Factual and Procedural Background
The Appellant, a charitable educational institution referred to as the College, appealed against a decision of the Upper Tribunal (UT) which reversed the First-tier Tribunal (FTT) ruling. The dispute concerned whether services provided in the construction of a new building (the Building) were zero-rated for VAT purposes under the Value Added Tax Act 1994 (the 1994 Act), implementing the Principal VAT Directive (2006/112/EC). The key issue was whether the provision of further education courses to students paying a fixed but publicly subsidised fee constituted carrying out an "economic activity" under article 9 of the VAT Directive.
The procedural history is extensive, with the matter first heard by the FTT in 2010. The UT allowed an appeal by the College in 2011, remitting two issues to the FTT, one of which is the subject of the present appeal. Permission to appeal to the court was granted following the Court of Justice of the European Union (CJEU) decision in Gemeente Borsele v Staatssecretaris van Financiën (Borsele) in 2016, which clarified the interpretation of the VAT Directive provisions relevant to the case.
The College is a charity and the 1994 Act provides zero-rating for construction services of buildings intended solely for relevant charitable purposes, used otherwise than in the course or furtherance of a business. The College conceded that courses provided to students paying full fees constituted business use, but argued that courses provided to subsidised fee-paying students did not. The percentage of business use was critical because up to 5% business use is de minimis and can be disregarded.
The appeal addressed the legal effect of the CJEU’s Borsele decision and other relevant case law on the determination of economic activity, followed by an application of these principles to the facts concerning the College’s activities and the Building’s use.
Legal Issues Presented
- Whether the provision of further education courses to students paying a fixed but publicly subsidised fee constitutes carrying out an "economic activity" within the meaning of article 9 of the VAT Directive.
- Whether the services provided in the construction of the new building qualify for zero-rating under schedule 8 to the 1994 Act, given the intended use of the building.
- The interpretation and application of the concepts of "consideration" (article 2) and "remuneration" (article 9) in determining taxable economic activity.
- The relevance and effect of the CJEU decision in Borsele and related case law, including Finland and Longridge, on the assessment of economic activity in this context.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Gemeente Borsele v Staatssecretaris van Financiën (C-520/14) |
Clarification of the test for economic activity under article 9 of the VAT Directive; distinction between "consideration" and "remuneration". |
Guided the court’s two-stage approach: first assess supply for consideration (article 2), then assess economic activity (article 9); influenced the court’s conclusion that subsidised fees constituted economic activity. |
| Commission of the European Communities v Finland (C-246/08) |
Distinction between supply for consideration and economic activity; established that partial payments not necessarily linked directly to service value may not constitute economic activity. |
The court relied on Finland to interpret the meaning of "consideration" and "remuneration" and to assess the directness of the link between payments and services. |
| Longridge on the Thames v HMRC [2016] EWCA Civ 930 |
Application of the economic activity test to a charity charging fees adjusted for ability to pay; considered the direct link between payment and service. |
Supported the approach that economic activity requires a direct link between payment and service; the court used this case to frame the legal position. |
| Hotel Scandic Gasaback AB v Riksskatteverket (C-412/03) |
Payment below cost price can still constitute consideration for VAT purposes. |
Referenced to support the interpretation that the amount of payment need not equal the cost to constitute consideration. |
| Apple and Pear Development Council v Customs and Excise Comrs (Case 102/86) |
Definition of supply for consideration requiring a direct legal link between supplier and recipient. |
Used to clarify the meaning of "consideration" and the direct link required under article 2. |
Court's Reasoning and Analysis
The court began with a detailed analysis of the relevant VAT Directive provisions and the distinction between "consideration" (article 2) and "remuneration" (article 9). It emphasized that while a supply for consideration is necessary for VAT liability, it is not sufficient to establish economic activity. Economic activity requires that the supply be made for the purpose of obtaining income on a continuing basis.
The court reviewed the CJEU’s decision in Borsele, where a municipality’s provision of school transport involving partial payments was held not to constitute economic activity due to the lack of a sufficiently direct link between payment and service and the municipality’s non-participation in the market as a typical supplier.
Applying the principles from Borsele, Finland, and Longridge, the court identified a two-stage test: first, determine if there is a supply for consideration (a legal relationship with reciprocal performance), and second, assess whether the supply constitutes economic activity by examining all objective circumstances, including the nature of the activity, the amount and basis of payment, and market participation.
Turning to the facts, the court found that the College’s provision of courses to subsidised fee-paying students involved a supply for consideration, as the fees were fixed, published, and amounted to a significant contribution (25-30%) towards the cost of courses. Unlike the municipality in Borsele, the College’s activity was its core function, and it operated in a market for educational services.
The court rejected the argument that charging less due to local economic circumstances negated economic activity, holding that such pricing decisions are part of normal economic activity. The fees were not fixed by reference to the means of individual students but were a fixed fee per course, which distinguished the case from Borsele and Finland.
Overall, the court concluded that the supply of courses to subsidised fee-paying students was an economic activity within article 9 of the VAT Directive, meaning the relevant construction services were not zero-rated under the 1994 Act.
Holding and Implications
DISMISSED: The appeal by the College was dismissed.
The court held that the provision of further education courses to students paying a fixed but publicly subsidised fee constitutes an economic activity under article 9 of the VAT Directive. Consequently, the construction services for the new building do not qualify for zero-rating under the Value Added Tax Act 1994. This decision clarifies the application of VAT zero-rating to educational institutions providing subsidised courses and aligns domestic law with the interpretation of the VAT Directive as clarified by the CJEU in Borsele and related cases.
No new precedent was established beyond the application of existing CJEU jurisprudence to the facts of this case. The decision affects other similar cases involving subsidised educational services and VAT treatment of construction services for charitable institutions.