Factual and Procedural Background
This opinion concerns an appeal by the Appellant, a statutory tourism promotion body established under foreign domestic legislation, against a decision of the First-tier Tribunal ("FTT") which dismissed the Appellant's claim to recover a greater proportion of input VAT incurred on its UK supplies. The FTT held that most of the VAT was irrecoverable because the Appellant’s activities were not business activities to the extent claimed. The Appellant operates a UK branch, is VAT-registered there, and promotes its home country as a tourist destination. The dispute arose primarily from the nature of funding and activities under a Performance Agreement with the home Government and other funding arrangements, including levies paid through a tourism business council. The appeal was heard by the Upper Tribunal (Tax and Chancery Chamber), with the main issues focusing on whether the Appellant made taxable supplies for consideration to the Government and whether it acted as a taxable person in respect of those supplies.
Legal Issues Presented
- Whether the Appellant’s activities under the Performance Agreement with the home Government constitute supplies of marketing services for consideration that would be taxable supplies if made in the UK.
- Whether the Appellant is predominantly not making taxable supplies to the home Government, but rather carrying out statutory duties funded by grants without consideration for taxable supplies.
- If the supplies are not wholly taxable, whether the apportionment of input tax recovery between taxable and non-taxable supplies as determined by HMRC is correct or should be altered.
Arguments of the Parties
Appellant's Arguments
- The Performance Agreement and related governance instruments demonstrate a legal relationship with mutual obligations and reciprocity, indicating supplies made for consideration.
- The Appellant is independent and acts commercially and professionally in carrying out its statutory functions, including entering into contracts and partnerships with third parties.
- The Performance Agreement’s conditions, including performance targets, renewal conditions, and remedies for breach, reflect a commercial contractual relationship rather than mere grant funding.
- The Appellant’s activities, including advertising and marketing services, occur in an economic market and thus qualify as taxable supplies under VAT law.
- The funding arrangements, including with the tourism business council, provide a quid pro quo for services supplied and thus constitute taxable supplies for consideration.
- The Appellant should be entitled to recover input VAT on the basis that its activities are taxable supplies made by a taxable person acting as such.
Respondents' Arguments
- The Appellant’s activities under the Performance Agreement are statutory functions funded by Government grants, not supplies made for consideration.
- There is no direct link or reciprocity between the funding and the services provided to the Government, so the funding is not consideration for taxable supplies.
- The Appellant is not acting as a taxable person when receiving Government funding to carry out statutory duties.
- Performance targets and conditional funding do not convert a funding arrangement into a supply for consideration.
- Funding earmarked for particular purposes and uncommitted funds to be refunded indicate a trust-like funding arrangement, not a commercial supply.
- Input tax recovery should be limited to the proportion of activities that constitute taxable supplies, excluding those funded by Government grants.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Apple and Pear Development Council v Customs and Excise Commissioners [1988] STC 221 |
Requirement of a direct link between service supplied and consideration received to constitute a supply for consideration under VAT law. |
Used to analyze whether mandatory charges or Government funding constitute consideration for taxable supplies; distinguished voluntary schemes from statutory funding. |
| Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats GA (Case 154/80) [1981] ECR 445 ("Dutch potato case") |
EU law definition of "consideration" for VAT purposes and the necessity of direct link between payment and service. |
Established that meaning of consideration is governed by EU law, not domestic law; principle applied in assessing funding arrangements. |
| Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509 |
Clarification that voluntary payments without legal reciprocal relationship do not constitute supplies for consideration. |
Applied to reject argument that voluntary funding or donations equate to taxable supplies; emphasized need for reciprocal performance. |
| Revenue and Customs Commissioners v Loyalty Management UK Ltd (Case C-53/09 and C-55/09) [2010] STC 2651 |
Need to consider economic realities and social context when determining nature of supplies. |
Supported approach of examining entire circumstances and economic reality rather than formal labels in VAT characterization. |
| Institute of Chartered Accountants in England and Wales v Customs and Excise Commissioners [1999] STC 398 ("ICAEW") |
