In this recent case, the First-tier Tribunal (Tax Chamber) (FTT) ruled that Woking Museum and  Art and Crafts Centre (the Charity) was making a taxable supply to Woking Borough Council (the  Council) under section 4 VATA 1996.

The Council had resolved to exhibit a collection of artefacts it owned, and the Charity was  identified as a suitable third party to establish and run a museum in which to do so. The  Council entered into a services agreement with the Charity which, as well as setting out the  Charity’s obligation to provide the museum, also recorded the Charity’s additional obligation  to provide the Council’s Visitor Information Service. In consideration of this, the Council  made various payments to the Charity and, in addition, some one-off grants in respect of  activities not covered by the service agreement. HMRC issued a decision to the Charity that the  arrangements under the supply agreement did not constitute a business supply by the Charity  and so fell outside of the scope of VAT. The Charity appealed to the FTT.

The FTT found in the Charity’s favour for, in summary, the following reasons:

  • the supply agreement was, as a matter of law, to be construed as a contract between the  parties and not a grant from the Council to the Charity. The FTT found support for this view  from the fact that the agreement contained, at its heart, the mutuality of obligation which is  characteristic of a contract, and the Charity would be liable to the Council for breach of the  supply agreement if it failed to perform the services thereunder
  • the delivery of services by the Charity to the Council provided a direct benefit to the Council
  • the arrangements under the supply agreement were not uncommercial in nature and  were not a sham. The simultaneous pursuit of a charitable objective by a service provider  does not of itself render the relationship non-economic for the purposes of the VAT  Directive 2006/112/EC
  • the payments made by the Council to the Charity under the supply agreement were never  intended to represent a part payment for the services provided by the Charity. The fact  that the bargain reached later proved to be disadvantageous to the Charity is entirely  distinguishable from a contract which provides only for part payment at the outset

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