United Kingdom VAT & Duties Tribunals Decisions

Nottinghamshire Wildlife Trust v Revenue & Customs [2006] UKVAT V19540 (24 February 2006)

19540

VALUE ADDED TAX — input tax — charity with objectives of conserving natural areas of land — public access to land available — charity also keeping sheep and selling wool and meat, and selling timber from woodland — attribution of input tax — extent of Appellant's business activities — Commissioners' approach excessively restrictive — Appellant's claims nevertheless overstated — appeal allowed in part

MANCHESTER TRIBUNAL CENTRE

NOTTINGHAMSHIRE WILDLIFE TRUST

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in public in Birmingham on 21, 22 and 23 November 2005

Melanie Hall QC, instructed by Saffrey Champness, for the Appellant

Robert Toone, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Introduction

1. In form, this in an appeal by Nottinghamshire Wildlife Trust ("NWT") against adjustments by the Respondents of its VAT return for period 08/02. The arithmetical detail of the adjustments, or proposed adjustments, is immaterial for present purposes, and indeed several areas of dispute have already been resolved between the parties. The remaining issue before me is one of principle. I am required to decide between the parties' competing approaches to the determination of the recoverable proportion of the input tax which NWT has incurred in pursuing two activities, of maintaining a flock of sheep, and of managing its woodlands. Briefly, NWT maintains that all of the relevant input tax is recoverable; the Commissioners accept that some is recoverable in full, but that the bulk must be apportioned between NWT's taxable supplies (the sales of produce derived from those activities) and its non-business activity of conservation.
2. The relevant return was filed after NWT became registered for VAT in July 2002, but with effect from 1 January 1989: NWT belatedly realised (for reasons not now material) that it should have been registered from that earlier date. The return with which I am concerned covers the entire period from 1 January 1989 to 31 August 2002. While records for the latter part of that period were, and are, available, they no longer exist, at least in a complete form, for the earlier part, but the parties have agreed upon a method which will enable them to determine NWT's liability for the entire period, although the precise calculation depends on the outcome of this appeal.
3. NWT was represented before me by Melanie Hall QC, and the Respondents by Robert Toone of counsel. I was provided with a substantial quantity of documentation and heard evidence from Charles Langtree, NWT's head of estate management and development, Marion Smalley, the officer who made the decision against which NWT now appeals, and Frances Clements, who reviewed the decision, amended it in some respects not now material, and adjusted its detail in other respects, without changing the underlying decision.

The facts

4. Although there was no formal agreement between the parties about the relevant facts, it became apparent as the evidence was given that the measure of disagreement was slight. The true dispute was about the character of NWT's various activities which are not agreed to be either wholly business, or wholly non-business, in nature, and how one should approach the question of the recoverability of the VAT incurred in pursuing activities which have elements of both kinds, if that is the better conclusion. I take what follows about the facts from what was agreed as the hearing proceeded, from the evidence of the witnesses, particularly Mr Langtree, and from the documents with which I was provided. Mr Langtree joined NWT only in 2002 and some of what he told me was information he had obtained from others, or from records. Nevertheless, I accept his evidence as reliable.
5. NWT is a registered charity whose principal purpose can be summarised as the conservation of natural resources within Nottinghamshire. It manages 65 nature reserves throughout the county, promotes conservation and provides education about it, conducts wildlife surveys, and provides various consultation and information services relating to wildlife. Clause 3 of its Memorandum of Association reads:

"The Objects for which the Trust is established are:

a. For the benefit of the public, to advance, promote and further the conservation maintenance and protection of:

(i) wildlife and its habitats;

(ii) places of natural beauty;

(iii) places of zoological, botanical, archaeological, geographical, or scientific interest;

(iv) Features of landscape with geological, physiographical, or amenity value in particular, but not exclusively, in ways that further biodiversity.

b. To advance the education of the public in:

(i) the principles and practice of sustainable development;

(ii) the principles and practice of biodiversity conservation.

c. To promote research in all branches of study which advance the Objects specified previously and to publish the useful results thereof.

