20670

Value Added Tax – whether provision of education and related care by the Appellant was made in the course or furtherance of a business – Section 4 VATA 1994 – Appeal Allowed.

EDINBURGH TRIBUNAL CENTRE

	QUARRIERS	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  Mr Kenneth Mure, QC
					 (Members):   Mrs Helen M Dunn, LL.B.
							  Mr R L H Crawford, BA., CA., CTA

Sitting in Edinburgh on Monday 10 and Tuesday 11 March 2008

for the Appellant		Mr Colin Tyre, QC
				Mr Glenn Havenhand

for the Respondents	Mr Andrew Scott, Shepherd and Wedderburn, LLP

© CROWN COPYRIGHT 2008.

DECISION

Introduction
The Appellant, “Quarriers”, is a company limited by guarantee.  It is a registered charity.  It owns Seafield School, Ardrossan, where it provides educational and related care services for children with serious emotional difficulties.  The issue in this Appeal is whether these are provided by the Appellant in the course or furtherance of a business for the purposes of Section 4 VATA 1994.  The Appeal seeks to challenge the further review of the matter by the Respondents in their letter dated 13 July 2006 which confirmed their stance that the provision was so made.

The Law
Section 4 VATA 1994 indicates that 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 to be carried on by him”.

Brief reference was made to Sections 70 and 71 of the Children (Scotland) Act 1995 and Section 4(1)(a) of the Education (Additional Support for Learning) (Scotland) Act 2004.  

The following authorities were referred to:- 

C&E v Morrisons Academy [1978] STC 1
C&E v Lord Fisher [1981] STC 238
ICAEW v C&E [1999] STC 398
C&E v Yarburgh Children’s Trust [2002] STC 207
C&E v St Paul’s Community Project [2005] STC 97; and
Donaldson’s College v HMRC (no 19258 – dated 15/09/2005)

The Facts
We heard evidence from the Appellant’s Financial and Corporate Service Director, Mr Hugh Walker FCA, who provided a detailed account about operations conducted at Seafield School.  His evidence by and large was not controversial and he referred extensively to various items of correspondence, financial and administrative records produced.  The Respondents led no evidence but referred to Witness Statements of 2 of their officers, Pamela Gibson and Angela Gibson (Respondents’ Productions 49/50).

On the basis of that evidence we make the following Findings-in-Fact, viz:-

1.	In about 1995 Strathclyde Regional Council asked the Appellant to take over Seafield School.  They concluded a contract to provide education and care there for about 3 years to 1998.

2.	At Seafield the Appellant provides about 28 residential places and 32 “day” places for children aged from 6/7 years to 17 years.  It takes pupils from various Scottish Local Authorities.  They are referred to Seafield on the basis of educational and social work needs.  Each Local Authority pays the Appellant a monthly sum for each child sent.  Currently the residential fee per child is £2300 per week, reflecting the level of support required.  Occasionally supplements are paid where exceptional individual needs arise.

3.	Seafield is unique in West and Central Scotland in as much as it provides for children of both primary and secondary school age with severe emotional difficulties.  It does not, however, cater for children who have been victims of sexual abuse or are subject to criminal justice proceedings.  (They are catered for in other establishments).  Seafield is not in competition with other similar institutions.  It does not tender for placements.  In relation to its educational services Seafield has to meet national standards.

4.	Until 1998 the Appellant received a block grant from Strathclyde RC.  Thereafter following Local Government restructuring it has had to negotiate with a larger number of Local Authorities.  It does not enter written contracts with the Local Authorities.  Until recently it has negotiated successfully in setting charges with them.  However, it is currently in dispute with Glasgow District Council in respect of increases, which the Council is not prepared to meet.  The only other financial receipt in respect of Seafield comes from a Central Government Grant of a varying amount which is applied in respect of capital outlays.  The children’s parents make no financial contribution.  

5.	The Appellant does not have a profit motive in relation to the services provided at Seafield.  In calculating its charges, which it does annually in advance, it pre-supposes a certain level of occupancy (just over 90%).  In these projections the Appellant subsidises Seafield by restricting its apportionment of management charges.  There is no contractual obligation on any Local Authority to maintain any particular number of pupils referred.  Children may be removed during the school session without financial penalty, which can upset seriously these financial projections.

