VBNB72200 - Legal history: cases about direct link between supplies and consideration
Apple & Pear Development Council 1988 STC 221
EC Commission v Finland (Case C-246/08) [2010] BVC 1,062
Institute of Chartered Accountants in England & Wales 1999 STC 398
JDI International Ltd [2018] BVC 516
Longridge on Thames [2016] BVC 33
Sveda CJEU (Case C-126/14) [2015] BVC 36
Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO) 2009 STC 935
Please note that the following material is not a full summary of the case - it merely highlights the principle referred to in the appropriate section of this manual.
Apple & Pear Development Council 1988 STC 221
Commercial growers had to register with the Apple & Pear Development Council and pay a compulsory annual charge to it. The European Court held that, for a supply of services to be for consideration, there must be a direct link between the service provided and the consideration received.
The evidence in this case showed that there was no relationship between the level of benefits that individual growers got from the Council’s services and the amount of the mandatory charges that they had to pay. The compulsory annual charges did not constitute ‘consideration’ and the Council was not making supplies of services for consideration.
Bastova CJEU C-432/15
Ms Bastova operated stabling services where she bred and trained horses. Some were her own, others she trained for other owners. Ms Bastova argued that the prize money she received from her horses winning races was not subject to VAT, but that she was still entitled to recover all the VAT on her costs because the purpose of entering the horses in the race was to promote her economic activity.
The CJEU found that the prize money was not subject to VAT because there was insufficient link between the services she provided by entering a horse in the race and the consideration received if the horse won. It went on to rule that where the participation of the horses in the race is for the purpose of promoting the taxable sale of the horses and the breeding and training services provided to other owners, the owner is entitled to full recovery because there is a direct and immediate link between the costs incurred in preparing the horses for the races and the overall economic activity of stable operation.
EC Commission v Finland (Case C-246/08) [2010] BVC 1,062
Finland provided legal aid which was financed from public funds to citizens. Recipients received the services free or they were required to contribute partly to the costs depending on their level of income and savings. The legal aid work could be supplied by public employee and private practitioner, the services of the public officers were not subject to VAT whether the services were provided free or there was a fee paid.
The Commission took the view that when the public advisers provide their services to the citizens in return for a part contribution, they were engaging in economic activity and VAT must be accounted for on the part payment to avoid distortion of competition with private advisers providing the same services. It took action to make Finland charge VAT on the services.
The Court of Justice European Union (CJEU) found that there was no sufficient direct link between the services provided and the contribution made because it was calculated only partly on the cost of the services provided, but also on the income and assets of the recipient. The more modest the income and assets of the recipient, the less strong the link was.
Institute of Chartered Accountants in England & Wales 1999 STC 398 {#Institute_of_Chartered_Accountants}
The Institute of Chartered Accountants in England and Wales provides advantages to facilities to its members. Those activities are covered by section 94(2) of the VAT Act 1994. It is also a recognised professional body and a recognised supervisory body.
HMRC ruled that the services the Institute performed in the course of its supervisory activities were not supplied by way of business. The Court held that the relevant supplies were not of a kind commonly made by those who seek to make profit from them, nor were they predominantly concerned with the making of taxable supplies for a consideration.
The Court held that the predominant concern of the supervisory activities was to the implementation through statutory policy of protecting the public interest through self-regulation and that charging fees for investigative and monitoring services is not the predominant concern or characteristic of the activities.
Lord Slynn observed that “performing a licensing function on behalf of the State was not a business”. The Court further held that it is not merely enough to point to the fact that there is a supply of services in return for a money payment and some loose economic connection but the activities must be of an economic character.
JDI International Ltd [2018] BVC 516
JDI International Leasing Ltd (JDI) the taxable person acquired tools for oilfield exploration and although the tools are designed for commercial exploitation, JDI did not exploit them itself, they let another business use them free of charge. As such the purchase was not for the business activity of JDI. Accordingly, the court found that the taxable person was not acting as a taxable person when he acquired the tools
The FTT found that JDI failed to establish that there a direct and immediate link between its acquisition of the Tools and its economic activity of supplying Spare Parts and therefore was not entitled to VAT refunds under the 13th Directive. JDI argued that acquiring the tools was ‘necessary’ for its economic activity.