6. For no immediately obvious reason, those Objects are rather differently set out in NWT's Regulations, at clause 2:

"The Objects for which the Trust is established, as stated in the Trust's Memorandum & Articles of Association are: -

For the public benefit:-

I) To record and study places and objects of ornithological, entomological, botanical, zoological, geological, archaeological or scientific interest, or of natural beauty, and to protect these from injury, ill treatment or destruction.

II) To establish, form, own, maintain and manage bird sanctuaries or nature reserves for the conservation and control of wild plants and other vegetation and of the wild creatures of any description living naturally therein.

III) To encourage the breeding of wild birds, plants or insects which are harmless, beautiful or rare.

IV) To promote, organise, carry on and encourage study and research for the advancement of knowledge in the natural sciences, and to make grants or donations for such purposes."

7. As one might expect, NWT's 65 sites differ in character. Many consist of open land, and of those sites some are suitable for grazing livestock; other sites are of woodland, including coppices; some are a mixture of the two; other sites still are wetlands. All have some form of wildlife. Most of the sites are freely open to the public, a few (or parts of them) only on prior request. Public footpaths cross many of the sites and, like any other landowner, NWT is obliged to keep the land alongside those footpaths, some paths it has itself created, and other areas to which the public have access, in a safe condition. That obligation entails the maintenance of trees by, for example, lopping dangerous branches. In order to protect the wildlife visitors are asked to keep to the marked paths and to keep dogs on leads.
8. NWT has several sources of income. Some are not the subject of the current dispute; they include membership subscriptions, fees earned from the grant of grazing rights (although none were in fact granted in the period with which I am concerned) and the proceeds of the sale of publications, souvenirs and similar items, all agreed to represent the consideration for taxable supplies, and there is no dispute about the recoverability of the input tax attributable to them. Other sources, the existence of which was originally not conceded and whose extent remains in issue, include income derived from sales of merchandise such as meat, wool, animal feeds and bedding, timber and timber products, the provision of consultancy services, sales of data and hire of equipment. The last three of those are presently relevant only to the extent that they are, NWT says, evidence of its continuing business activities. I heard no detailed evidence about the scale of those activities but it was apparent that it was modest. In addition, NWT's activities are supported by grants, subsidies, donations, legacies, investment income and occasional fund-raising events. Again, I had no detailed evidence about the magnitude of such income.
9. Mr Langtree's evidence was that the management of NWT's woodlands requires techniques which differ from one site to another. Some require minimal intervention, beyond the maintenance of paths in a safe condition. On others, coppicing has been undertaken for very many years, often since long before NWT took over responsibility for the site. Coppicing is not merely a means of conservation, but also a means of deriving fuel, both as wood and as charcoal, and the raw material for various crafts and for hedging. Some wood, of poorer quality, is sold for firewood but the remainder is sold to local craftsmen, and sales of coppice products have been a source of income for NWT, of about £700 per hectare, for some time; it has carried on coppicing for about 30 years. Other sites contain forest woodland on which timber is grown. As one would expect, such sites require only occasional maintenance for some years as the timber grows, and then there is a fairly short period of activity as the timber is felled and cleared, and the site is replanted. The evidence I heard does not enable me to determine how NWT's timber sales compare in scale with those of typical commercial growers, but I am satisfied that the quantity of timber produced is significant, being measured in hundreds of tonnes. NWT has engaged in timber production for about 20 years. Usually, Mr Langtree said, the timber and coppice wood are sold standing and the purchasers undertake their own cutting, but that is not always so and NWT also carries out its own management of the woodlands as the timber is growing.
10. Although the Commissioners were initially reluctant to accept that NWT's timber and coppice wood sales were commercial in nature they do now concede that to be the case, albeit there remains a dispute about the extent of the recoverable input tax. They do not, however, take the same view about NWT's livestock activities. In 1999 NWT began to consider the possibility of maintaining its own flock of sheep and in the following year it made a first acquisition of 35 animals. The flock has since grown, by breeding and further purchases, and averages about 650 head in total; approximately 400 lambs are born to the flock each year. The flock is managed by two full-time shepherds. The sheep are moved from one site to another in order to benefit from the most suitable grazing although, at the same time, NWT takes into account its conservation obligations. In that, Mr Langtree said, it does not differ from ordinary commercial farmers who likewise move their flocks from pasture to pasture both for the benefit of the sheep and with the aim of conserving the land (and, like