DECISION
Background
1.
The Appellant is a non-profit making groundwork trust and the
representative member of a VAT group. It owns a trading company called
Groundwork Environmental Services (Cheshire) Limited (“Groundwork”). This
appeal is against a decision of HMRC that certain services which Groundwork
provides to businesses do not amount to supplies for the purposes of VAT.
2.
We set out the facts in more detail below. By way of introduction
Groundwork provides a range of services to businesses including health and
safety management and environmental consultancy. One particular service which
it offers consists of providing advice and support to businesses to help them improve
environmental and energy efficiency.
3.
The arrangement between Groundwork and its clients is that clients are
not required to pay Groundwork for the services it provides. Instead Groundwork
receives funding through a programme called “Enworks”. The Enworks programme is
itself funded by the North West Regional Development Agency (“NWDA”) and the
European Regional Development Fund (“ERDF”).
4.
The issue on this appeal is whether the sums received by Groundwork in
relation to these services are third party consideration for a supply of
services or what is known as a “block grant”. The appellant contends that sums
received from Enworks amount to third party consideration. As such they are
consideration for a supply of services and within the scope of VAT. The
respondents contend that the sums received amount to a block grant and are therefore
outside the scope of VAT.
5.
On 25 October 2010 an HMRC officer wrote to Groundwork’s representative
setting out his decision that the funds received by Groundwork from Enworks was
outside the scope of VAT. HMRC considered that the funds were not third party
consideration because they were in the nature of a grant. Mr Everett asked for
a review of that decision and by letter dated 21 April 2011 the decision was
confirmed.
6.
We are concerned in this appeal with the point of principle described
above. The significance for the appellant is that if the supplies are within
the scope of VAT it will be able to recover input tax on taxable supplies which
it receives. We are concerned with the point of principle on this appeal and
not with an assessment by HMRC or a refusal of a claim to input tax claim. We
were also told that this decision may have significance for other groundwork
trusts.
The Law
7.
There was no dispute between the parties as to the relevant legal
principles which we must apply in order to determine this appeal. The real
issue between the parties involves the application of the law to the particular
facts of this case.
8.
Section 4(1) of the Value Added Tax Act 1994 ("VATA
1994") provides:
“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.”
9.
Section 5(2)(a) VATA 1994 provides:
“ ‘Supply’ in this Act
includes all forms of supply; but not anything done otherwise than for a
consideration.”
10.
There is no definition of ‘consideration’ in VATA 1994, but Article
73 Principal VAT Directive (Directive 2006/112/EC) provides:
“ In respect of the
supply of goods or services, other than as referred to in Articles 74 to 77,
the taxable amount shall include everything which constitutes consideration
obtained or to be obtained by the supplier, in return for the supply, from the
customer or a third party, including subsidies directly linked to the price of
the supply.”
11.
The ultimate question on this appeal is whether the payments received by
Groundwork from Enworks are “subsidies directly linked to the price of the
supply”. We were referred to various authorities as to the principles that are
relevant to the application of this test.
12.
In Office des produits wallons ASBL v Belgium [2003] STC 1100 (“Wallons”)
the ECJ considered the equivalent provision to article 73 in the 6th
Directive. The case concerned a non-profit making association which advertised
and sold agricultural and horticultural products from a particular region in Belgium and received a subsidy from that region. The ECJ noted at [11] that operating
subsidies which cover a part of running costs “nearly always affect the cost
price of the goods and services supplied by the subsidised body”. The ECJ
then set out the following approach to be adopted in determining the issue:
“12. However,
the mere fact that a subsidy may affect the price of the goods or services
supplied by the subsidised body is not enough to make that subsidy taxable. For
the subsidy to be directly linked to the price of such supplies, within the
meaning of Article 11A of the Sixth Directive, it is also necessary, as the
Commission has rightly pointed out, that it be paid specifically to the subsidised
body to enable it to provide particular goods or services. Only in that case
can the subsidy be regarded as consideration for the supply of goods or
services, and therefore be taxable.
