ZERO-RATING — charity providing day nursery — new building constructed for day nursery and other activities agreed to be charitable — whether nursery a charitable or business activity — whether cost of construction to be apportioned — VATA 1994 Schedule 8 Group 5 Item 2 — nursery charitable — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	ST PAUL’S COMMUNITY PROJECT LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Colin Bishopp (Chairman)
						Mohammed Farooq (Member)	

Sitting in public in Birmingham on 29 October 2003

Roger Thomas of counsel, instructed by Shakespeares, for the Appellant
 
Richard Shaw of the Solicitor’s Office of HM Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2004

DECISION
1.	 The question for our determination in this appeal is whether a day nursery run by the appellant at premises in Balsall Heath, Birmingham, is to be regarded as a business activity, as the respondents contend, or is instead a charitable activity, as the appellant maintains. If the former, the supplies made to the appellant in the construction of that part of its premises which is devoted to the day nursery, and a share of the supplies made for the construction of the common parts of the building (the remainder, as the respondents accept, being devoted to charitable purposes) are standard-rated. If the latter, they are zero-rated. Formally, the appeal is against the respondents’ decision, set out in a letter of 4 March 2003, that the cost of the supplies made for the construction of the entire building must be apportioned in a manner which reflects their view of the matter.
2.	We heard the appellant’s opening and evidence on 29 October 2003 but there was insufficient time available for us to hear the respondents’ submissions (they did not intend to call any witnesses) and the appellant’s response. It was accordingly agreed that we would receive submissions in writing and they were duly provided by Richard Shaw, of their Solicitor’s office, for the respondents in November and by Roger Thomas of counsel, for the appellants, in December. We have considered their submissions and are grateful to their authors for their clarity.
3.	Few of the facts of the case were in dispute. The appellant is a registered charity, established some years ago in Balsall Heath, a disadvantaged part of Birmingham. Over the years, it has developed from a small playgroup started as a largely cooperative venture by a number of parents, to a fairly large, but still local, organisation devoted to the needs of the area. The day nursery with which we are concerned is one of several activities carried on by the appellant, and is complementary to some of those activities, in particular the “Sure Start” programme (an initiative of the Department for Education and Science) which is designed to help the parents of young children return to work; the availability of a day nursery is an obviously useful adjunct to that programme. Overall, the turnover of the day nursery (in grant income and fees) represents about 10% of the appellant’s total income.
4.	Until 1979 what is now the appellant was a number of separate small organisations. They came together in that year but each had its own premises, some not very satisfactory for their purpose. In late 2000 the appellant took a lease from Birmingham City Council of the land on which it constructed the building with which we are concerned. That building now houses all its activities most of which, as the respondents agree, are charitable in nature. The construction of the building was largely funded by grants from the National Lottery Charities Board and from Sure Start. The Appellant’s continuing activities are supported by grants, some from central and some from local government. It also receives some further grant money from the Lottery, and some donations. It makes up the rest of the income it requires from fund-raising activities and from the fees it charges to users. 
5.	We take the foregoing in part from the documents produced at the hearing and in part from the evidence of the appellant’s chief executive, Anita Halliday. We accept what she told us.
6.	The only controversial points which emerged from Dr Halliday’s evidence related to the management of the nursery and to its fee structure. It is, as we accept, the appellant’s aim to involve parents in the management of the nursery. Although there has been some parental involvement, it seemed to us that it was rather less than that appellant had hoped, and we have concluded that although the level of parental involvement was by no means nominal, the management committee was, in practice although not by design, dominated by the other members. On the other hand, we accept Dr Halliday’s evidence that parental involvement was not confined to membership of the management committee, and that parents were involved in the day to day activities of the day nursery to a significant extent.
7.	Dr Halliday told us (as we accept) that the grants received by the appellant, although often, but not always, designated for a specific purpose, were not calculated on a per capita basis. The appellant was required to make some places at the nursery available for cases identified by the local authority (some for emergency use), and there was correspondingly a requirement that a minimum number of places be provided. The appellant was also required to adhere to staffing levels prescribed by the local authority. In fact, as Dr Halliday explained, there are prescribed national standards for the staffing of nurseries, which the appellant has exceeded by employing more highly qualified staff than those standards demand. We observe too that the number of nursery places actually provided is significantly more than the minimum demanded by the local authority.