The Upper Tribunal stated that a ‘but for’ test is not sufficient for input tax deduction, the relevant goods or services must be used for the taxable transaction.
Longridge on Thames [2016] BVC 33
Longridge is a charitable trust that provides water-based activities to young people in return for payment. It engaged the services of volunteers and received donations which allowed it to subsidise charges to its users. Longridge charged for the use of the facilities which was sometimes adjusted depending on what the users of the facility could pay.
Longridge argued that its activities were non-business and therefore non-economic because the services provided were substantially subsidised through donations and the organisation relied heavily on the use of volunteers to carry out its activities. Accordingly construction services relating to its’ building were zero rated.
The lower courts considered that the ‘predominant concern’ of Longridge as an organisation was to pursue its charitable objectives because some of the features of Longridge’s organisation and activities were unlike those normally associated with a commercial enterprise (for example the substantial use of volunteers). The courts decided that Longridge’s activities were not economic and that, as a result, the building was intended for use solely for a relevant charitable purpose.
However, the Court of Appeal found that ‘predominant concern’ was not the correct test of economic activity. Instead it was necessary to consider whether the organization was providing goods or services, or exploiting property, for the purposes of obtaining income therefrom on a continuing basis. This must be considered objectively and without regard to the intent of the person. On that basis Longridge’s activities were economic activity. The fact that the organisation’s overall purpose (or ‘predominant concern’) in undertaking its activities was not commercial was not relevant.
Sveda CJEU (Case C-126/14) [2015] BVC 36
In the case of Sveda the CJEU found that a business constructed a capital asset (a path) with the intention of attracting customers to their business. Although the path was also available for use by the public free of charge and was 90% funded by grants from a Local Government Authority that did not affect the direct link that existed between the cost of the capital item and the supplies made by the business. As Sveda was only concerned in making taxable business supplies (it was accepted as fact that it had no non-business purpose or activities) the VAT incurred in creating the path was fully deductible.
As noted in the CJEU judgment, the referring court harboured some doubts as to whether the significant subsidy provided by the Lithuanian government would alter this straightforward analysis and confer a ‘purpose’ that was not wholly business on the recipient. Consistent with the UK’s treatment of subsidised commercial operators, the CJEU did not find that Sveda’s purpose or intention (nor the nature of their activities) had changed as a result of the government funding.
There was a clear finding by the court in this case that Sveda was a wholly commercial enterprise and would use the asset entirely for its fully-taxable business. It had no non-business activities or purpose with which to link the costs incurred. Any ‘incidental’ third party benefit arising from the construction of the path was not relevant in considering whether Sveda could deduct the related VAT.
The decision in Sveda does not establish a new test for deduction of VAT. Where a taxpayer incurs expenditure with the sole purpose of making business supplies, all the VAT it incurs in relation to that purpose will be input tax.
Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO) 2009 STC 935
An organisation claimed input tax on the costs of the general promotion of its members’ interests. The Court was asked to rule on when Articles 6(2) and 17(2) of the Sixth Directive apply.
It held that they do not apply to the use of goods and services allocated to the business for the purpose of transactions which are not taxable transactions of the taxable person. This is because the tax on goods and services that relates to transactions that are not taxable cannot be claimed.
The Court stated that ‘business’ extends beyond economic activities giving rise to supplies within the scope of VAT. It also includes any activity that forms part of the wider purpose of the taxable person’s undertaking or enterprise.
So if the activity is part of the taxable person’s wider purpose, the term ‘business’ covers even those activities that are not economic activities (such as those outside the scope of VAT) and which are not normally regarded as ‘business’ for UK VAT purposes.