13. In
order to establish whether the subsidy constitutes such consideration, it
should be noted that the price of the goods or services must, in principle, be
determined not later than the time of the triggering event. It should also be
noted that the undertaking to pay the subsidy made by the person who grants it has
as its corollary the right of the beneficiary to receive it, since a taxable
supply has been made by the latter. That link between the subsidy and the price
must appear unequivocally following a case by case analysis of the
circumstances underlying the payment of that consideration. On the other hand,
it is not necessary for the price of the goods or services - or a part of the
price - to be ascertained. It is sufficient for it to be ascertainable.
14. It is therefore for
the referring court to establish the existence of a direct link between the
subsidy and the goods or services at issue. That makes it necessary to verify
at an early stage that the purchasers of the goods or services benefit from the
subsidy granted to the beneficiary. The price payable by the purchaser must be
fixed in such a way that it diminishes in proportion to the subsidy granted to
the seller or supplier of the goods or services, which therefore constitutes an
element in determining the price demanded by the latter. The court must
examine, objectively, whether the fact that a subsidy is paid to the seller or
supplier allows the latter to sell the goods or supply the services at a price
lower than he would have to demand in the absence of subsidy.
15. In the main
proceedings and in view of the fact that, according to the framework agreement,
OPW carries out a number of activities, the referring court must verify whether
each activity gives rise to a specific and identifiable payment or whether the
subsidy is paid globally in order to cover the whole of OPW's running costs. In
any event, it is only the part of the subsidy identifiable as being the
consideration for a taxable supply that may, in appropriate cases, be subject
to VAT.
16. …
17. Moreover,
in order to determine whether the consideration represented by the subsidy is
identifiable, the national court may either compare the price at which the
goods are sold in relation to their normal cost price, or examine whether the
amount of the subsidy has been reduced once those goods are no longer produced.
If the factors examined are significant, it must be concluded that the part of
the subsidy allocated to the production and sale of the goods in question
constitutes a subsidy directly linked to the price. In that regard, it is not
necessary for the subsidy to correspond exactly to the diminution in the price
of the goods supplied, it being sufficient if the relationship between the
diminution in price and the subsidy, which may be at a flat rate, is
significant.”
13.
We take the reference to a “triggering event” at [13] to be the
date of payment of the subsidy. In other words, it refers to the event which
triggers the issue and the price of the goods or services must be determined or
determinable at that time. Having said that, there is no timing issue on the
facts of this appeal and it is not necessary for us to explore this matter
further.
14.
We were referred to a number of cases in which the principles described
in Wallons have been applied. These included a decision of the ECJ in Keeping
Newcastle Warm Ltd v Commissioners of Customs & Excise Case C-353/00
and a recent decision of the First-tier Tribunal in Hope in the Community
Limited [2012] UKFTT 498 (TC). These cases do not really add anything to the
approach set out in Wallons. It is however worth noting that the ECJ has
on a number of occasions stressed the importance of a direct link between the
consideration and the service provided. We were referred to the following cases
by way of example: Staatsecretaris Van Financien v Co-operatieve
Aardappelenbewaarplaats GA Case C-154/80 at [12], Staatsecretaris
Van Financien v Hong Kong Trade Development Council Case C-89/81 at [10],
Apple and Pear Development Council v Customs & Excise Commissioners Case
Case C-102/86 at [12] and [13], and Tolsma v Inspecteur der
Omzetbelasting Leeuwarden Case C-16/93 at [13].
15.
We were also referred to the HMRC manual at V1-3 and 1-6 which considers
the question of supply and consideration for VAT purposes. The manual does not
have the force of law and whilst it includes a useful background discussion in
relation to groundwork trusts generally it is not necessary for us to refer to
it for the purposes of this decision.
Findings of Fact
16.
We received evidence in the form of a witness statement from Mr Michael Benson,
a partner in the appellant’s accountants, Murray Smith LLP. His evidence was
not disputed. We heard oral evidence from Mr Greville Kelly who is a director
of Groundwork. He had produced a witness statement and was cross-examined. We
were also provided with a statement of agreed facts which we have incorporated
into the following findings of fact in so far as it is relevant.
17.
Enworks is a partnership between a number of organisations. It was
established in 2001 and one of its purposes is to co-ordinate environmental
advice, training and support to businesses throughout the North West of
England. It works with local organisations including groundwork trusts.