8.	The amount of the appellant’s grant income was insufficient to meet all of its costs of providing those places, and the balance (which could not be made up by fund-raising activities) had to be found by charging fees to the parents. We accept Dr Halliday’s evidence that the fees were pitched at a level which was intended to ensure that the appellant broke even, and that the exercise of calculating the amount to be charged was extremely difficult, depending as it did on the amount of grant to be expected, a prediction of the number of children who would attend the nursery and the prompt payment by parents of the fees. It was complicated too by the somewhat haphazard system by which, as Dr Halliday explained, subsidies available to individual parents (though mandated by them to the appellant) were actually paid. We are satisfied from her evidence and from the accounting information which was produced to us that, taking one year with another, the appellant did not, and did not set out to, make any profit from the nursery, either for its own sake or for the purpose of cross-subsidising the appellant’s other activities. The fees charged by the appellant, at between £85 and £95 per week per child, represented only part of the cost of providing a place which Dr Halliday had calculated at £130 per week per child. By comparison, the cost of a place at a local commercial nursery was, on average, £118 per week (the highest fee she had discovered in the course of her enquiries was £145).
9.	Schedule 8 to the Value Added Tax Act 1994 sets out the categories of supplies which are zero-rated. Item 2(a) of Group 5 in that Schedule includes supplies in the course of construction of a building intended for use solely for “a relevant charitable purpose” although Note (10) to the Group allows an apportionment when a building is used partly for a charitable purpose and partly for other purposes. The only question in issue in this appeal is whether the nursery constitutes “a relevant charitable purpose” within the meaning of this provision. The definition of the phrase is to be found at Note (6) to the Group; it
	“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; or
(b)	as a village hall or similarly in providing social or recreational facilities for a local community.”
10.	There was no dispute that the appellant is a charity, and it was not contended on its behalf that paragraph (b) was of any application. The only remaining question, therefore, is whether the nursery as we have described it represents use “in the course of furtherance of a business”. This expression is not further defined or explained in the Act: section 94(1) of the Act (“In this Act ‘business’ includes any trade, profession or vocation”) does not help; and we derive little further assistance from the use in the Sixth VAT Directive, at article 4, of the equivalent term “economic activity”. We therefore turn to the case-law on the subject.
11.	It is convenient to focus upon the most recent of the cases to which were referred, Customs and Excise Commissioners v Yarburgh Children’s Trust [2002] STC 207, not least because (after eliminating from consideration an added complication in that case which does not arise here) it has several points of factual similarity with this case. Mr Shaw argued that it should be distinguished on those facts; Mr Thomas that the similarities between the two cases were so great that we could not properly distinguish them and, bound as we are by an authority of the High Court, we should follow Yarburgh and determine the appeal in the appellant’s favour.
12.	As its names implies, the appellant in that case was a charitable trust; it too provided day care facilities for children, and constructed a building, to replace its old premises, in which it could carry on that activity. The Commissioners refused the trust’s claim that the construction works were zero-rated; this tribunal, on the trust’s appeal, concluded that its activities were not in the nature of a business, and allowed the appeal. That conclusion was upheld by Patten J on the Commissioners’ further appeal to the High Court. The court had first to deal with the issue which does not arise in this case, but in the course of doing so Patten J referred (though without setting them out) to the well-known tests extracted from Customs and Excise Commissioners v Morrison’s Academy [1978] STC 1 and advanced by counsel in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 (and accepted by the court as useful tools rather than a test). It is, he commented, well established that an activity may be pursued in the course of business even though it is not pursued for profit (Morrison’s Academy); and he referred to the authorities which show that not every supply of services for a consideration amounts to a “business” or “economic” activity (Wellcome Trust Limited v Customs and Excise Commissioners [1999] STC 398). Then, turning to the issue whether the child care group represented a business activity, the judge said:
