This case in the First-Tier Tribunal (“FTT”) concerned whether the letting of school premises to an independent school and the running of this school were business purposes under VAT law.
French Education Property Trust Limited (“FEPT”), a charitable company, purchased a property in London and developed it for use as a school to educate French children living in England. The development was funded by a bank loan and support from donors. A separate charitable vehicle (College Français Bilingue de Londres) (the “College”) was set up to run the school. FEPT leased the school premises to the College.
The issue for the FTT was whether FEPT should be charged VAT on the construction costs by its contractor at the standard or zero rate. Zero rating is available on an "approved alteration" of a building which is “intended for use solely for relevant charitable purposes after the…alteration”. The “relevant charitable purposes” must be non-business. The point in dispute was whether the leasing of the property by FEPT to the College was a non-business purpose.
The FTT found that, for the zero rating to be available, neither the granting the lease nor the College’s use of the property could be business activities.
The FTT accepted that there were some factors which pointed away from FEPT and the College being engaged in a business activity. These included that the College’s fees were below market rate; that both FEPT and the College were charities; that FEPT did not aim to make a profit on the lease and that the College did not aim to make a surplus.
However, factors which pointed towards the granting of the lease being a business activity were more substantial and included that the lease was at approximately market rent; the arrangements between FEPT and the College were formal and that FEPT had a commercial imperative to recover the rent from the College in order to pay its liability under the bank loan. Overall, the letting was a serious undertaking with recognisable continuity which was earnestly pursued by FEPT and operated on sound and recognised business principles.
The College was also carrying out business activities in running the school because it was substantial, professionally-run and well managed.
The FTT ruled that the letting of the school property by FEPT and the operation of the school were business activities and that therefore VAT was chargeable at the standard rate on the construction services supplied to FEPT. Because making exempt supplies of education limited the extent to which the College could recover its input VAT, the VAT on construction costs would have represented a real and substantial cost to one or both of FEPT and the College.
While this case confirms that “business” is widely interpreted for VAT purposes and can include charitable activities which are not intended to make a profit, it does not establish a general principle that the provision of education in return for fees or the letting of property for rent is always a business activity. However, the FTT did suggest that independent schools will frequently be businesses, especially where they are substantial, professionally-run and well-managed. Equally, letting property will often be a business activity where it is carried out on a formal and commercial basis.
Of wider application are the principles put forward by the FTT that business activities must include an element of remuneration but do not necessarily need to be (or aim to be) profitable. It is necessary to look at the nature and status of the activities in the context of the whole picture. This means that cases which turn on whether or not an activity is a business activity will be highly fact specific, although it will generally be difficult for the taxpayer to show that its activities are non-business where fees are being charged for provision of goods or services.