Groundwork trusts were set up as a result of government policy towards
promoting urban and post industrial renewal. Enworks’ is supported by NWDA and
ERDF.
18.
Groundwork markets an Enworks programme which offers an “Environmental
Action Plan” to businesses in Cheshire. The programme is aimed at identifying the
cost and resource savings businesses can achieve through increased resource
efficiency. It is marketed as being supported by Enworks, amongst others, and
is expressed to be “available FREE of charge”.
19.
On 17 November 2008 Enworks wrote to Groundwork setting out a “Service
Level Agreement” for the period October 2008 to March 2010. The document was
also on its face described as a “Grant Offer Letter”. This was an extension to
a previous agreement. The letter stated:
“The offer consists of a
maximum grant of £769,419 (‘the Grant’) towards the eligible costs of the
Project.
The grant is made up of the
following:
North West Regional
Development Agency (NWDA) £ 502,224
Single Programme
European Regional Development
Fund (ERDF) £ 267,195”
20.
The grant was expressly subject to Groundwork delivering the project, ie
the Enworks programme, in line with its business plan, achieving various
targets and complying with various other conditions. Those conditions included:
(1)
Groundwork has to submit monthly claims,
(2)
claims must be submitted on an appropriate claim form,
(3)
claims must be accompanied by an invoice containing a detailed breakdown
of grant being claimed from the two funding streams, namely NWDA and ERDF,
(4)
all project claims must be based on actual expenditure and not budgeted
figures,
(5)
all activity, expenditure, income, outputs and outcomes reported must be
supported by adequate auditable evidence and made available to Enworks on
request.
(6)
all businesses receiving support from the Enworks programme must be
informed in writing, at least on an annual basis, of the value of the support
they have received in order that they can make informed declarations on the
receipt of state aid.
(7)
documentation must be retained to demonstrate the causal link between
funding and outputs/outcomes.
21.
By letter dated 14 April 2010 Enworks offered Groundwork a further
service level agreement and grant offer for the period 1 April 2010 to 31 March
2013. It was subject to similar terms as the previous offer. The “maximum
grant” for the period was £1,190,158.
22.
We have been asked on the grounds of confidentiality not to identify the
specific clients of Groundwork in this decision. In fact there is no real
reason for us to identify specific clients.
23.
When Groundwork receives an enquiry from a potential client a consultant
will identify the scope of support that can be provided. The aim is to spend
the bulk of the grant monies where the best return can be achieved in terms of
resource efficiency and energy savings. Tier 3 clients as they are called are
generally smaller business, and receive a basic level of generic advice.
Support is based on a telephone interview. Time spent by consultants is
recorded against that client’s name and the grant will be drawn down as set out
below.
24.
Tier 2 clients are offered an initial resource efficiency audit. A consultant
will visit the business spending between 1 and 4 hours identifying the scope of
any opportunities. They receive an audit report describing those opportunities.
Certain businesses are identified as justifying longer term support and a more
bespoke service.
25.
Whatever the level of service provided, Groundwork records the time
spent by each member of staff with each client and any disbursements. Members
of staff are required to complete project-coded time sheets. Groundwork also
records outputs and outcomes achieved through delivery of the service. Outputs
and outcomes include for example the number of businesses assisted to improve
performance, jobs created, sales increased and CO2
reductions. The causal link between funding and outputs/outcomes is documented.
26.
Following a client visit and audit, Groundwork produce a report for the
client. The report identifies and discusses recommended actions together with
the potential savings including resource and energy savings as well as cost
savings associated with each action. Further advice and support may be
available to the business, although this does not extend to support for capital
expenditure.
27.
The various costs incurred by Groundwork are claimed from Enworks. There
are agreed methods in place for the recovery of costs. For example, staff costs
are recovered by reference to productive hours recorded on time sheets and an
appropriate charge out rate according to the particular member of staff. Staff
members do not spend all of their time on the Enworks programme and Groundwork
offers other areas of consultancy services. Office rental costs are recovered
by reference to a space/time apportionment method. NWDA and ERDF have different
rules as to what costs can be recovered via the Enworks programme.
28.