farmers, NWT is required to maintain stock movement records). When it obtained its flock NWT was required to register as a sheep farmer and meat producer and to purchase a quota allocation, and it receives agricultural grants in exactly the same way as other sheep farmers. Sales of lamb, as meat, began in 2000, at a very modest level (£1,500) but by 2004 the value of sales had grown to £11,406. The flock, which is of a pedigree breed, is sheared annually and the wool is sold to a specialist producer which makes the wool up into garments. They, or some of them, are in turn purchased by NWT for sale in the shops at some of its sites. I was not provided with details of the value of the wool and garment sales. NWT also has a few beef cattle, but the scale of beef production is currently very modest and this activity can be disregarded for present purposes.
11. I should mention, if only for completeness, that some time was occupied at the hearing by Mr Langtree's description of several of NWT's individual sites. I do not find the similarities and differences between the sites to be of great significance. Inevitably some sites are more suitable for forestry or grazing than others, while some are suitable, and are used, for neither purpose. It was not suggested that I deal with the dispute on a site-by-site basis, and I do not propose to do so. I shall instead deal only with the issues of principle.
12. What became clear as the hearing proceeded is that although NWT's main purpose is nature conservation, and its farming and forestry activities as I have described them are subsidiary to that purpose (it is conspicuous that they are not mentioned at all in the extracts from NWT's Memorandum of Association and Regulations which I have set out above), and are, as I deduce, of comparatively modest scale, they are seriously pursued, in a professional manner. I accept too that NWT sets out to maximise its profits from forestry and its flock, albeit profits are small and, it appears, ownership of the sheep has led to losses, though the losses are at least mitigated by grant income and Mr Langtree told me he was hopeful that NWT would break even in the near future.
13. Mrs Smalley became involved in the case when NWT's VAT return for the period 08/02 (its first, covering the entire period from NWT's back-dated registration on 1 January 1989: rather more than 13 years) was submitted. The length of the period covered was itself unusual (though an inevitable consequence of the back-dating of the registration) but in addition the return claimed a net repayment of £165,173.99, an amount sufficient to prompt a verification visit, which Mrs Smalley undertook on 23 October 2002.
14. Although Mrs Smalley was impressed by the detail of the calculations produced to her, she was less impressed by NWT's inability to produce records for the entire period covered by the return—no input tax records for the years 1989 to 1994 or for 1996 were available, and no breakdown of NWT's sales had been maintained at all—and by the method adopted for apportioning input tax between taxable, exempt and non-business use. The former criticism does not concern me, save that I should record that estimates had been used where records did not exist, and I need say no more about it since the parties have agreed to devise a method of determining the amount of input tax which is to be allowed in respect of those periods in respect of which records are not available. Mrs Smalley's concern, on the latter issue, was that the apportionment method used, an expenditure-based method, did not achieve a fair result but led to NWT's recovering much more input tax than appeared to be appropriate. Her concerns, as I understand them, have two features: that the calculation itself is flawed, and that the assumptions on which it relies are incorrect. Again, I do not need to deal with the former concern, but only with the latter. In essence, Mrs Smalley did not consider that NWT's attribution of the input tax it had incurred in obtaining supplies of fencing materials, various items used in the management of the flock of sheep and certain equipment wholly to taxable supplies was correct. She took the view that NWT is predominantly concerned with conservation, a non-business activity, and that most of the input tax had been incurred on supplies used for that purpose. She considered that NWT's keeping sheep and its woodland activities are means of carrying on conservation, rather than activities in their own right.
15. Mrs Clements' role was to review Mrs Smalley's conclusions, when NWT's advisers challenged them. Much of what she did is not relevant to the present dispute or, at least, does not need to be explained here. It is quite clear that Mrs Clements undertook a great deal of detailed work, and examined the evidence available to her with considerable care. Although she made some adjustments to Mrs Smalley's calculations, she took the same overall view: that NWT's activities are primarily charitable, of a non-business character. As a simple example, she considered that the primary purpose of NWT's keeping a flock of sheep is to advance its charitable, non-business, object of conservation; only the input tax incurred by NWT on supplies relating to shearing, the slaughter of lambs and the preparation of the meat for sale is recoverable. Additionally, if fencing is in part used for keeping the flock of sheep in, it is also used to keep members of the public out and, to the extent that NWT's keeping sheep is to be regarded as a business activity, an apportionment of the input tax between that activity and the non-business activity of making its sites accessible to the public is required.

