It is often said, perhaps rather cynically, that nothing in life is free. Whilst things often appear to be “free”, the reality is often that someone else is paying for it. This was essentially the issue in Groundwork Cheshire v HMRC.2 The First-tier Tribunal (“FTT”) found that supplies made by the subsidiary of a non-profit making trust, which supplied services free of charge to clients, were supplies made for consideration and therefore within the scope of VAT. The consideration in this case was the funding which Groundwork Cheshire received from regional development agencies.
The appellant is a non-profit making groundwork trust and the representative member of a VAT group. It owns a trading company called Groundwork Environmental Services (Cheshire) Limited (“Groundwork”). The appeal was against a decision of HMRC that certain services which Groundwork provided to businesses did not amount to supplies for the purposes of VAT.
Groundwork provides a range of services to businesses including health and safety management and environmental consultancy. One particular service which it offers consists of providing advice and support to businesses to help them improve environmental and energy efficiency.
Clients were not required to pay Groundwork for the services it provided. Groundwork received funding through a programme called Enworks, funded by the North West Regional Development Agency (“NWDA”) and the European Regional Development Fund (“ERDF”).
Groundwork marketed an Enworks programme which offers an “Environmental Action Plan” to businesses in Cheshire. The programme is aimed at identifying the cost and resource savings businesses can achieve through increased resource efficiency. It is marketed as being supported by Enworks, amongst others, and is expressed to be “available FREE of charge”.
The issue in this case was whether the sums received by Groundwork were third party consideration for a supply of services or what is known as a “block grant”. Groundwork argued that sums received from Enworks amounted to third party consideration. As such, they were consideration for a supply of services and within the scope of VAT (which would enable Groundwork to recover input tax on the taxable supplies which it received). HMRC argued that the sums received were a block grant and therefore outside the scope of VAT.
Section 4(1) of the Value Added Tax Act 1994 (“VATA 1994”) provides:
“VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.”
Section 5(2)(a) of VATA 1994 provides:
“ “Supply” in this Act includes all forms of supply; but not anything done otherwise than for a consideration.”
Whilst “consideration” is not defined in VATA 1994, Article 73 of the Principal VAT Directive (Directive 2006/112/EC) provides:
“In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.” (Our emphasis).
This case therefore turned on whether the payments received from Enworks were “subsidies directly linked to the price of the supply”.
The ECJ has previously considered the equivalent provision to Article 73 in the 6th Directive (the predecessor to the Principal VAT Directive) (see Office des produits wallons ASBL v Belgium (“Wallons”) ).
The ECJ noted at  that operating subsidies which cover a part of the running costs “nearly always affect the cost price of the goods and services supplied by the subsidised body” and went on to say:
“12. However, the mere fact that a subsidy may affect the price of the goods or services supplied by the subsidised body is not enough to make that subsidy taxable. For the subsidy to be directly linked to the price of such supplies, within the meaning of Article 11A of the Sixth Directive, it is also necessary, as the Commission has rightly pointed out, that it be paid specifically to the subsidised body to enable it to provide particular goods or services. Only in that case can the subsidy be regarded as consideration for the supply of goods or services, and therefore be taxable.
13. In order to establish whether the subsidy constitutes such consideration, it should be noted that the price of the goods or services must, in principle, be determined not later than the time of the triggering event. It should also be noted that the undertaking to pay the subsidy made by the person who grants it has as its corollary the right of the beneficiary to receive it, since a taxable supply has been made by the latter. That link between the subsidy and the price must appear unequivocally following a case by case analysis of the circumstances underlying the payment of that consideration. On the other hand, it is not necessary for the price of the goods or services - or a part of the price - to be ascertained. It is sufficient for it to be ascertainable.
14. It is therefore for the referring court to establish the existence of a direct link between the subsidy and the goods or services at issue. That makes it necessary to verify at an early stage that the purchasers of the goods or services benefit from the subsidy granted to the beneficiary. The price payable by the purchaser must be fixed in such a way that it diminishes in proportion to the subsidy granted to the seller or supplier of the goods or services, which therefore constitutes an element in determining the price demanded by the latter. The court must examine, objectively, whether the fact that a subsidy is paid to the seller or supplier allows the latter to sell the goods or supply the services at a price lower than he would have to demand in the absence of the subsidy.