A detailed “Monthly Progress Report and Grant Claim” is submitted
by Groundwork to Enworks. The front summary page splits the claim between NWDA
funding and ERDF funding. Apart from having different rules as to cost
recovery, the two funders have different rules as to the businesses which can
be funded. For example ERDF will only fund small and medium sized enterprises
under the Enworks programme whereas NWDA will also fund larger businesses.
There are no circumstances in which Groundwork will work for clients who do not
qualify for funding.
29.
Each client is provided with an annual statement indicating the value of
the support it has received from Groundwork. By way of example such statements
are in the following terms:
“In the last 12 months
Groundwork Cheshire has provided your company with support to improve its
resource efficiency or standards of corporate responsibility. This work was
funded by the European Regional Development Fund and the Northwest Regional
Development Agency.
… The level of support for
your business for the past year (2010) is as follows:
£ 10,195.93
… If you wish to access
further support please contact your adviser … ”
30.
The information used to produce these statements is derived from a
database. All time spent and support given is recorded against the client’s
name. This mainly comprises time spent by consultants employed by Groundwork
but can also include sums spent on obtaining third party consultancy services
on behalf of the client. The figure for support given to an individual business
does not include any apportionment of overheads. Overheads are not apportioned
to particular businesses. However the overheads recovered in any particular
month are those directly attributable to the work done for businesses pursuant
to the Enworks programme in that month.
31.
The business plan produced by Groundwork as a condition of the grant
offer includes details of employees of Groundwork who will be working on the Enworks
funded programme. Employees are categorised between direct delivery staff,
direct support staff and indirect support staff. Direct delivery staff includes
the consultants who deliver advice to clients. Direct support staff includes
administrators who co-ordinate and market the Enworks programme. Indirect
support staff includes general office managers and assistants.
32.
The business plan also shows the anticipated amount of time each member
of staff will spend on the Enworks programme, split between NWDA funded
activity and ERDF/NWDA co-funded activity. The reason for identifying the
source of funding is because ERDF has certain restrictions on what it will fund
which do not apply to NWDA. Time spent by certain indirect support staff such
as finance and office staff, is not recoverable via ERDF funding. The cost of
senior management is not recoverable at all under the Enworks programme.
33.
Mr Kelly described the grant funding from Enworks as being subject to “a
fundamental principle that the grant money can only be claimed retrospectively,
for costs, which it can be demonstrated were incurred in delivery of specific
activities within the Enworks contract”. We accept that is a fair
description of the circumstances. He also said that “… funding is only
payable for specific work undertaken”. That is part of the issue we have to
determine and which we consider in our decision below.
Summary of the Parties’ Submissions
34.
The grounds of appeal succinctly summarise the issue, asserting that the
payments received from Enworks are properly to be treated as third party
consideration on the basis of the ECJ decision in Wallons.
35.
Mr Everett on behalf of the appellant essentially submitted that the
payments received from Enworks are a subsidy for the work done by Groundwork on
behalf of clients. The subsidy is directly linked to the price of the supply. It
covers the whole of the price but no more. The fact that it is payable by
reference to a single maximum amount does not cause the sums paid to be a
global grant. He accepted that the fact that certain overheads are recovered from
Enworks but not apportioned to clients does at least support the respondents’
case but it was not determinative of the issue. His principal submission was
that the grant is not a fixed sum. If the services were not delivered to
specific businesses then Enworks would not make any grant payment to
Groundwork.
36.
Mr Mansell on behalf of the respondents submitted that the necessary
direct link between the service and the grant funding was not present on the
facts of the case. He noted that Enworks cannot identify from the claim forms
what proportion of each monthly payment relates to which business. The absence
of any allocation of overheads indicates that there is no direct link between
the payment and the service. The condition of funding requiring Groundwork to retain
auditable evidence and documentation demonstrating a causal link between
funding and outputs/outcomes is simply a matter of good housekeeping and
financial control. In reality Groundwork is claiming all its costs incurred in
relation to the programme from Enworks.
Decision
37.
Both parties agreed that the approach we should take in considering the
facts of the present case is to be derived from Wallons. We must
consider whether the payments received by Groundwork from Enworks are directly
linked to the price of the services provided. This involves consideration of
the following matters:
(1)
Do the payments from Enworks affect the price charged by Groundwork to
its clients?