The law

16. There was no material disagreement between the parties about the relevant legislation. The right of a taxable person to deduct as input tax VAT he has paid on supplies made to him is granted by article 17 of the Sixth VAT Directive (77/388/EEC), implemented in United Kingdom law by section 25 of the Value Added Tax Act 1994. The deduction is allowed only where the supplies in question are to be used by the trader for the purpose of making taxable supplies, and is not allowed when the supplies are to be used for other purposes, such as the making of exempt supplies, or for non-business activities. Article 19 of the Sixth Directive and section 26 of the 1994 Act deal with those cases where a trader uses supplies to him partly for making taxable supplies and partly for other purposes and it is consequently necessary to determine the extent to which he can recover input tax.
17. The basic rules are set out succinctly in regulation 101 of the Value Added Tax Regulations 1995 (SI 1995/2518). So far as material, it reads:

"(1) … the amount of input tax which a taxable person shall be entitled to deduct … shall be that amount which is attributable to taxable supplies in accordance with this regulation.

(2) In respect of each prescribed accounting period—

(a) … goods or services supplied to the taxable person in the period shall be identified

(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,

(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and

(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period."

18. Thus it is essential to identify the type of use—making taxable supplies, making exempt supplies or other purposes—to which the taxable person puts supplies he receives and in respect of which he has incurred input tax. That input tax is attributed directly when possible, and proportionately when direct attribution is not possible, and only that tax which is directly attributable and the appropriate proportion of the tax which cannot be directly attributed ("residual input tax") are recoverable.
19. The word "attributable" is not further defined in the legislation (the same word is used, again without further definition, in the Sixth Directive) but there is a substantial body of case law on the topic. One description of what is meant by attribution to supplies is to be found in the judgment of the European Court of Justice ("ECJ") in Abbey National plc v Customs and Excise Commissioners (Case C-408/95) [2001] STC 297, at paragraph 28, in which it said, of supplies in respect of which input tax is recoverable, that it "presupposes that the expenditure incurred in acquiring them must form part of the cost components of the taxable transactions". The Court relied upon its earlier conclusion in BLP Group Plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424, at paragraph 19, that if input tax is to be recoverable, "the goods or services in question must have a direct and immediate link with the taxable transaction". The test is wholly objective: "the ultimate aim pursued by the taxable person is irrelevant in this respect" (ibid).
20. A taxable supply is "a supply of goods or services … other than an exempt supply": see the 1994 Act, section 4(2). That definition, taken alone, is rather unhelpful, but if it is read with subsection (1), which charges tax on "a taxable supply made by a taxable person in the course or furtherance of any business carried on by him" the meaning becomes clearer. NWT is a taxable person, and its sales of wool, meat, wood and timber are plainly taxable supplies; so much is common ground. The remaining question is whether the Commissioners are correct to maintain that only those supplies to NWT which can be directly related to its sales—in summary, the costs of shearing, slaughter of lambs and the preparation of the meat, and the cost of felling and transporting the wood and timber, to the extent that NWT undertakes those tasks itself—are attributable to taxable supplies; or whether, as NWT contends, all of the costs of keeping and exploiting its flock and of maintaining its woodlands are so attributable.
21. Mrs Hall's argument was that, objectively viewed, the entirety of NWT's activities in husbanding its flock and maintaining its woodlands amounted to the pursuit of a business. The Respondents had asked themselves the wrong question, because they had focussed not on the objective characteristics of the activity, but upon NWT's supposed subjective intention, that is of conserving the land within its care. If one considered the activities, the only reasonable conclusion was that NWT was pursuing a business. Its breeding sheep and then shearing them in order that the resulting wool could be sold, and slaughtering them in order that their meat could be sold, were all features of a sheep farming business. Similarly, its maintaining woodlands, allowing trees to grow and harvesting, or selling standing, the resulting wood and timber, were features of a forestry business. The objective characteristics of the activity are the determining criterion: Commission v Netherlands (Case C-235/85) [1987] ECR 1471; thus the Commissioners were wrong to take NWT's wider purposes of conservation into account—see also Wellcome Trust v Customs and Excise Commissioners (Case C-155/94) [1996] STC 945. Neither the scale (Wellcome Trust) nor the profitability (BLP and Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655) of the activity are relevant considerations.
22. Mr Toone, for the Commissioners, did not dispute that analysis of the case-law. His argument, in effect although he did not quite put it this way, was that Mrs Hall's approach begged the question. The matter to be decided was not whether NWT's activities shared the characteristics of a business, but whether NWT was engaged in the making of taxable supplies for a consideration. It did so only incidentally to its principal activity of providing to the public, free of charge, the service of making available access to its various sites: that activity, as its Objects made clear, was its raison d'être. Such an activity could not amount to the pursuit of a business, since no consideration for it was received. Only in so far as the "direct and immediate link" described in BLP between input tax and an onward taxable supply was established could that input tax be recovered; the remainder must be considered to have been incurred for NWT's non-business purposes and was irrecoverable. At the very least an apportionment must be made.

