Introduction

The case of Revenue & Customs v. Longridge On The Thames ([2014] UKUT 504 (TCC)) presents a significant examination of Value Added Tax (VAT) regulations as they apply to charitable organizations undertaking construction projects. The dispute revolved around whether the construction services provided to Longridge, a registered charity dedicated to educating young people in waterborne activities, should be zero-rated for VAT purposes. Central to this determination was whether Longridge was deemed to be carrying on an economic activity or operating solely within its charitable objectives.

The parties involved were HM Revenue and Customs (HMRC) representing the appellants, and Longridge On The Thames as the respondent. The crux of the appeal focused on a £135,000 VAT issue concerning the construction of a training centre intended exclusively for charitable use.

Summary of the Judgment

The Upper Tribunal upheld the First-tier Tribunal's decision, which had previously allowed Longridge's appeal against HMRC's determination that the construction services were not zero-rated for VAT. The tribunal concluded that Longridge was not carrying on an economic activity, despite charging fees for its services, because the predominant purpose of its activities was to further its charitable objectives rather than to generate profit.

The judgment emphasized that while Longridge did charge for its services, these charges were structured to remain affordable for young people and were supplemented by donations and volunteer contributions. The tribunal found that the intrinsic nature of Longridge's activities—providing educational and training services—was not aligned with that of a business, thereby qualifying the construction services for zero-rating under VAT regulations.

Analysis

Precedents Cited

The judgment extensively reviewed existing case law to establish the criteria for determining whether an organization's activities constitute an economic activity subject to VAT. Notably, the tribunal referred to:

• Customs & Excise Commissioners v Yarburgh Children's Trust [2001] EWHC 2201 (Ch), [2002] STC 207
• Customs and Excise Commissioners v St Paul's Community Project Ltd. [2004] EWHC 2490 (Ch), [2005] STC 95
• Customs and Excise Commissioners v Lord Fisher [1981] STC 238
• Institute of Chartered Accountants in England and Wales v Customs and Excise Commissioners [1999] 1 WLR 701
• Commissioners for Her Majesty's Revenue and Customs v London Clubs Management Ltd [2011] EWCA Civ 1323

These cases collectively helped define the six indicia used to ascertain whether an enterprise amounts to carrying on a business, focusing on factors such as the seriousness of the undertaking, continuity, and whether the activities were predominantly concerned with making taxable supplies for consideration.

Legal Reasoning

The tribunal's legal reasoning hinged on the interpretation of Section 30 and Schedule 8 of the VAT Act 1994 (VATA). The key question was whether the construction of the training centre by Longridge was undertaken "in the course or furtherance of any business" under Section 30, thereby qualifying for zero-rating.

To determine this, the tribunal applied the six indicia derived from the aforementioned precedents. While Longridge did engage in activities that involved taxable supplies (charging for services), the tribunal observed that the predominance of its activities aimed at fulfilling charitable objectives rather than generating profit. The reliance on volunteer contributions and donated income further reinforced the non-business nature of its operations.

The tribunal emphasized an objective approach, assessing the nature and context of the activities rather than the motivations behind them. This approach aligns with the principle of tax neutrality, ensuring that activities of the same economic character are treated consistently, irrespective of the underlying motivations.

Impact

This judgment clarifies the application of VAT regulations to charitable organizations, particularly in scenarios involving construction for charitable purposes. By affirming that not all non-profit activities constitute an economic activity subject to VAT, the case provides a precedent that can influence future disputes involving charities and VAT classifications.

Additionally, the judgment reinforces the importance of a holistic assessment of an organization's activities, reinforcing that factors such as volunteer contributions and reliance on donations can be pivotal in distinguishing between business and non-business activities.

Complex Concepts Simplified

VAT Zero-Rating

VAT zero-rating allows certain goods and services to be taxed at 0%, meaning that while the supplier does not charge VAT to the customer, they can still reclaim VAT on their business-related purchases. In this case, the construction services could be zero-rated if they were for a building used solely for charitable purposes.

Economic Activity vs. Charitable Purpose

An economic activity typically involves making supplies (goods or services) for consideration (payment) and is often associated with profit-making. However, as seen in this case, an organization can carry out activities that involve charging for services without being considered as conducting an economic activity if the primary aim is charitable.

Six Indicia of a Business

The six indicia used to determine if an organization is carrying on a business include:

• Serious undertaking earnestly pursued
• Reasonable continuity
• Substantial in amount
• Conducted regularly on sound business principles
• Predominantly concerned with making taxable supplies to consumers for consideration
• Consisting of taxable supplies commonly made by profit-seeking businesses

In this case, although some indicia were met (e.g., making taxable supplies), others, such as conducting activities on sound business principles and being predominantly profit-focused, were not, leading to the conclusion that Longridge was not engaged in an economic activity.

Conclusion

The Revenue & Customs v. Longridge On The Thames judgment underscores the nuanced application of VAT regulations to charitable organizations. By meticulously evaluating the nature and context of Longridge's activities, the tribunal established that not all non-profit activities equate to economic activities subject to VAT. This decision emphasizes the importance of considering the overarching charitable objectives, the role of donations and volunteers, and the structure of service charges in determining VAT obligations.

For charitable organizations, this judgment provides clarity on how VAT rules are interpreted in the context of construction and service provision. It highlights that maintaining a clear focus on charitable purposes, coupled with reliance on donations and volunteer work, can be decisive factors in qualifying for VAT exemptions. Consequently, charities are advised to structure their operations and funding mechanisms in ways that align with these principles to optimize their tax positions.

Overall, this case contributes to the broader legal understanding of the intersection between VAT law and charitable activities, promoting fairness and tax neutrality in the treatment of non-profit sectors.