(2)
If so, are payments made to Groundwork specifically for it to provide
particular services to its clients?
(3)
The link between the subsidy and the price must appear unequivocally
from the circumstances in which the payment is made.
(4)
It is not necessary for the price of the services provided to be
ascertained, it is sufficient that it should be ascertainable.
(5)
The price payable by the client must be fixed in such a way that it
diminishes in proportion to the payment made by Enworks, such that the payment
made by Enworks constitutes an element of the price charged by Groundwork to
its clients.
(6)
We must consider whether each activity carried out by Groundwork gives
rise to a specific and identifiable payment, or whether the payment is made
globally to cover the whole of Groundwork’s running costs.
(7)
It is not necessary that the payment from Enworks corresponds exactly to
the reduction in price to Groundwork’s client. It is sufficient that the
relationship between the two is significant. A flat rate subsidy may be
significant.
38.
It was not suggested to us that the principles to be applied are any
different where there is a partial subsidy reducing the price paid by the
customer, or where as here the subsidy effectively reduces the price paid by
the client to nil. In the latter case no part of the price is charged to the client.
It seems to us that the question remains whether the subsidy is directly linked
to what would otherwise have been the price charged to the client for the
supply.
39.
It is clear to us that the payments from Enworks to Groundwork do affect
the price charged by Groundwork to its clients. They enable the service to be
provided free of charge. As Wallons makes clear, subsidies will nearly
always affect the cost price of goods or services supplied by a subsidised
body.
40.
It is also clear that payments made by Enworks to Groundwork are made
specifically for Groundwork to provide particular services to its clients within
the Enworks programme. The fact that Enworks does not know at the time the
service is provided the identity of the client or the specific service within
the Enworks programme which is being provided is not relevant.
41.
In the light of our findings of fact set out above we are satisfied that
the link between the subsidy and the price appears unequivocally from the
circumstances in which the payment was made. In particular the grant is by
reference to a maximum amount of funding and the funding is calculated each
month by reference to specific services provided to specific businesses.
42.
The fact that not all overheads are allocated to particular businesses is
relevant to the existence of a direct link. However everything else points
towards a direct link and overall we are satisfied that there is a direct link.
Indeed we consider the fact that not all overheads are allocated to particular
businesses simply indicates that the price of the services to those businesses
has not been fully ascertained. However it is ascertainable because there is no
reason in principle why the overheads incurred each month could not be
allocated.
43.
No price is payable by clients to Groundwork. It is therefore artificial
to consider whether the price is fixed in such a way that it diminishes in
proportion to the payment made by Enworks, or that the subsidy constitutes an
element of the price charged to clients. Looked at overall the price that would
be payable by clients is clearly related to the payment made by Enworks. It is
that payment which enables Groundwork to provide a free service. For the same
reason the payment made by Enworks can be said to constitute an element of the
price that would be charged by Groundwork to its clients.
44.
We consider that each activity carried out by Groundwork gives rise to a
specific and identifiable payment. Work done for a client pursuant to the
Enworks programme can be traced directly to a monthly payment made by Enworks.
The more work done for clients, the greater that payment will be. The
relationship between the work done and the payment made is clearly
identifiable. Again, whilst overheads which are recovered from Enworks are not
allocated to clients, they could easily be allocated. As such the payment made
in relation to each client is identifiable. The relationship between the
payment from Enworks and the provision of a free service to clients is
significant. The payment is not made globally to cover the whole of
Groundwork’s running costs.
45.
On the basis of the above analysis we consider that that there is a
direct link between the services provided to clients and the funding received
from Enworks. The payments from Enworks amount to consideration for the
services supplied to clients. For all the reasons given above we allow the
appeal.
46.
There was some discussion during the course of Mr Kelly’s evidence as to
how in practical terms, if the supplies to clients are within the scope of VAT,
Groundwork would charge VAT to clients when what was offered was a free
service. That is beyond the scope of the issue we have to decide and we say no
more about it.
47.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
JONATHAN
CANNAN
TRIBUNAL JUDGE
RELEASE DATE: 6 December 2012