6.	The Appellant accepts that it has to subsidise the operation at Seafield School if it is to remain open.  Currently it accepts that it has to operate it on a “limited loss” basis.  It would not be viable if it had to be run on a full cost economic basis.  The Local Authorities have indicated that they are not prepared to pay fees calculated on the basis of “full cost recovery”.  In the 8 years to March 2007 there has been an overall shortfall of about £540,000, which has been met out of charitable donations received by the Appellant.  In addition Seafield’s expenditure has been subsidised to the extent of £391,000 approximately.  (See Appellant’s productions /44).  If the shortfall was not met or could not be met out of charitable funds Seafield School would have to close.

Respondents’ Submissions
Mr Scott invited us to refuse the appeal and uphold the decision of the Respondents in their letter of 13 July 2006 (Respondents’ productions/30) and that on the basis that the activities conducted by the Appellant at Seafield were in the course or furtherance of a business.  The absence of a profit-motive did not preclude such a conclusion:  see Morrisons Academy per L P Emslie and Lord Cameron.  He adopted 6 criteria as being indicia of a business all as set out by Gibson J in the Lord Fisher decision.  (These do refer to other authorities, including Morrisons Academy but seem to reflect Counsel’s submission rather than the ratio of the decision).

He sought to distinguish the decision of the Tribunal in Donaldson’s College.  There it was decided that the provision of care and education of deaf children was not in the course or furtherance of a business.  Funding there was substantially from Central rather than Local Government.  Donaldson’s was unique, Mr Scott submitted, in that it had no competition whereas the schools at Geilsland and at Springboig (see relative inspection reports as produced) represented a form of competition in the present case.  The elements of accommodation and care in the present case were of a business and economic nature, he submitted.  Again, the absence of a profit-motive does not preclude this inference.  Quarriers, he added, did take account of likely costs in their calculations of charges.

Moreover the payments by the Local Authorities represented consideration for educational supplies.  There was a weekly rate per pupil.  If any special provision was required, extra payment was made for that.  There was accordingly, Mr Scott argued, a direct link between the amount paid and services provided.  The Appellant’s approach to claim special tax status because of social reasons and its charging a fee level below commercial rates with a subsidy making up any deficit, was misconceived, he maintained.  

Mr Scott submitted that the decisions in Yarburgh Children’s Trust and St Paul’s Community Project, both founded on by the Appellant, were wrongly decided.  (These have not been appealed).  As “Single Judge” decisions they did not bind the Tribunal, he added.

Appellant’s Submissions
Mr Tyre commended to us the evidence of Mr Walker.  The narrative of correspondence in the Witness Statements of HMRC’s officers should be ignored insofar as being their interpretation of the law.  Mr Tyre suggested that the Tribunal should review the facts objectively and apply its interpretation of the law.

The crucial issue in deciding whether or not a business was being carried on was determining the “predominant concern”.  While the absence of a profit-motive did not preclude a finding of “business”, the enterprise had to be akin to an “economic activity”.  The payment of money, with a benefit provided, was not necessarily indicative of a business.  

“Predominant concern” was noted by the Lord President in Morrisons Academy (p6 f-g).  The economic nature of the activity and its being of a type supplied commercially are important, he submitted.  Morrisons Academy was followed in Lord Fisher where the predominant concern test was applied.  The reference there to 6 factors (p.245 b-f) suggested by HMRC as indicative of business being conducted was noted as Counsel’s argument, but was not judicially approved.  While these factors were noted by Lord Slynn in the appeal of ICAEW (p404) these were not judicially endorsed by the House of Lords.  Rather the emphasis was on the “economic” content of the enterprise. 

“Predominant concern” and “economic content” were acknowledged in the 2 decisions of the Chancery Division in Yarburgh Children’s Trust and St Paul’s Community Project.  In each the Commissioners of Customs & Excise were unsuccessful in challenging the Tribunal’s decision that a children’s playgroup and nursery were not businesses.  These decisions, Mr Tyre argued were consistent with Morrisons Academy and ICAEW.  

Finally, Mr Tyre founded on the Tribunal’s decision in Donaldson’s College as being closely akin to the present case.  There education and residential care were provided for deaf children and others with communication disorders.  As in the present case the provision met a national (or area) need.  There was public financing – one from Central Government and the other substantially from Local Government.  There was crucially an element of charitable funding.  The Tribunal found that its activities were not made in the course or furtherance of a business.

