A ruling on the case of French Education Property Trust Limited v HMRC has provided guidance on whether the letting of premises to an independent school, and the running of that school, are business activities for VAT purposes.
The case concerned French Education Property Trust (Trust), which developed a property in London as a school to educate French students. A separate charity (College) was set up to carry on the school, and the College leased the premises from the Trust for this purpose.
The issue before the Tribunal was whether the Trust’s contractor should charge the Trust VAT on the constructions costs at the standard or zero rate. Zero rating is available for “approved alterations” of a building which is “intended for use solely for relevant charitable purposes after the … alteration”, means that it must be for “non-business” purposes. The Tribunal therefore had to consider whether the leasing of the property by the Trust to the College was a non-business purpose.
The Tribunal held that, for the VAT zero rating to be available, neither the grant of the lease by the Trust nor the College’s use of the property could be business activities.
What constitutes business activity?
On the one hand, the Tribunal found that the fees charged by the College were at below market rate and that the College was not aiming to make a surplus, and took into account the fact that it had charitable status and was carrying out its charitable objects by running the school. On the other hand, the “overwhelming impression” given to the Tribunal by the evidence before it was that “the College [was] a professionally run business, managed by the Headmaster and the bursar and controlled by the trustees.”.
In addition, various factors pointing towards the granting of the lease being a business activity included the fact that the lease was at, more or less, market rent; the arrangements between the Trust and the College were formal, and the Trust had a commercial reason to recover the rent in order to pay down its debt to the bank. Overall, the Tribunal judged that the letting was business activity.
Consequently the Tribunal ruled that the letting of the school property by the Trust and the operation of the school by the College were business activities and therefore VAT was chargeable at the standard rate on the construction services supplied to the Trust.
This unfortunately had a serious financial implications because the College’s income was mainly from school fees, which are exempt from VAT. This therefore limits the extent to which the College could recover its input VAT.
“Business activity” can therefore include charitable activities which are not envisaged as a business nor intended to make a profit. The courts will apply the terminology widely, interpreting the facts of each case in turn, looking at the nature and status of the activities in the context of the whole arrangement. Although cases will depend on the facts, it will generally be difficult for an organisation to demonstrate that its activities are non-business if it is charging fees for provision of goods or services. This may have implications for the tax position of organisations that would not otherwise consider themselves to be ‘businesses’.