The Upper Tribunal has released its judgment in the appeal by HMRC against the First Tier Tribunal (FTT) decision in Wakefield College.

This case concerns whether the construction of a new building for the taxpayer was zero-rated as being intended for use solely for a relevant charitable purpose within the meaning of Item 2(a) of Group 5 of Schedule 8 to the VAT Act 1994, or whether a proportion of business use precluded that.

The Upper Tribunal reversed the FTT’s decision and allowed HMRC’s appeal, holding that the fees charged to students, who only paid a proportion of the fees for their courses, amounted to consideration for the taxpayer’s supplies of education, which were made in the course or furtherance of a business. Wakefield is an important decision for the sector given that there is understood to be an estimated £121m VAT relief relying on it in the 50 cases stated as standing behind it and a very rough estimate of £60m value per year going forward. It is not yet known if the decision will be appealed to the Court of Appeal.

This decision of the Upper Tribunal is also important to charities in that it interprets the Commission v  Finland case (C 246/08) on the critical question of what constitutes a taxable supply for consideration where there is a significant subsidy element so full costs of providing the service are not met by the recipient. While no definitive conclusion is reached, in short, a claim to be RCP arising from subsidised fees will not be accepted, whereas such a claim where the contributions made are specifically means tested can and probably will succeed.

Members should also note that the Longridge case was distinguished by HMRC’s Counsel (see paragraph 44). In Longridge the charges made were incidental to carrying out the main objects of the charity, which were intrinsically non-business. So Wakefield does not automatically mean that the appeal by HMRC in Longridge to the Court of Appeal will succeed – the concept of an activity being ‘intrinsically non-business’ because it is concerned with carrying out the charity’s core objectives rather than raising funds is still for the time being intact. However the test in Finland about proving fees are charged according to the means of the recipient may be held not to apply in Longridge.

The case also brings into very sharp focus the unsatisfactory ‘brick wall’ nature of the relief.  In this case, most of its activities were accepted as being relevant charitable purposes, and the issue was whether they met the 95% indicative test.  It was a minority of toxic supplies which could scupper the entire relief.  It is notable that the judge laments the state of the law which creates this disproportionate impact and calls for consideration of a pro rata relief rather than the ‘all or nothing’ relief currently applicable.

We are grateful to Peter Jenkins and Graham Elliott for their expert commentary on this case.