Nutley Hall Ltd v Customs & Excise [2003] UKVAT V18242 (31 July 2003)
ZERO-RATING – Supply of the construction of a hall for use by a charitable company – Whether solely for relevant charitable purposes – Whether for use as a village hall or similarly in providing social or recreational facilities for a local community – No - Appeal dismissed – VATA 1994 s.30 and Sch 8 Group 5 Item 2(a) and Note 6(b)
LONDON TRIBUNAL CENTRE
NUTLEY HALL LTD Appellant
- and -
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
Tribunal: STEPHEN OLIVER QC (Chairman)
JOHN BROWN CBE, FCA, ATII
Sitting in public in London on 8 July 2003
Paul Bradford, manager, for the Appellant
Nicola Shaw, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents
© CROWN COPYRIGHT 2003
DECISION
- The disputed decision of the Commissioners is a ruling that supplies made to the Appellant, Nutley Hall Ltd, in relation to the construction of a building called Orchard House are properly standard-rated. Nutley Hall Ltd maintains that these same supplies are properly zero-rated.
- Nutley Hall Ltd seeks to argue that the supplies made in the course of the construction of Orchard House are zero-rated supplies under item 2(a) Schedule 8 of VAT Act 1994. Orchard House was built during 2002 within the grounds used by Nutley Hall Ltd. Orchard House serves as a hall for a wide range of activities which we will explain in detail later. The VAT paid on the construction (only) costs is some £73,000.
- Nutley Hall Ltd is a charitable company limited by guarantee. It operates as a Rudolf Steiner residential and crafts centre for people with learning difficulties. There are 33 of those people in residence and we referred to them as "residents". The Nutley Hall project has been running for about forty years. It caters for a wide range of learning difficulties at different levels of need. Residents, men and women aged from between the early twenties to the seventies, are long-term and for them Nutley Hall is their chosen home for life. By the year 2000 there were five residential houses in the Nutley Hall six acre site. Each house provided a different amount of care and afforded a different level of independence to suit the needs of the particular resident. Half of the staff lived in the house, in some cases with their own families. Some staff, such as those running the workshops, come in from outside. Many of the staff have been with Nutley Hall for a long time and some are volunteer students from abroad. Craft work takes place in on-site workshops. There is a bakery, a weavery, a woodwork and instrument making workshop and a candle and basket making workshop. The craft work is also carried out in the kitchen, the laundry and the garden. Nutley Hall provides adult education classes. It promotes leisure activities such as music, drama and other social and cultural pursuits. The bakery sells produce to the public and a mini-shop is attached to the workshop.
- Nutley Hall Ltd's memorandum of association refers to it as a "public benefit" charitable company whose main object is, in summary, to establish and conduct at its premises a home for the care and education of persons with learning difficulties. It does not hold its property on trust; it holds these to further its own objects. Nutley Hall Ltd is a "not for profit" organization.
- Nutley Hall Ltd's Statement of Financial Activities for the year to 31 March 2002 shows that it received fees of some £743,000. Some £27,000 came from donations and legacies. £7,500 was raised by fund raising events and £12,659 came from sales of produce. The fees are contractually-based care fees (97% from Social Services topping up income support benefits). 66% of these are directed at the residential aspect of care and the balance at the day services provided on site. A letter from Nutley Hall Ltd of 27 June 2003 shows that overall 92% of its income is derived from fees, the balance from gifts, fund raising events and sales of produce.
- In parenthesis, we mention that we raised the question of whether Nutley Hall Ltd has been carrying on a business or economic activities. The matter was not debated; indeed it was a new point to Paul Bradford, Nutley Hall's manager who represented it at the hearing. Prima facie it seems to us on reflection that Nutley Hall Ltd has been carrying on a business even though supported by voluntary effort and private donations. This is because Nutley Hall Ltd has been making exempt supplies of care and welfare services in a professional and business like way in return for a separate consideration paid for each resident; and that consideration has covered more than nine-tenths of Nutley Hall Ltd's annual expenditure.
- Nutley Hall Ltd has a board of governors. Paul Bradford is the manager registered with the National Care Standards Commission. There is a management committee of Nutley Hall Ltd's activities. Membership includes residents, staff, volunteers and neighbours.
