-by, and who was held not to be making a supply of services for a consideration for VAT purposes since there was no legal relationship between the barrel organ player as the provider of the services and the recipients of those services, namely the passers-by who made donations to him in response to his playing and his requests for donations. As to the requirement that there must be reciprocity in terms of a direct link between the value of the supply and the value of the consideration given for the service supplied, Miss Nathan referred to both the Apple and Pear Development Council case (see paragraphs 15 and 16 of the decision) and the Tolsma case (see paragraph 17 of the decision).

In Miss Nathan's submissions she accepted, in applying the Lord Fisher indicia as summarised in the ICAEW case (and adopting the same sequence of lettering), that the schooling and educational activity of the RW School (a) is a serious undertaking earnestly pursued; (b) is pursued with reasonable continuity; (c) is substantial in amount; (d) is conducted regularly on sound recognised business principles; and (f) is such as consists of taxable supplies of a kind commonly made by those who seek to make profit from them. However, she submitted that the aims of the RW School and the way in which it operates are such that it cannot be said to meet indicium (e), since it is not "predominantly concerned with the making of taxable supplies to consumers for consideration". She distinguished the RW School from an ordinary fee-paying school by arguing that it aims to provide an education beyond the standard curriculum, concentrating as it does on the philosophical teachings of Rudolf Steiner with an emphasis on the relationship between the individual and the community, so that the whole family, and not just the children who are pupils, is committed to the education process. She also distinguished the RW School by the manner in which it operates, submitting that there is no system of fixed fees calculated so as to produce a profit, and that the contributions made by parents (which vary in amount depending upon the circumstances of the family) comprise a moral responsibility to contribute to the whole community and not a legally enforceable obligation to pay a specified amount of fees as consideration for the education of their respective children. There was thus no legal relationship between supplier and recipient, nor a direct link between the supply made (the education provided) and the payment made, and so the requirements stipulated by the European cases were not met.

The Commissioners' case

Mr Keller, for the Commissioners, took a broader approach in arguing that the RW School is carrying on a business for VAT purposes. He submitted that the six indicia identified in the Lord Fisher case comprise part of the Crown's submissions in that case, and are derived from more general statements made in the case of CEC v Morrison's Academy Boarding Houses Association [1978] STC 1. There is nothing in the Lord Fisher case that requires that they should be applied as a rigorous quasi-statutory conjunctive test in order to determine conclusively whether a particular activity is a business – instead they are useful tools to be used when looking at the totality of the nature and scope of the activities in question. The Appellant had conceded that all but one of those indicia were satisfied, so that for the greater part the business-like nature of the activities was accepted – the Appellant's case rested on the single point that the activity of the RW School is not predominantly concerned with the making of taxable supplies to consumers for a consideration.

He submitted that if one looks at the overall picture, a large number of facts indicate that the RW School is carrying on an undertaking which is a business, in particular: the size of the undertaking; the parents as the principal source of its income; the significant amounts paid by most parents (whether such amounts are by way of a fee or a donation); the sophisticated and business-like manner in which the undertaking is managed both generally and financially; the detailed Finance Policy with its complex process for determining "minimum contributions" which parents are expected to make (which may amount to a legally enforceable liability to make payment, even if in fact any rights are not enforced), and the right which the school reserves to exclude children if parents do not co-operate with that Finance Policy; and the direct relationship between the expected "minimum contribution" and the number of children which parents have in the school.

As to the European cases cited by the Appellant in relation to the requirement that there must be a "direct link" between the supply and the consideration given, Mr Keller submitted that those cases are distinguishable from the circumstances of the Appellant. For example, in the Apple and Pear Development Council case the functions carried out by the Council were provided generally for the industry, so that there was not the direct link between the charges imposed on growers and benefits accruing to them individually. Similarly the circumstances of the Tolsma case are far removed from that of the Appellant's activities. In the case of the Appellant, the contributions made by individual parents (whether or not pursuant to a legal obligation) are directly related to the education of their child or children – if you asked a parent: "Why are you making this contribution to the school?", he would reply: "Because my child is being educated by the school". Applying a common sense approach, rather than an over-legalistic analysis, it was fair to say that there was a direct link between the supply and the consideration given.