Applying these principles to the present case, Mr Tyre submitted that the service provided here was not a commercial activity.  The Appellant was fulfilling a social need not an economic function.  The Local Authority had responsibilities for the children in terms of the Childrens (Scotland) Act 1995, Section 70 and the Education (Additional Support for Learning) (Scotland) Act 2004, Section 4.  It was this function which the Appellant fulfilled.  There was no direct link between the cost of providing education and care to a particular child as an individual and the fee level which was set.  As with Donaldson’s College there was public (here substantially local authority) funding.  The Appellant did not compete on costs:  it was the child’s needs which determined his/her placement.  This type of education and care was not provided commercially and Seafield would not be viable if it were independent financially of the Appellant’s organisation.

For these reasons Mr Tyre moved us to allow the Appeal.

Decision
It was agreed by Parties that the only issue to be determined by the Tribunal was whether or not the activities conducted at Seafield School amounted to a “business”.  In effect for purposes of VAT were they provided by Quarriers “in the course or furtherance” of a business, having regard to Section 4 VATA 1994?  In our view they were not, and that for the following reasons.

“Business” is not exhaustively defined in the relevant legislation (see Section 94(1) VATA) but in this context it denotes an economic activity.  The absence of a profit-motive does not preclude this conclusion, especially (as was emphasised in Morrisons Academy) in the context of a tax charge on turnover rather than profit.  We agree with Mr Tyre’s submission that the case-law directs us to consider primarily the “predominant concern” of the Appellant’s activities.  We also have to consider the economic nature of the activity and whether it is typically commercial.

We are satisfied that Seafield School would not presently be operating and could not continue to function if the Appellant were not prepared to devote charitable funds to meet any balance of liabilities.  While in some years a surplus has been produced (albeit subject to adjustment for the subsidised management and other charges), over an extended period an overall loss has resulted.  Given the apparent intransigence of Glasgow District Council in relation to meeting increased costs the need for a continuing subsidy from charitable funds seems inevitable.  This basis of funding is, of course, wholly consistent with the Appellant’s purposes (see its Memorandum:  Appellant’s productions/5).  

The nature of the activities conducted at Seafield is not commercial.  The Appellant does not “tender” its services.  It is not in competition with other “providers”.  It could never expect the operation to be profitable or even financially viable given the high level of costs now required.

The decision in Donaldson’s College seems apt in the present case.  The “predominant concern” in that and in the present case was the education and care for children with special needs.  Seafield, as with Donaldson’s College, is not in any real sense a commercial enterprise.  The services provided for the children are not in our view taxable supplies made for a consideration.  Rather they are in essence charitable, considering particularly that it is the Appellant’s resources as a charity which underpin Seafield financially.

We were referred by Mr Scott to certain correspondence and invoices in which, it was suggested, the Appellant had acknowledged that VAT was payable on the school’s charges.  As Mr Tyre commented, these were referred to in the Witness Statements of the Respondents’ officers (Respondents’ productions/49 and 50).  However, we note that over an extended period the Appellant had sought clarification of the tax status of these activities from the Respondents and there was a state of some uncertainty.  Given that context we have thought it appropriate to form our opinion rather on the basis of objective appraisal of the financial and other circumstances in which the School’s activities were conducted.  

Accordingly the Appeal is allowed.

Costs
Mr Tyre sought an award of expenses in the event of success and we award costs to the Appellant subject, of course, to taxation, if necessary, in terms of Rule 29(3) of the VAT Tribunal Rules 1986 (as amended).

Mr Scott did suggest that in the event of the Appellant’s success costs should be restricted in that important information to the effect that the operations at Seafield ran at a deficit and had to be subsidised, only emerged shortly before the Hearing when productions were lodged.  While this may be correct the other and major considerations founded on in the appeal, particularly “predominant concern”, seem to have been aired earlier.  We observe too that the Appellant had experienced difficulty earlier in obtaining a “ruling” from the Respondents on the tax status of Seafield’s operation.

For these reasons we consider that any restriction in the award of costs is inappropriate.  

MR KENNETH MURE, QC

CHAIRMAN

RELEASE:  6 MAY 2008
EDN/07/63