Given the relative lack of case decisions on the question of charity input tax recovery, the recent decision in Will Woodlands (TC06021) is welcome, particularly as it supported the case made by the charity. This article gives my views as to what the case means and how it might assist charities. However, these comments should be used with caution, since, in my view, the case was not one which HMRC had a realistic prospect of winning, and it may not therefore provide as much help in more borderline cases as one would wish.
The issue is the familiar one of how to attribute costs where the charity’s objective or motive is non-commercial, but the outcome of the activity is that taxable supplies are made. Putting the question in deceptively simple terms: Is the cost partly ‘non-business’, simply because the motivation is not a business purpose, or is it wholly ‘business’, because that is what results from the activities? To my mind, the answer to that simple question is simply that motive is irrelevant, and that it is the objective nature of the activity which determines the VAT recovery position. And my views are supported by the decision in this case. That said, matters are rarely as simple as this question presents them, or as simple (in my view, at least) as this case presents them.
This decision is also of special note because it is only the second decision in a UK court relating to the CJEU decision in Sveda as applying to charities. The first was last year’s decision in the case of Durham Cathedral (see my commentary on this case). Whilst this is helpful, it is worth noting that the inception of this litigation pre-ceded the Sveda decision (which was not true of Durham), and clearly would have been decided in the same way had Sveda never existed. Whilst this does not nullify the usefulness of the references to this important CJEU decision, it means that the case does not denote any great new development or novel opportunity. Basically, the reliance on Sveda does no more than confirm what has been the position all along.
I should also mention that the facts concerning a woodland conservation charity are somewhat special, and do not obviously read across to charities in general.
Having dampened your expectations, I will now summarise what the case says.
The charity was set up with the object of conservation of woodlands largely for environmental reasons. The ‘model’ involves running the woodlands as managed operations similar (in fact, identical) to that which is found in sustainable commercial forestry. This means that the trees will be felled in due course and sold for timber, with occasional ‘thinning’ and sales of the off-cuts made as time goes by. It is in the nature of such an activity that the substantial taxable income from sales arises decades later than the associated costs. In the meantime, the conservation aims are met by reference to the management of each such woodland. Various streams of income, such as grants, are continuously received (some of which sources of income are equally available to purely commercial operations).
HMRC agreed, some fifteen years ago, that the costs should be recovered on the basis that the relevant outcome in VAT terms is that they are cost components of a taxable supply. More recently, HMRC changed its mind and stated that some account had to be made of the non-commercial charitable motivation of the appellant. This could be achieved, they said, by assuming that some income was ‘non-business’, and thus gave rise to non-recovery. Since the sales of timber were largely far in the future, HMRC postulated a dummy sales figure based on assumed sales values spread over the years it would take to generate the sales, and this was to be compared with the non-taxable actual streams of income.
To some extent, this newly suggested basis is secondary to the main point of the case, since, if the costs are deemed to have a direct and immediate link with taxable supplies, there is no need for any apportionment method, whether a tortuous one, or a rational one. That said, the tribunal was withering in its criticism of HMRC’s suggested basis of apportionment, regarding it as completely unrealistic, and indicative of significant ignorance of the forestry industry.
But, of greater importance to us is the central theme of the litigation, which is whether ‘motive’ is important in determining VAT recovery. Before the tribunal even considered Sveda, it turned to other decisions, particularly our own Court of Appeal decision in Longridge on the Thames. From this it deduced that the issue of ‘motive’ or over-arching ‘purpose’ is irrelevant. The VAT treatment is determined by the objective character of the activity, and the purpose or result is irrelevant as such. This principle had been used in Longridge to decide that there was an economic activity (and thus not a relevant charitable purpose), which is a different point to input tax recovery, but the tribunal in Will Woodlands was clear that this is a distinction without a difference. The input tax analysis is essentially the same as that for outputs.
Only then did the tribunal turn to Sveda (having already decided the case in the charity’s favour). But it is here that the theme continues in a useful vein. HMRC’s argument was that Sveda concerned a purely commercial supplier which had received a grant to build a path in a wood (ironically) and which therefore had only the one, commercial, motive, since the path led directly to a shop from which it sold taxable goods. This reliance on motive was not approved by the tribunal. It thought that the charity’s operation was a commercial one, and that is all that counted. Indeed, whereas the Sveda example involved costs for a means of access to the taxable products, the woodland costs, in our case, actually engendered the very product that was intended to be sold. This was a closer link to the final taxable supplies than arises in a cost of giving access. Whereas the section of the decision on Sveda does not seem explicitly to state that ‘motive does not matter’, when combined with the commentary on Longridge, that is the net result.
In summary, this case was an extremely aggressive one for HMRC to take, particularly given that it was seemingly based on scant preparation. The case could have been decided from basic VAT principles almost without any reference to case precedent. But the case precedent of Longridge and Sveda – both fairly recent decisions of very senior courts – put the matter beyond all realistic doubt, and seems to me to have confirmed that a charity’s objects or ‘motive’ are not relevant in determining the right to input tax recovery.