Mr Keller referred us to the decision of the tribunal in the case of Royal Society for Prevention of Cruelty to Animals [1991] VATTR 407 (VTD 6218), where the tribunal had held (in favour of the taxpayer) that the charity, in operating branch clinics in furtherance of its charitable objects, was carrying on a business. This was so notwithstanding that payments by those bringing their pets to the clinics for treatment were related to what they could afford to pay (if anything), and that payments might be characterised as "donations". The facts of that decision, Mr Keller submitted, were closely analogous to those of the Appellant's circumstances, and we should follow that decision by dismissing the Appellant's appeal on the grounds that it is carrying on a business and is using the classrooms building in the course of that building.

The decision

It is our decision that the Appellant's appeal should be allowed. The particular nature of the Appellant's activities in operating the RW School, and the manner in which those activities are carried on, are such that they do not comprise a business for VAT purposes, as that concept is to be understood from the relevant cases. Accordingly, the use of the classrooms building by the RW School for the purposes of those activities is a use by the charity which is otherwise than in the course or furtherance of a business, and is therefore use for a "relevant charitable purpose" within the meaning of that expression given by Note (6) to Group 5 of Schedule 8 VATA. The construction of the classrooms building is therefore the construction of a building for use solely for a relevant charitable purpose within section 35(1A)(b) VATA. Therefore in constructing the classrooms building the Appellant has carried out works to which section 35 VATA applies, entitling it to make a valid claim under section 35(1) VATA for the refund of the amount of VAT charged to it on the supply or acquisition of goods used by it for the purposes of the works comprising the construction of the classrooms building.

The reasons for the decision

The single matter in dispute between the parties in this appeal concerns the use by the Appellant for the purposes of the RW School of the classrooms building which the Appellant constructed as the third phase of its project to provide classroom and related facilities for the RW School. If in using the classrooms building for such purposes the Appellant (which it is common ground is a charity) can be said to be using the building "in the course or furtherance of a business", then such use is not "use for a relevant charitable purpose", applying what in this case is the key term of definition, which is to be found in Note (6) to Group 5 of Schedule 8 VATA. This question resolves itself into whether the Appellant in its activities as the RW School is carrying on a business for VAT purposes. It seems to us that we are required first to determine what is the meaning of the term "business" for the purposes of the relevant VAT legislation, which is a matter of law; and then we are required to apply that meaning to the facts of this case as we have found them to be to determine whether the activities of the Appellant as the RW School fall within that meaning, and that is a matter of fact.

As we have noted, the VAT legislation does not provide a definition of "business": section 94(1) VATA tells us merely that "'business' includes any trade, profession or vocation". We therefore have to turn to the case law authorities to see what the term "business" means for VAT purposes – as we shall see, the cases do not so much offer a meaning of the term "business", but rather they show how to determine whether a particular activity or undertaking is a "business" for these purposes and the scope and nature of the enquiry which is to be made in order to reach that determination. Miss Nathan helpfully took us through the relevant cases, as we have detailed above. The UK's domestic VAT legislation must be construed so as to give effect to the relevant European Union provisions, being for these purposes the Sixth Directive, where the relevant provisions are couched in terms of a person carrying out any specified "economic activity", and specified economic activities comprise "all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions" (see Art 4 of the Sixth Directive). It is a fair to say that the UK cases do not suggest that the term "economic activity" itself offers a more clear-cut definition of what activities do and what do not fall within the scope of VAT – in effect they treat the two terms "business" and "economic activity" as one and the same.

The case of CEC v Morrison's Academy Boarding Houses Association [1978] STC 1 provides the starting point. In that case the taxpayer charity operated boarding houses to accommodate pupils of Morrison's Academy (a related charity), and charged boarding fees to the parents of the boarding pupils. The charity's affairs were so managed that it made neither a profit nor a loss. It claimed that its services of providing boarding facilities to the pupils were not supplied "in the course of a business" which it carried on, and so were not subject to VAT. It was held by the Court of Session that the services were subject to VAT. On the question of defining a business, the Lord President said (at page 6):-

"In my opinion it will never be possible or desirable to define exhaustively 'business' within the meaning of s 2(2)(b) [the statutory predecessor provision of section 4(1) VATA]. What one must do is to discover what are the activities of the taxable person in 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 s 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."

The decision is principally directed at the question of whether an activity is precluded from being a "business" if the intention of those making the supplies is that there should be no profit - it was held that an activity does not cease to be a "business" for VAT purposes merely because the motive in supplying the services is not to make a profit but is some wider purpose (in this case the support and assistance of the school, Morrison's Academy).

Subsequent cases have developed (or refined) this approach as factors other than a motive of profit or gain have come to the fore. In CEC v Lord Fisher [1981] STC 238 the appellant organised a shooting syndicate comprising friends and relations, and he asked syndicate members to contribute in advance to the anticipated costs of running the shoot. The question was whether the appellant was making supplies in the course of a business carried on by him – if so, those supplies were taxable. Ralph Gibson J said as follows (at p 247):-

"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 s 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 a business."