“[29] I accept, as I have indicated earlier in this judgment, that the fact that an essentially business operation is intended to further the charitable objects of the body which carries it out does not of itself alter the nature of the operation for VAT purposes. A charity shop run to make a profit for the charity is a business even though its object is to benefit that charity. But in that case the shop itself is not as such a charitable activity. It is merely a form of fund raising run on a commercial basis. The operation of the playgroup by contrast is itself charitable. This may not prevent it being treated as a business but its charitable nature does have to be taken into account in deciding whether in the words of Lord Slynn in the Institute of Chartered Accountants case ([1999] STC 398 at 404) the playgroup operation has an economic content.
[30] Although it might be said in the present case that the playgroup was a serious undertaking earnestly pursued with reasonable continuity and that it was conducted regularly it is evident to me as it was to the tribunal that it is not predominately concerned with the making of taxable supplies for consideration. The overwhelming impression which one gets from considering the evidence before the tribunal is that this is a co-operative venture run by trained staff with the benefit of help provided by parents under the control of a committee on which parents predominate. The evidence before the tribunal included a pre-school information sheet which states that the playschool is not profit led and struggles to maintain the balance between remaining affordable and meeting its operating costs. Playschool fees are fixed on this basis. This seems to me to be a very different arrangement from that subsisting in the case of a commercial playgroup run for a profit which was an example which [counsel for the Commissioners] put to me. An intention to trade at a profit is not of course an essential feature of a business but it is relevant to a consideration of whether the organisation in question can seriously be regarded as doing anything more then the carrying out of its charitable functions. I think that the tribunal was entitled to conclude from the evidence before it that no business user was involved in this case.”
13.	Mr Shaw argued that the similarities between the facts of Yarburgh and those of this case were merely superficial. There, the activity was of a playgroup; here it is a day nursery. That, in our view, is a distinction of no significance at all. Likewise his contention (as Mr Thomas pointed out, not supported by any finding of fact in Yarburgh) that the opening hours there were shorter than those here seems to us, even if correct, to be quite immaterial. He suggested that, since nothing had been said by the tribunal or by Patten J about the level of fees charged to parents, or even the manner in which that level was determined, it must be assumed that they were very modest. By contrast, he said, the appellant had a much larger budget and more closely resembled a commercial operation. The assumption, even it is valid (and, again, there is no finding of fact in Yarburgh to support it though we think it is a reasonable inference), does not seem to us to have any real merit. Rather, we think there is an essential similarity between the two cases in that the fees were set at a level designed to ensure that the operation broke even. If there are differences between the two cases, they seem to us to be differences of scale or degree rather than of principle.
14.	There is at first sight rather more in Mr Shaw’s point that the management of the playgroup in Yarburgh was wholly in the hands of a committee of parents, and its constitution expressly excluded employees, whereas here parents, as a general rule, made up a minority of the committee, and it was evident that the appellant did not intend, at any time, that management should be wholly devolved to parents. While we accept that proposition (and are mindful of Dr Halliday’s evidence that the budget was set by employees, albeit approved by the committee, in the light of the appellant’s resources) we have concluded that it is not, when properly analysed, a basis for distinguishing the two cases. The validity of the Commissioners’ stance depends on our preferring the view that this is a business, rather than a charitable, activity. Though it cannot be said that the management of an activity is irrelevant to its character, the essential focus must be on the activity itself. In this case it is the not-for-profit provision of a day nursery. If that (or something very close to it) is a charitable activity when carried on (as in Yarburgh) by a cooperative, does it cease to be charitable, and become a business activity, when it is managed by those who perform it even though in every other respect it is materially identical? In our view the answer to that question is no. The nature of the activity is unchanged. The financial constraints under which it is undertaken are identical. The level of the fees will not go up or down depending upon who is on the committee; their level is dictated by the available income and the cost of supplying the service, factors which would not change in any way if parents dominated the committee, or were its only members.
15.	We are satisfied that there is no meaningful distinction to be drawn between this case and Yarburgh. As we have indicated, that case is binding on us, but we are in any event content to follow it. We are satisfied that the appellant’s day nursery is run, not as a business, but as a charitable activity and that the building works should properly be zero-rated. The appeal is therefore allowed.
16.	We direct that the respondents pay the appellant’s costs of the appeal. If they cannot be agreed either party may apply for further directions about their assessment.

COLIN BISHOPP
CHAIRMAN
RELEASE DATE:

MAN/002/637