- In the late 1990s a plan developed to build a hall for "community" activities on the Nutley Hall site. Nutley Hall Ltd engaged an architect who produced designs. On 21 January 1999, following an appeal to the Planning Inspectorate, the planning authority communicated the decision to grant planning permission subject to various conditions. One of these was that the building should "not be used other than for teaching, leisure and social activities, ancillary to the use of Nutley Hall as a residential home for people with a learning difficulty".
- Nutley Hall Ltd launched an appeal with £450,000 as its target. In due course Nutley Hall Ltd engaged a building contractor. Practical completion was achieved by 12 December 2002. The official opening of Orchard House took place on 28 March 2003.
The Orchard House building
- The building is constructed mainly out of wood. It consists of an auditorium and stage built to a horse shoe design and with a floor space of 168 square metres. At one side is a kitchen and service extension of about 90 square metres. It provides seating for 100 people and its maximum seating capacity is about 150 people.
- Orchard House has a hall manager who holds the diary. It has its own management committee comprising residents, staff, volunteers and neighbours, which takes decisions as to how and by whom it is to be used. It has, since completion, been used for a wide variety of functions. In evidence Paul Bradford divided the users into four categories. The first he described as the "inner community": these consisted of residents, staff and volunteers. Second, there are near neighbours. Third there is the "wider community" of friends living within 5-7 miles. Fourth, there is the extended community which includes families of the residents living in other parts of England.
- We were provided with a list of events in Orchard House since its opening. There have been some sixty of these. Ten were for the inner community alone. Twenty-five were for the inner community plus guests, neighbours and members of the wider community of friends. About twenty were the product of an outside offering or request. Three events were for complete outsiders. There have been concerts, puppet shows, demonstrations, meetings of learned societies, gatherings on religious occasions, lectures and management meetings. The extended community participate in the use of Orchard House through, for example, activities such as "riding for the disabled". Orchard House has not been hired out to third parties. Any financial return for its use has been by way of silver collection. Paul Bradford explained that Orchard House would not be let for outside functions; the management committee did not want to create a precedent for such commercial use, preferring uses that were for the mutual benefit of the inner community and people coming in from the outside.
The relevant statutory provisions
- Section 30 of the VAT Act 1994 provides for supplies listed in Schedule 8 to the Act to be zero-rated. Item 2(a) of Group 5 of Schedule 8 includes:
"… the supply in the course of construction of a building designed as a dwelling or a number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity."
Note 6 defines use for a relevant charitable purpose as used by a charity in either or both of the following ways, namely -
"(a) otherwise than in the course or furtherance of business;
(b) as a village hall or similarly in providing social or recreational facilities for a local community."
- Paul Bradford for Nutley Hall Ltd contended that Orchard House provided a village hall or similar community hall providing social or recreational facilities for the benefit of the local community and this community included the community at large rather than just a section of it. Nutley Hall, he argued, was a village-type community. This was recognized in a Government White Paper entitled "Valuing People" and its statutory guidelines. Referring to housing and residential care for people with learning difficulties, these included as a key principle "a village and intentional communities as well as residential care" and the need for village type communities. Orchard House has, it was argued, functioned as a village hall for each of the various layers of the community from Nutley Hall's inner community to its extended community. The facilities provided can, it was argued, appropriately be described as social and recreational. The members of the community, at all levels, have made use of those facilities and participated in the management of Orchard House.
- On the face of it Paul Bradford's contentions have common sense and reality on their side. We know from Note 6(b) that "use for a relevant charitable purpose" means use as a village hall or similarly in providing social or recreational facilities for a local community. (We repeat in this connection that it was not Nutley Hall Ltd's case that Orchard House has been used "otherwise than in the course or furtherance of a business" for purposes of Note 6(a).) Focusing on the words of Note 6(b), read in isolation, we would be prepared to conclude that the evidence supported the contention that Orchard House was used in a way that provided social and recreational facilities for a local community. There is no dispute that the facilities provided by Orchard House are of a social or recreational nature. The Nutley Hall "inner community" is we think (and in the absence of any authority to the contrary – a point to which we will return) "a local community" in its own right. It contains people who have come to live together in the same locality for the common purpose of caring and being cared for. That there are only 33 residents and (almost) as many staff who volunteer does not detract from Nutley Hall's status as a local community. The fact that Orchard House provides social and recreational facilities for both the inner and the wider communities reinforces its status as such.