The case of Institute of Chartered Accountant in England and Wales v CEC [1999] STC 398 concerned the question of whether a professional body was making supplies in the course of a business when it issued regulatory licences for which it charged fees in order to cover its costs of carrying out that statutory function. It was held that the appellant institute was not carrying on a business – it is not sufficient that there is a supply of services made in return for payment: to comprise a business the activities must be of an "economic nature":-

"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.

Although differences between them may arise, it seems to me that the institute was right in its case to accept: 'The expression "business", it is accepted, represents "economic activities"'. It is not necessarily sufficient (although 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." [Lord Slynn at 404h]

In CEC v Yarburgh Children's Trust [2002] STC 207 (where, in essence, the question was whether a charity which provided day care playgroup facilities was carrying on a business in circumstances where it charged fees sufficient only to meet its costs), it was reaffirmed that a transaction or activity is not to be treated as an "economic activity" or a "business" merely because it results in a payment or produces income. Nor is the matter to be determined by reference only to the motive of the person supplying the goods or services. A wider enquiry is required of the features and context of the activities in question, that enquiry encompassing the nature of the activities, the manner in which they are carried out and the nature of the relationship between the parties to ascertain whether those activities comprise a "business" or some form of "economic activity" (see Patten J's judgment at [23]). It was held in that case that the appellant charity was, in operating the playgroup and charging fees so as only to meet its costs, carrying out its charitable objects, which was an important factor in determining whether its activities had an "economic content" – it was reasonable for the tribunal to have concluded on the facts that the charity was not predominantly concerned with the making of taxable supplies for a consideration, so that it was not carrying on a business (see Patten J's judgment at [30]).

This approach was followed in the recent case of CEC v St Paul's Community Project Ltd [2005] STC 95, where the relevant activities comprised the running by a charity of a day nursery for the benefit of disadvantaged and problem children. In that case the appellant charity charged fees (at below "market" rates) to enable it to meet the deficit otherwise arising after taking into account grants and donations which it received for this work. The tribunal had concluded that in these circumstances the charity was not predominantly concerned with the making of taxable supplies to consumers for a consideration, since the evidence showed that the nursery was run as a charitable activity, and not as a business. The court accepted that as a reasonable determination by the tribunal on the evidence before it. In the course of his judgment reviewing all the authorities Evans-Lombe J said as follows as to the approach to be taken in determining whether an activity is or is not a business (at para [51]):-

"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."

In the Lord Fisher case counsel for the commissioners in his submissions had identified six indicia (for the most part drawn from the judgment of Lord Cameron in the Morrison's Academy case) for determining whether an activity is a business – is the activity (a) a serious undertaking earnestly pursued; (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognised business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; and (f) such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them. In his judgment Ralph Gibson J had the following to say about these indicia (at 246h):-

"As I understand their judgments, the learned judges in the Court of Session did not thereafter set out to lay down principles which, if satisfied, would in all cases demonstrate that an activity must be regarded as a 'business' within those provisions. Those aspects of an activity, to which their Lordships drew attention, and on which counsel for the Crown has relied on formulating the indicia listed above, plainly describe the main attributes of any activity which will be regarded as falling within the concepts of 'business' and 'trade, profession or vocation', and clearly they are useful tools, some perhaps more useful than others, for the analysis of an activity and for the comparing of it with other activities which are unarguably 'businesses'. The courts, however, cannot, by the formulation of tests and by the expounding of indicia, substitute any test or phrase different from that set out in the statutory provision and I am sure that their Lordships had no intention of doing so."

Notwithstanding, subsequent cases have given high significance to these criteria as "tests" for determining whether or not an activity is a "business" – they are referred to (implicitly with approval) in the ICAEW case (where the tribunal in reaching its decision had held that indicia (e) and (f) were not satisfied and that the appellant's licensing activity was not a business); and in the St Paul's Community Project case they are referred to as "the test as formulated by Lord Slynn in the ICAEW case" – the tribunal had applied the indicia to the activities of the appellant charity, and had concluded that all except for (e) were answered in the affirmative, but that, on the evidence, the charity could not be said to be "predominantly concerned with the making of taxable supplies to consumers for a consideration", and so the relevant activities did not in that case comprise a "business": Evans-Lombe J did not demur from this approach by the tribunal nor from its reasoning or its conclusion.