Conclusions

23. I have dealt with the arguments only briefly, and have mentioned only a few of the authorities to which I was referred, even though the hearing extended over three days, since it seems to me that there is very little difference between the parties about the principles which must be applied. Mrs Smalley and Mrs Clements both said that their principal concern was that the calculations advanced by NWT and its advisers led to NWT's recovering an excessive proportion of the input tax it had incurred. For reasons to which I shall come later, I agree with them that there are flaws in the proposed method, or at least in its application, but it seems to me that one should not approach the problem by considering the result first, and redrawing the calculation in order that it leads to what might be perceived as a fairer result. An apparently unfair result may, perhaps even should, put an officer on enquiry, but the correct approach as I see it is to examine the activity, or activities, first and consider the result in the light of that examination.
24. It is perfectly true that NWT's principal (and non-business) activity is the conservation of the land entrusted to it, and the provision of access to that land, free of charge, to members of the public. It is equally true that, without the land entrusted to it, NWT could not carry on its activities of keeping a flock and selling wood and timber, and that such profits as it derives from those activities are applied to its charitable purposes. But those facts are, in my judgment, immaterial. The first question is whether NWT carries on the businesses of sheep farming and forestry. In my view, it plainly does; and I see no basis on which it can be said that the business element of either activity is restricted in the manner the Commissioners suggest. On this issue, I prefer Mrs Hall's approach. Whether or not the ultimate objective of the activity is the advancement of NWT's charitable purposes is immaterial: see BLP. I agree with Mr Toone that the question is whether the activities are pursued with the intention, or for the purpose, of making taxable supplies; but, contrary to his contentions, I am satisfied they are. The notion that they are partly pursued for that purpose and partly for another, because of NWT's ultimate aims, seems to me to be misconceived.
25. I will deal in more detail with the flock of sheep first. The Commissioners' position is that the sheep were acquired by NWT in order to advance its object of conserving those of its sites on which sheep might graze; thus, they say, the sheep are moved from one site to another principally in order to manage the growth of grass and other foliage. I do not doubt that NWT was mindful of its conservation obligations when it decided to buy the sheep, and that it has always taken care to ensure that its management of the sheep does not compromise its pursuit of those obligations. It may well be that its decisions about the management of the flock have been coloured by its wider obligations. However, the suggestion that the ownership and management of the flock amounts to a business activity while the sheep are being shorn or slaughtered, but is a non-business activity at other times, is in my view wrong. In order to have sheep to shear, or from which to produce meat, it is necessary to breed them, provide for their feeding requirements, care for their health and prevent them from straying (and, I imagine, a shepherd does a good deal more). Those tasks must be undertaken throughout the animals' lives and if any task is neglected, there will be no wool or meat. The management of a flock is, in my view, a single indivisible activity and where, as here, it is pursued in a business-like manner (as distinct from a hobby) with a view to earning profit, it is a business activity.