15. In the main proceedings and in view of the fact that, according to the framework agreement, OPW carries out a number of activities, the referring court must verify whether each activity gives rise to a specific and identifiable payment or whether the subsidy is paid globally in order to cover the whole of OPW’s running costs. In any event, it is only the part of the subsidy identifiable as being the consideration for a taxable supply that may, in appropriate cases, be subject to VAT.
17. Moreover, in order to determine whether the consideration represented by the subsidy is identifiable, the national court may either compare the price at which the goods are sold in relation to their normal cost price, or examine whether the amount of the subsidy has been reduced once those goods are no longer produced. If the factors examined are significant, it must be concluded that the part of the subsidy allocated to the production and sale of the goods in question constitutes a subsidy directly linked to the price. In that regard, it is not necessary for the subsidy to correspond exactly to the diminution in the price of the goods supplied, it being sufficient if the relationship between the diminution in price and the subsidy, which may be at a flat rate, is significant.”
The FTT considered the reference to a “triggering event” at  to be the date of payment of the subsidy.
The FTT was shown a copy of a letter (described as a “Grant Offer Letter”) from Enworks to Groundwork setting out a “Service Level Agreement” for the period from October 2008 to March 2010.
The letter stated:
“The offer consists of a maximum grant of £769,419 (“the Grant”) towards the eligible costs of the Project.
The Grant is made up of the following:
North West Regional Development Agency (NWDA) £ 502,224
Single Programme European Regional Development Fund (ERDF) £267,195.”
The Grant was expressly subject to Groundwork delivering the project ie the Enworks programme, in line with its business plan, achieving various targets and complying with various other conditions.
Each client was provided with an annual statement indicating the value of the support it received from Groundwork. For example:
“In the last 12 months Groundwork Cheshire has provided your company with support to improve its resource efficiency or standards of corporate responsibility. This work was funded by the European Regional Development Fund and the Northwest Regional Development Agency.
… The level of support for your business for the past year (2010) is as follows:
… If you wish to access further support please contact your adviser …”
The information used to produce these statements was derived from a database and time spent and support given was recorded against the client’s name.
The business plan produced by Groundwork as a condition of the grant offer would include details of employees of Groundwork who would be working on the Enworks funded programme including the anticipated amount of time each member of staff would spend on the Enworks programme, split between NWDA funded activity and ERDF/NWDA co-funded activity.
The FTT accepted that the grant funding from Enworks was subject to “a fundamental principle that the grant money can only be claimed retrospectively, for costs, which can be demonstrated were incurred in delivery of specific activities within the Enworks contract”.
The FTT’s decision
The FTT adopted the approach from Wallons to determine whether the payments received by Groundwork were directly linked to the price of the services.
The FTT considered that the principles to be applied are no different where there is a partial subsidy reducing the price paid by the customer, or where (as in this case) the subsidy effectively reduces the price paid by the client to nil. The question remained whether the subsidy is directly linked to what would otherwise have been the price charged to the client for the supply.
The FTT was satisfied that the payments from Enworks to Groundwork did affect the price charged by Groundwork to its clients. They enabled the service to be provided free of charge. It was also clear that payments made by Enworks to Groundwork were made specifically for Groundwork to provide particular services to its clients within the Enworks programme. It was irrelevant that Enworks did not know at the time the service was provided the identity of the client or the specific service within the Enworks programme which was being provided.
The FTT was therefore satisfied that the link between the subsidy and the price appeared unequivocally from the circumstances in which the payment was made. In particular, the funding was calculated each month by reference to specific services provided to specific businesses. The FTT said:
“Looked at overall the price that would be payable by clients is clearly related to the payment made by Enworks. It is that payment which enables Groundwork to provide a free service. For the same reason the payment made by Enworks can be said to constitute an element of the price that would be charged by Groundwork to its clients.”
The FTT was of the view that the relationship between the work carried out and the payment made was clearly identifiable.
The payments from Enworks were therefore consideration for the services supplied to clients and Groundworks’ appeal succeeded.
This decision provides helpful clarity on the application of the Wallons judgment for organisations which depend on subsidies for the services which they provide. It also confirms that, simply because some overhead costs cannot be attributed to specific clients or projects, does not necessarily undermine the requisite “direct link between the subsidy and the price of the supply”.
See http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=6889 for full details of the case.