We draw the following guidance from the cases in determining whether an activity is a business for VAT purposes:

(1) A wide-ranging enquiry must be made with the objective of discovering the intrinsic nature of the activity: that enquiry should extend to the features of the activity, and the manner and context in which it is carried out, including the relationship between all the parties;

(2) To comprise a "business", the activity must have "economic content" – its intrinsic nature must be economic (and not, for example, social or charitable);

(3) The fact that in the carrying out of the activity a supply is made for a consideration is not in itself sufficient to give the activity such "economic content";

(4) The fact that in the carrying out of the activity no profit is made (or there is no intention to make a profit) is not in itself sufficient to enable the activity to be characterised as having no such "economic content": in particular, an activity may have "economic content" where it is carried out by way of making supplies which are of a kind that are made commercially, even if in the case under review they are made for no profit;

(5) The motive of the person carrying out the activity does not dictate its tax treatment (and in particular, whether or not it is a business for VAT purposes): that treatment must be ascertained from the nature of the activity rather than its purpose;

(6) If the activity is undertaken by a charity, then the fact that the activity is a means whereby the charity carries out its charitable objects is not in itself sufficient to enable the activity to be characterised as having no "economic content": but that fact is relevant to the intrinsic nature of the activity and therefore to the question of whether or not the activity has "economic content";

(7) The six indicia or "tests" first referred to in the Lord Fisher case are useful tools which can be employed in the analysis of an activity to determine whether it is a business, but they are no more than tools and should not be applied as a comprehensive and rigid code.

We turn now to the circumstances of the Appellant and of this particular appeal.

First, we consider that we had laid before us by the Appellant such evidence as enabled us to make the wide-ranging enquiry required to discern the intrinsic nature of the activities carried on by the Appellant through the RW School, covering in particular the scope and extent of those activities, the manner in which they are carried out by the RW School, the nature of the relationship between the RW School and the families whose children are educated at the school and whose parents make financial contributions to the school, and the extent to which the RW School is pursuing its charitable objects by means of carrying on those activities (see paragraph [10] for the scope of the evidence before us).

For immediate purposes we will assume it to be the case that in carrying out its activities the RW School is making a supply – the provision of education – for a consideration (the Appellant argued (see paragraphs [38] to [40]) that this was not so, on the grounds that there is no legal relationship between supplier and recipient, nor a direct link between supply and payment – we deal with this point below). This consideration – "contributions" made by families whose children are or have been at the RW School – comprises about 80 per cent of the annual income of the RW School (see paragraph [22]).

The RW School makes little or no profit, nor does it intend to make a profit: its annual budgeting exercise is directed at balancing its expenditure with its income (see paragraphs [25] to [30]); the Appellant's Memorandum of Association prohibits the distribution of any profit to its members (see paragraph [12]).

The supplies made by the RW School in the course of carrying out its activities are of a kind that can be, and are, made commercially and for a profit – this point was conceded by the Appellant (as it had to be), since if the RW School is providing education to school-age pupils it is carrying out activities which, in the case of some at least private schools, are carried out commercially and for a profit.

The Appellant is a charity whose principal object is the advancement of education by means of establishing and maintaining social and therapeutic communities of schools in accordance with Steiner principles (see paragraph [11]), and the whole of the activity of the RW School (curriculum, teaching, management, administration) is run in accordance with, and in order to educate families in, Steiner philosophy, principles and social precepts (see paragraph [17]). Therefore the activity carried on by the RW School is a means whereby the charitable objects of the Appellant are achieved.

This leads us to examine the intrinsic nature of the activity carried on by the RW School, noting that the fact that the activity is the pursuit of the Appellant's charitable purposes is a relevant factor in making that examination. The following features of the activity of the RW School (each of which is discussed in more detail below) are also, in our view, of key significance in identifying the intrinsic nature of that activity:-

(1) The RW School's principal purpose and activity is the education of children in accordance with Steiner principles, and fundamental to that is the commitment and involvement of the whole family in the education process. Families wishing to educate their children at the RW School are educated into the principles and approach of the school and are expected to embrace and support them as a family;

(2) As already mentioned, the whole of the school activity – not just the classroom curriculum or teaching method - is run in compliance with and to give effect to Steiner principles;

(3) Central to these principles, and central to the activity of the RW School and the way that activity is carried out, is the concept of the community encompassing everyone concerned with the school: managers, teaching and non-teaching staff, pupils and their families;

(4) This concept of community underlies the nature of the relationship between the individuals who make up the community, which is one of reciprocal responsibility; and