- Still focusing on the words of Note 6(b) we would be inclined to accept Paul Bradford's contention that the use of Orchard House was similar to that of a village hall. It is managed by the Nutley Hall community and used mainly for that community for purposes that complement or enhance their community. But Note 6(b) does not stand alone. It is a note that defines the scope of the description of the relevant supply in item 2 to Group 5 and item 2 in its turn describes one class of services which is zero-rated when supplied by a taxable person. This is where the Commissioners join issue. They say that the services supplied by the taxable person, e.g. the builder, was supplied to Nutley Hall Ltd. Nutley Hall Ltd has its own economic activity, namely the provision of exempt care and welfare supplies for reward. Nutley Hall Ltd uses the builder's supplies for the purpose of making its own onward care and welfare supplies. Nutley Hall Ltd is not on any reckoning functioning as a village hall or similarly. Thus the supplies on which Nutley Hall Ltd before tax were not, so the Commissioners' argument runs, of services falling within item 2 as defined by Note 6(b).
- The Commissioners rely on the decision of the Court of Appeal in Jubilee Hall Recreational Centre Ltd v Customs and Excise Commissioners [1999] STC 381. In that case a charity ran a sports and fitness centre in Covent Garden. The centre was fully equipped and the objects the charity were to promote facilities for recreation in Greater London. The sports centre was run commercially and many of the members worked locally but lived elsewhere. The Court of Appeal decided that, on the facts, the use made at the centre was not similar to the use of the village hall in providing social or recreational facilities for a local community and so supplies in connection with building alterations to the centre were not zero-rated under the predecessor of Note 6(b). Relevant to the present context the Jubilee Hall case raises three issues, namely the correct approach to the construction and application of Note 6(b), then the question of whether Orchard House was used as a village hall or similarly and finally the question of whether the Orchard House facilities have been provided for a local community.
- The part of the Jubilee Hall decision on the construction and application of Note 6(b) was explained by Dr A N Brice in the decision in the South Molton Swimming Pool Trustees (1999) VAT Dec 16495 under the heading – "Should the provisions of Note 6(b) be construed narrowly?". We can do no better than to quote paragraphs 23-26.
"23. For the Trustees Miss Preston argued that there was no authority for the view that a zero-rating provision should be narrowly construed; this was not an exemption. For Customs and Excise Mr Beal argued that the Note 6(b) should be narrowly construed; this was a derogation from the provisions of the Sixth Directive and derogations should be narrowly construed.
24. The background to the zero-rating provisions was discussed by Sir John Vinelott in Jubilee Hall at pages 384 and 385. He referred to article 28(2) of Council Directive EEC/77/388 (the Sixth Directive) which provided that exemptions with a refund of tax (zero-rating) which satisfied the last indent of Article 17 of Council Directive EEC/67/228 (the Second Directive) could be maintained. This is the derogation to which Mr Beal referred. The last indent of Article 17 provided that exemptions with a refund of tax could only be given for clearly defined social reasons and for the benefit of the final consumer. The scope of that provision was considered in EC Commission v France (Case 416/85) [1988] STC 456 where the Court of Justice said that the term "final consumer" could be applied only to a person who did not use exempted [or zero-rated] goods or services in the course of an economic activity. The Court of Justice added:
"The provision of goods or services at a stage higher in the production and distribution chain which is nevertheless sufficiently close to the consumer to be of advantage to him must also be considered to be for the benefit of the final consumer as so defined."
25. Sir John Vinelott then concluded that section 30 and Schedule 8 of the 1994 Act had to be construed in a way which gave effect to the purpose outlined by the Court of Justice, even though that might involve some departure from the strict and literal application of the words used.
26. We conclude that, in considering Note 6(b), we do not have to consider whether to give it a wide or narrow construction; rather it is necessary to have in mind the purpose of the provision and the statement of the Court of Justice. In this appeal the supplies were made to the Trustees who were carrying on an economic activity, albeit non-profit making. Thus the Trustees do not come within the normal meaning of "the final consumer". Accordingly, it has to be considered whether the supplies to the Trustees were "nevertheless sufficiently close to the consumer to be of advantage to him". That is the construction which we adopt."
