This month’s Chartered Accountants Tax Case digest examines the decision of the First-tier Tribunal (“FTT”) in the Mid Ulster District Councils’ appeal against HMRC’s decision refusing the repayment of VAT charged on sports and leisure facilities. The case provides clarification on the VAT treatment of supplies made by public bodies in their role as a public authority acting in the interest of the public.

The case considers the treatment of a public authority as a non-taxable person and the requirement for the activities or transactions not to lead to a significant distortion of competition under Article 13(1) of the Principal VAT Directive (2006/112/EC) (“PVD”).

At the time of writing, HMRC has not yet decided on whether to appeal the outcome of this case.

Background

The Appellant’s claim for repayment of an overpayment of VAT for a number of accounting periods, by way of voluntary disclosure, had been rejected by HMRC. HMRC contended that VAT at the standard rate was chargeable on amounts paid by members of the public for access to sports and leisure facilities provided by the Appellant (the Council).

The Council disputed the charge to VAT on such payments on two alternative grounds:

1. Supplies of leisure and recreational services to members of the public by the Council are not “economic activities”, and are therefore outside the scope of VAT; or
2. Supplies of leisure and recreational services to members of the public are provided by the Council in its role as a public authority acting under a special legal regime, and therefore it is not a taxable person in respect of those supplies.

The economic activity argument

The Council relied on the judgments in C-246/08 Commission v Finland [2009] ECR I-10605 and C-520/14 Gemeente Borsele v Staatssecretaris van Financien [2016] STC 1570 in arguing that it was not carrying on an economic activity, such that it was a taxable person under Article 9 PVD and therefore there was no VATable supply under Article 2 PVD.

While acknowledging that it was possible to have an economic activity when supplies were made at a loss, the factor for consideration for the Council was the affordability of services for the users, in discharging its obligations under Article 10 of the 1986 Recreation Order (Article 10). An affordable charge was said to bear no obvious relationship to the value of the recreational and leisure services provided.

HMRC provided that the Council’s position could be distinguished from that of the case law it had cited, as the amounts paid by users of the relevant services could not be viewed as “symbolic amounts with an insufficient link with services provided”. The financial contribution of the users was argued as being consideration for the provision of the services, and those services were an economic activity.

The FTT agreed with the decision of the Court of Appeal that the fees the Council received amounted to consideration for the purposes of Article 2 PVD. In addressing the question on whether the supplies by the Council constituted an economic activity for the purposes of Article 9 PVD, the FTT noted that the provision of leisure and recreational services was a core activity of the Council, almost all users paid for the services, and 20 to 30 percent of the cost of the services was recovered through charges. This was compared to a 3 percent recovery in the Gemeente Borsele case.

On analysis of the relevant case law and in consideration of the facts of the case, the FTT did not accept the argument that the supplies provided by the Council didn’t constitute an economic activity.

The taxable persons argument

Article 13 PVD provides, so far as relevant:

• “1. States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.
• However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition. …”

In determining whether the Council was a taxable person, the FTT considered the two paragraphs of Article 13 separately.

Public authority acting under a special legal regime

With reference to a number of decisions of the European Court of Justice, the FTT noted that Article 13 didn’t apply to activities engaged in by a body as one governed by private law rather one governed by public law, accordingly it was necessary to identify the legal regime applicable under national law in respect of the provisions of the relevant services.

The Council was bound by law to provide adequate leisure and recreational services and was prohibited from imposing charges exceeding its costs, to ensure that the services were affordable to residents in line with Article 10, which went beyond simply empowering the Council to provide these services. The Council argued that this placed it in a different position to private providers of similar services.

The FTT agreed with the argument put forward by the Council, noting on an analysis of the operating constraints placed on the Council, that any private sector business, even one indistinguishable to the consumer from the Council’s facilities would not be providing services in line with Article 10, but instead under the general legal regime applicable to all facilities operators. Given the legal conditions, the Council provided its services were different to a private provider providing similar services, the Council’s services were considered to be provided under a special legal regime applicable to a body governed by public law. As such, the first paragraph of Article 13 was considered to be satisfied.

Significant distortions of competition

In moving to the second paragraph of Article 13, the FTT considered whether the treatment of the Council as a non-taxable person would lead to more than negligible actual or potential distortion of competition in the market for such activities in Northern Ireland.

There was said to be no realistic possibility of a private provider entering the market under the economic and legal conditions that the Council operates and as such, no distortion to competition. With reference to evidence provided by Mr Tohill, a Chartered Accountant and a member of this Institute who had been the Director of Finance for the Council for a number of years, the FTT considered that there was no non-negligible alternative to the leisure and recreational services provided by the Council. Only local authorities were considered to be in a position to provide facilities that meet the demanding requirements for community equality.

Mr Tohill explained the challenges facing the Council and the lengths to which it goes to deliver what he termed community relations outcomes; also, how any private operator would be likely to find itself having to duplicate provision of facilities; further, how his informal discussion with a private provider demonstrated that a private operator would never be able to deliver facilities that went anyway close to being comparable to, let alone in competition with the community-driven facilities demanded from the Council.

Conclusion

The Mid Ulster District Council through the successful appeal of its status as a taxable person has provided a basis for public bodies in their role as a public authority acting in the interest of the public, where the services have been provided for the benefit of the community primarily in a manner which cannot be replicated by the private sector, to be treated as a non-taxable person under Article 13 PVD.

The full judgment in this case is available from:- https://www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKFTT/TC/2020/TC07911.html&query=(Mid)+AND+(Ulster)+AND+(District)