26. One can regard the management of the woodlands in a similar way. NWT could confine itself to ensuring that there was no danger to members of the public, leaving its woodlands otherwise to grow naturally. Instead it harvests coppice products and sells timber and again, as I am satisfied, it does so in a business-like manner and with a view to earning profits. I do not doubt that these activities, too, are conducted in a manner which is consistent with, even designed to advance, NWT's conservation obligations, but the fact of consistency does not mean that the forestry is itself no more than conservation. In my view it is a business activity which happens to be pursued by an organisation whose objects are charitable, but it is no less a business activity for that.
27. I accept that many of the visitors to NWT's sites may come in order to see the sheep, and to walk within managed, rather than wild, woodlands. But people may walk along public paths through ordinary commercial farmers' fields, in order to see the animals, or through commercially run forests, without their doing so affecting the character of the activity carried on by the owner of the land. The motives of NWT's visitors and the fact that NWT encourages them whereas other landowners might accept them only on sufferance are in my view quite irrelevant considerations. Thus I have concluded that NWT's sheep farming and woodland exploitation are to be treated wholly as business activities.
28. However, while I disagree with the Respondents on their view of the scope of NWT's business activities, I think there is merit in their objection that NWT has sought to attribute too great a proportion of its input tax to those activities. Although, as I have mentioned, I was not asked to make any particular findings on this point, I was taken in some detail to a variety of individual items and formed the impression that, wherever there was doubt, NWT had resolved that doubt in its own favour. A single example will suffice: the claim was made that the cost of maintaining a footpath was attributable to business activities because sheep had at some time grazed in the field which it crossed. In such a case the "direct and immediate link" described in BLP is clearly absent, and maintaining a footpath used by human visitors can scarcely be regarded as a cost component of producing wool or meat. The maintenance of a public footpath crossing his land might be an unavoidable burden for a commercial farmer; in NWT's case the obligation to repair is a consequence of its principal objectives, and must be considered in a different light.
29. It is for NWT to establish that the input tax for which it seeks credit is properly due: see Rompelman. That requirement, as I see it, is not satisfied by its merely establishing some link between the expenditure which gave rise to the input tax and an onward taxable supply, but the "direct and immediate link" which the ECJ described in BLP. Where two links can be established, the stronger should, I think, usually prevail, but where neither is the stronger, or there are plainly two "direct and immediate" links, an apportionment is required. In the case of the footpath to which I have referred, the stronger link (if, despite my own view, it could truly be said there is any link at all to the management of the flock) is plainly with NWT's non-business activity of providing public access to its sites. On the other hand, if a fence both keeps sheep in and keeps people out, one must ask why the people are kept out: if it is in order to protect the flock, and for no other reason, its cost would in my view be an expense attributable to the business activity.
30. The appeal is allowed, to the extent I have described. Although the parties expressed confidence in their being able to resolve matters of detail, I think it appropriate I should give permission to them to apply to restore the appeal so that such issues may be determined, should that be necessary. It was agreed that any application either party might make for costs should be the subject of a further hearing, and I make no immediate direction in that respect.

COLIN BISHOPP

CHAIRMAN

Release date: 24 February 2006

MAN/03/0130