Longridge: what is an economic activity for VAT purposes?

The Court of Appeal has upheld HMRC's appeal in the case of Longridge on the Thames and held that Longridge's activities amounted to an economic activity for VAT purposes with the result that Longridge was liable to pay VAT in respect of supplies of building services to construct its new training centre.  

The case is significant because it attempts to deal with a long line of UK jurisprudence as to what amounts to a "business" for VAT purposes and examines the extent to which UK jurisprudence is consistent with the jurisprudence of the Court of Justice of the European Union (CJEU) on the subject of what does or does not amount to an "economic activity".  

Longridge contended that the supplies of construction services to build their new training centre qualified as a zero-rated supply because the building was intended for use solely for relevant charitable purposes, namely use by a charity otherwise than in the course of or furtherance of a business.

Context of the activity

Longridge initially succeeded in their appeal to the First-tier Tribunal who decided that although the question of whether a person is engaged in economic activity is to be decided objectively, without reference to the purpose or results of an activity, it was nevertheless necessary to identify what the activity was in order to determine whether it was an economic activity.  This involved looking at the entirety of the activity and the context in which it was carried out.  

When that was done, it was apparent that there were a number of factors to be taken into account in assessing how Longridge carried on its activities which were inconsistent with the existence of a business activity.  Uppermost among these were the way that charges were set up to meet operational costs, the reliance on donations and grants and, of particular significance, the extent to which Longridge relied on volunteers to enable it to pursue its principal charitable objective of being a centre of excellence for the advancement of education in water, outdoor and indoor, activities for young people.

The Upper Tribunal held that the First-tier Tribunal was entitled to come to the view that it had and that its decision did not show any error of law.

Direct link between remuneration and activity

The Court of Appeal disagreed with the Tribunals.  

In the leading judgment given by Arden LJ, the Court held that the starting point was the judgment of the CJEU in European Commission -v- Finland and the principle stated in that judgment that as a general rule an activity will constitute an economic activity where the activity is permanent and is carried out in return for remuneration which is received by the person carrying out the activity.  In the case of Finland, the provision by the State of subsidised legal aid was held not to constitute an economic activity on the basis that there was no direct link between the payment and the service provided.  

The test of whether the money paid has a direct link with the activity provided and in return for which that money is paid, was the key test in the judgment of the Court of Appeal.  The Court went on to consider the UK authorities in the light of that analysis and found that those domestic authorities have developed in a way which meant they had erroneously diverged in some respects from the correct test to be applied.  In particular, the Court of Appeal was critical of the six criteria set out in Lord Fisher to determine whether an activity amounted to a business because they were inconsistent with the approach required by CJEU jurisprudence, and in particular because they omitted reference to or the requirement to examine the connection or proportionality of the payment to the service and therefore did not sufficiently focus on whether there was or was not a direct link.  

Similarly, the Court was also critical of the judgment in the case of Yarburgh Children's Trust which considered the "observable terms and features of a transaction" and concluded that the landlord in that case was not motivated by profit in making charges for the facilities that it provided and was therefore not carrying on a business.  Moreover, the examination of the charity's "predominant concern" in the case of St. Paul's Community Project was also wide of the mark because economic activity is to be assessed objectively.  

It followed from that that features such as a reduced basis of charging with the aim only to cover costs, the fact that donations and grants were used to fund some of Longridge's activities and its reliance upon volunteers were all irrelevant factors.

Comment

Whether it is correct to apply such a strict objective test has been subsequently called into question by the judgment of the CJEU in the case of Gemeente Borsele.  That case concerned the provision by a public body of transport services for school children.  The municipality of Borsele claimed that it was carrying out an economic activity and so was able to deduct input tax incurred in providing the relevant school transportation service notwithstanding the fact that only one third of parents of pupils for whom school transportation was provided paid any contribution to the service and the total amount collected by the municipality was equal to approximately three per cent of the amount paid by it to fund the transportation services in question.  

In its judgment, the CJEU stated that the fact that some parents did pay a contribution towards the transportation service permitted the inference that the municipality was supplying services for a consideration.  However, the mere existence of a supply of services for consideration was not sufficient to establish the existence of an economic activity.  In order to determine whether a service is supplied in return for remuneration with the result that the activity in question is to be classified as an economic activity, the Court stated that it was permissible to examine the circumstance in which the relevant person supplied the services in question and to compare those circumstances with those in which that type of service is usually provided.  In other words, the CJEU appeared expressly to condone the type of examination and analysis that the Court of Appeal was at pains to say was not permitted.

The judgment of the CJEU in Gemeente Borsele is widely considered to be inconsistent with the judgment of the Court of Appeal in Longridge.  It is a shame, although understandable, that Longridge has decided not to appeal to the Supreme Court.  For now, the leading UK judicial authority on this area is out of kilter with the most recent judgment of the CJEU.  It is hoped that other cases on this area of the law, such as Capernwray or Wakefield College, may eventually reach the CJEU and this area of the law may be clarified.

Please click below for further articles in this newsletter: 

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Capital allowances on leases of plant and machinery – consultation

VAT exemption for negotiation of credit applies to lead generation services

Tackling disguised remuneration