Distinction between regulatory activities and economic activities for VAT purposes. |
Used to contrast statutory regulatory functions with commercial activities; statutory functions alone do not necessarily constitute taxable supplies. |
| National Water Council v Customs and Excise Commissioners [1979] STC 157 |
Recognition that statutory bodies can carry on economic activities. |
Supported proposition that statutory status does not preclude carrying on taxable economic activities. |
| Hutchison 3G UK Ltd and others v Customs and Excise Commissioners (Case C-369/04) [2008] STC 218 |
Definition of taxable person and economic activity under VAT law. |
Confirmed that carrying on statutory functions can constitute economic activity for VAT purposes. |
| Netherlands Board of Tourism v Customs and Excise Commissioners (VAT Tribunal, 1994) |
Consideration of whether government grants to a statutory body constituted taxable supplies. |
Distinguished from Appellant's case on facts; found some supplies made to Government with direct link and consideration. |
| Turespaña (Spanish Tourist Office) v Customs and Excise Commissioners (VAT Tribunal, 1996) |
Assessment of whether budgetary payments to a statutory body amounted to taxable supplies. |
Found no supplies made to State and no direct link between payments and services; contrasted with Netherlands Board of Tourism. |
| Hong Kong Trade Development Council (Case 89/81) [1982] ECR 1277 |
Relationship between taxable person status and taxable transactions. |
Confirmed that absence of taxable transactions means no taxable person status; applied in reasoning about Appellant’s activities. |
Court's Reasoning and Analysis
The court began by examining whether the Appellant made supplies for consideration to the home Government under the Performance Agreement. The court emphasized that the concept of "consideration" is governed by EU law principles, requiring a direct link and reciprocity between the service provided and the payment received. Drawing on established case law, including Apple and Pear and Tolsma, the court found no such direct link or reciprocal relationship in the funding arrangement. The Performance Agreement was characterized as a funding mechanism to enable the Appellant to perform statutory duties, rather than a contract for services supplied for consideration.
The court rejected the submission that statutory duties and the existence of performance targets precluded supplies for consideration, clarifying that statutory functions can be discharged through taxable supplies if reciprocal arrangements exist. However, in this case, the overall economic and legal context showed the funding was not a quid pro quo for services supplied to the Government, but rather a negotiated grant to support statutory functions.
The court further analyzed whether the Appellant was acting as a taxable person in relation to the Government funding. It found that focusing on the receipt of funds in isolation was flawed and that the economic activity must be assessed in the context of the funded activities. Since there was no supply for consideration, the Appellant could not be regarded as acting as a taxable person in respect of those activities.
Regarding other activities, such as joint marketing initiatives and incidental commercial activities, the court agreed with the FTT that these constituted taxable supplies. The court notably departed from the FTT’s erroneous reliance on the absence of "earmarking" of funds as a legal principle.
The court then addressed the funding from the tourism business council (TBCSA) levies. Unlike the Government funding, the memorandum of understanding with TBCSA demonstrated a reciprocal relationship with specific services provided in return for payments, establishing a supply for consideration. The court set aside the FTT’s decision denying input tax recovery on this funding and remade the decision in favor of the Appellant on this point.
Finally, the court declined to refer questions to the Court of Justice of the European Union, finding the relevant principles sufficiently clear to resolve the appeal.
Holding and Implications
The court’s final decision was as follows:
- The appeal is dismissed in respect of the Appellant’s arrangements with the home Government under the Performance Agreement. The arrangements are characterized as funding to support statutory functions rather than taxable supplies for consideration.
- The appeal is allowed in respect of the funding derived from levies paid through the tourism business council. These payments constitute consideration for supplies that would be taxable if made in the UK, entitling the Appellant to recover input VAT accordingly.
- No reference is made to the Court of Justice of the European Union.
The direct effect is to uphold the limitation on input VAT recovery related to Government funding while permitting recovery in relation to levy-derived funding. No new legal precedent was established beyond the application and clarification of existing EU VAT principles to the specific funding arrangements of a statutory tourism body.