The last consideration raised in the extract from the South Molton decision brings us to the issues specifically relevant to its determination. The first of these is whether Orchard House was used as a village hall or similarly in the sense in which that expression has to be read in the light of the proper construction of the Directives referred to in the above extract.
- In Jubilee Hall Sir John Vinelott at pages 388 to 390 considered the meaning of the phrase "as a village hall or similarly". At 389(b) he approved the decision of the tribunal in Ormiston Charitable Trust v Customs and Excise Commissioners (1995) VAT Dec 13187 where the chairman had said:
"With economic activities carried on in a very modest way being a business for VAT purposes, the specific relief for village halls, which in the ordinary way one would not immediate regard as being in business, makes sense."
At page 390b Sir John Vinelott added:
"In this context the plain purpose of sub-paragraph (b) was in my judgment to extend the relief in sub-paragraph (a) to the case where a local community is the final consumer in respect of the supply of the services … in the sense that the local community is the user of the services (through a body of trustees or a management committee acting on its behalf) and in which the only economic activity is one in which they participate directly; the obvious examples are the bring-and-buy or jumble sale; the performance of a play by local players and the like. On a strict construction … a hospital which provides free medical care and which carries on the business of selling flowers and books to visitors is outside [the predecessor of Note 6(b)]."
Accepting for a moment that the Nutley Hall "community", whether defined as the inner community or the wider community, is "a local community", can it fairly be said that that local community is the "final consumer" in respect of the supply of the builder's services in the sense that that local community uses the builder's services through the medium of Nutley Hall Ltd? We think not. The relevant supplies by the builder were direct to Nutley Hall Ltd for use in its own economic activities of providing care and welfare services; they were paid for by Nutley Hall Ltd and the building became Nutley Ltd's property. Nutley Hall Ltd did not receive those supplies as trustee or in some equivalent capacity for the local community.
- On page 396g Beldam LJ said:
"… the real question is whether, having regard to the scale of the commercial activities carried on at the Jubilee Hall to subsidize and promote the charitable objects, it can properly be said that the works were carried out to a building to be used solely for a relevant charitable purpose; in this context use by the centre solely in providing social or recreational facilities for a local community in a similar way to the use of a village hall. The introduction of the concept of the village hall seems to me to have been intended to equate the activities with the kind of use ordinarily made of a village hall and thus to introduce considerations of scale and locality."
That passage indicates that the expression village hall informs the rest of Note 6(b). The design of Orchard House and the way it is used and managed go beyond what we would regard as characteristics of a village hall. It is operated as an integral part of the economic activities of Nutley Hall Ltd. It supplements the whole range of those activities and those activities go well beyond what we would regard as the kind of use ordinarily made of a village hall. In this connection we recall the terms of the planning permission which were to restrict the use of Orchard House to teaching, leisure and social activities ancillary to the use of Nutley Hall as a residential home for people with a learning difficulty. This is in line with the conclusion that the builder's services in relation to which the present claim relates were really directed at Nutley Hall Ltd and that the "local community" cannot properly be described as the final consumer.
- For those reasons we think that Orchard House was not used as a village hall or similarly. That makes it unnecessarily for us to decide whether, in the light of the Jubilee Hall decision, the facilities of Orchard House were provided for a local community. In the Jubilee Hall decision, we note, Sir John Vinelott, in considering the meaning of the expression "a local community" said (at 390f) that he doubted whether a simple rule could be formulated. However, he also doubted whether the phrase could include people who worked locally as well as those who lived locally and also said that it could not be assumed that all the unemployed, senior citizens and disabled persons who used the facilities in the centre were persons resident in Covent Garden. He went on to say that he had doubts whether the community of Covent Garden and its neighbourhood could aptly be described as "a local community" or whether an area as wide as that could be treated as a locality within the contemplation of the predecessor to Note 6(b). In paragraph 15 above we provisionally expressed the view that the Nutley Hall community is a local community. We find nothing in the Jubilee Hall decision and particularly nothing in the passage summarized above that displaces this.
- In conclusion therefore we do not consider that the relevant supplies qualify for zero-rating as falling within item 2(a) and Note 6(b) of Group 5. We dismiss the appeal.
STEPHEN OLIVER QC
CHAIRMAN
RELEASED:
LON/02/988
