Grants For Services - Customs' appeal succeeds in Commissioners of Customs and Excise v Church Schools Foundation Ltd.

Grants For Services
Customs' appeal succeeds in Commissioners of Customs and Excise v Church Schools Foundation Ltd.
A charitable foundation which owned school properties received grants from a related charitable company which ran the schools, and in return the foundation carried out improvement works to the school premises. Customs argued that the improvement work was a supply for consideration, and that a legal relationship existed between the foundation and company in that respect. The court agreed with Customs, overruling the decision of the tribunal.
The facts
The Church Schools Foundation was a charitable company which owned and operated schools. In 1993, a second charitable company was formed to run the schools, while the foundation managed the properties. In March 1993, the foundation granted a lease of the properties to the charitable company at a market rent and opted to tax the rents for VAT purposes. However, the properties needed improvements, and the company agreed that to receive these improvements, it would allow the foundation to share in its cash surpluses. So on the same day as the lease was granted, the company confirmed in a letter its intention to pay any surpluses by way of grants to the foundation.
Subsequently, the company made grants of various sums to the foundation, and the foundation made the improvements to the school properties. The grants helped fund the work, but the actual cost was far greater than the grants paid.
Customs assessed the foundation to VAT in respect of each grant as being a consideration for a supply of services. The foundation appealed to the tribunal. The tribunal allowed the appeal on the grounds that the grants could not be characterised as consideration for a supply since there was no direct link between the grants and the service, and the grants had not been paid as a result of a legal relationship between the company and the foundation.
Customs therefore appealed to the High Court.
(Melanie Hall for Customs; David Milne QC and Richard Vallat for the Church Schools Foundation Ltd.)
The decision in the High Court, Chancery Division
Counsel for the foundation said that for Customs' appeal to succeed there had to be a legal relationship between the foundation and the company. The relationship had to be a relevant one in order to satisfy the test laid down in Tolsma v Inspecteur der Omzetbelastung Leeuwarden (Case C-16/93) [1994] STC 509. The tribunal was right, said Mr Milne, to say that the grant was not paid as a result of the landlord and tenant relationship which undoubtedly existed between the foundation and the company; it was rather paid as a result of an informal relationship.
Mr Justice Neuberger, however, did not agree that the tribunal's decision was correct. He said that the documents and evidence showed that a relationship between the foundation and company was such that the money paid to the foundation by the company was paid pursuant to a legal relationship. The company had agreed to pay over surpluses, in the form of grants, to the foundation on the day that it was given possession of the foundation's properties. The company clearly expected to have surpluses, and to pay sums to the foundation on the basis that the foundation would carry out the improvements to the buildings.
The judge said that this arrangement clearly constituted a legal relationship between the foundation and the company, and that it was enforceable under English law. He thought it unlikely that the foundation would have committed itself to the improvement works if it had not had the promise of financial support.
Counsel for the foundation also relied on the absence of 'reciprocal performance', as described in Tolsma, or 'the stipulated exchange and mutually dependent services'. However, Mr Justice Neuberger said that one of the factors leading him to conclude that a legal relationship existed between the two entities was the degree of reciprocal performance. That is, the company paid grants to the foundation, and in accordance with the documentary evidence, the foundation agreed to carry out improvements to the premises using that money. The fact that the foundation spent considerably more money in its improvement work than it received from the company did not mean that there was no reciprocity of performance.
The situation was made more complicated by the arrangement involving the company agreeing to pay towards the improvements, and also leading to an eventual increase in rent. A rent review was allowed for in the documents and justified on the grounds that the improved buildings would benefit the charitable company. So the company not only paid towards the improvements, but was also going to pay more rent as a result of the improvements to which it had contributed. The judge said there was an element of double payment, and that it was 'not particularly surprising' if that extended to VAT. Certainly, the foundation also benefited from the improvements, in terms of increased rent, however with regard to VAT paid twice, it was the foundation's choice to elect to waive the exemption in order to pay VAT on the rent receivable from the company under the lease. No double payment would have occurred otherwise.
Overall, the tribunal's decision was wrong, and Customs' appeal must succeed.
Decision for Customs
(Reported at [2000] STC 651.)
Commentary by Allison Plager
This was a complicated appeal, and even the judge said that he had not found it easy to reach a decision. He said this was due to the high quality of the arguments, but also because the facts could not easily be applied to European law relating to VAT. The decision centred around the existence of a legal relationship, as discussed in Tolsma by the European Court. In his decision, the judge seemed almost to take the middle road rejecting David Milne's contention that for a legal relationship to exist, there had to be a contract, but also ruling out Customs' suggestion that a legal relationship existed whenever money changed hands.
The problem for the Church Schools Foundation was that it elected to waive exemption from tax. This meant that not only was VAT payable on the rents, but also on the grants, as consideration for a supply of services. While these circumstances are unusual, it demonstrates the care needed when making such elections.