In Mid Ulster District Council (formerly Magherafelt District Council) v HMRC (TC/2011/687 & TC/2012/9253), the lead case on behalf of Northern Ireland Councils, the First-tier Tribunal found in favour of the taxpayer when deciding that charges paid by members of the public for access to sports and leisure facilities provided by local authorities in Northern Ireland were outside the scope of VAT and the VAT should be repaid.
This case could have wider implications for the circumstances when local authorities may be able to reclaim wrongly paid VAT, when they are obliged by local law to provide goods and services in the capacity of a public authority when those services do not lead to significant distortions of competition with the private sector.
The dispute arose between Mid Ulster District Council (the council) and HMRC concerning whether VAT had been correctly paid by members of the public for access to leisure facilities provided by the council.
The council contended that the charges in dispute did not attract VAT on two grounds:
First, the council argued that its provision of sports and leisure facilities was not an economic activity. Article 2 of the Principal VAT Directive (2006/112/EC) (PVD) subjects to VAT ‘the supply of services for consideration within the territory of a Member State by a taxable person acting as such’. Article 9 of the PVD defines ‘taxable person’ as ‘any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity’.
The council contended that it did not provide the leisure and recreational facilities for the purposes of obtaining income on a continuing basis. It did so under article 10 of the 1986 Recreation Oder (article 10), which places an obligation on district councils to provide facilities for recreation, social, physical and cultural activities.
The council accepted that the charges it received constituted consideration under article 2 PVD. However, the council argued it was not engaged in an economic activity under article 9 PVD as it was obliged by local government law to provide adequate social, physical and cultural activities to residents. The services were heavily subsidized, as the council was by law obliged to provide the services irrespective of financial viability, and the significant gulf between the costs of provision of the services to the council and the charges paid by users for the said services further evidenced there was no ‘direct link’ between the value of the services provided by the council and the charges paid by users.
However, HMRC argued that those services were an economic activity within the meaning of articles 2 and 9 PVD.
The tribunal agreed with HMRC that the services were an economic activity, noting in particular that the provision of leisure and recreational services was a core activity of the council; that almost all users of the leisure and recreational services paid something for the services; that about 20% to 35% of the cost of the services was recovered through charges, compared to 3% in Gemeente Borsele (Case C-520/14), so the charges received made a significant contribution to the cost. All these factors together meant that the provision of the activities for the subsidised charges was an economic activity.
Nevertheless, the council succeeded crucially on its second argument that it was providing the services in its capacity of a public authority acting as such; and that there were no significant distortion of competition with the private sector.
Article 13 of the PVD states ‘local government authorities … 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 transaction, 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.’
The council drew a distinction between cases in which a public authority is simply empowered to provide leisure and recreational services, which a private provider also has the power to do, and cases where (as for the council in Northern Ireland) a public authority is obliged to provide those activities (under article 10 here) in such a way as to put them in a completely different position from the private provider.
The tribunal agreed that supplies of leisure and recreational services to members of the public were provided by the council in its role as a public authority acting under a special legal regime, within the meaning of article 13. The council was therefore not a taxable person in respect of those supplies; and, because the council’s strong evidence to the tribunal demonstrated that the private sector could not possibly provide the same level and scope of services, to provide community equality, to enhance community integration, and reduce social deprivation, without financial viability being primary, the services could not lead to significant distortions of competition.
This case brings some welcome clarification on the VAT treatment of supplies made by public bodies in their role as a public authority acting in the public interest. The case emphasises that the absence of significant distortions of competition is fact driven but explains how this test can be satisfied where the private sector cannot possibly provide the range of services where the motive is the benefit of the community, as opposed to financial viability. The case opens the door to similar claims being made by local authorities under a public law obligation where the services have been provided with the benefit of the community primarily in mind, and consequently where the range and types of services cannot be matched by the private sector. That the council lost its argument that it was not carrying on an ‘economic activity’ within the meaning of article 9, additionally again emphasises that the bar is very low here.
Richard Woolich & Maud Murcia, DLA Piper (note: the authors represented the council in this case)
In Mid Ulster District Council (formerly Magherafelt District Council) v HMRC (TC/2011/687 & TC/2012/9253), the lead case on behalf of Northern Ireland Councils, the First-tier Tribunal found in favour of the taxpayer when deciding that charges paid by members of the public for access to sports and leisure facilities provided by local authorities in Northern Ireland were outside the scope of VAT and the VAT should be repaid.
This case could have wider implications for the circumstances when local authorities may be able to reclaim wrongly paid VAT, when they are obliged by local law to provide goods and services in the capacity of a public authority when those services do not lead to significant distortions of competition with the private sector.
The dispute arose between Mid Ulster District Council (the council) and HMRC concerning whether VAT had been correctly paid by members of the public for access to leisure facilities provided by the council.
The council contended that the charges in dispute did not attract VAT on two grounds:
First, the council argued that its provision of sports and leisure facilities was not an economic activity. Article 2 of the Principal VAT Directive (2006/112/EC) (PVD) subjects to VAT ‘the supply of services for consideration within the territory of a Member State by a taxable person acting as such’. Article 9 of the PVD defines ‘taxable person’ as ‘any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity’.
The council contended that it did not provide the leisure and recreational facilities for the purposes of obtaining income on a continuing basis. It did so under article 10 of the 1986 Recreation Oder (article 10), which places an obligation on district councils to provide facilities for recreation, social, physical and cultural activities.
The council accepted that the charges it received constituted consideration under article 2 PVD. However, the council argued it was not engaged in an economic activity under article 9 PVD as it was obliged by local government law to provide adequate social, physical and cultural activities to residents. The services were heavily subsidized, as the council was by law obliged to provide the services irrespective of financial viability, and the significant gulf between the costs of provision of the services to the council and the charges paid by users for the said services further evidenced there was no ‘direct link’ between the value of the services provided by the council and the charges paid by users.
However, HMRC argued that those services were an economic activity within the meaning of articles 2 and 9 PVD.
The tribunal agreed with HMRC that the services were an economic activity, noting in particular that the provision of leisure and recreational services was a core activity of the council; that almost all users of the leisure and recreational services paid something for the services; that about 20% to 35% of the cost of the services was recovered through charges, compared to 3% in Gemeente Borsele (Case C-520/14), so the charges received made a significant contribution to the cost. All these factors together meant that the provision of the activities for the subsidised charges was an economic activity.
Nevertheless, the council succeeded crucially on its second argument that it was providing the services in its capacity of a public authority acting as such; and that there were no significant distortion of competition with the private sector.
Article 13 of the PVD states ‘local government authorities … 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 transaction, 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.’
The council drew a distinction between cases in which a public authority is simply empowered to provide leisure and recreational services, which a private provider also has the power to do, and cases where (as for the council in Northern Ireland) a public authority is obliged to provide those activities (under article 10 here) in such a way as to put them in a completely different position from the private provider.
The tribunal agreed that supplies of leisure and recreational services to members of the public were provided by the council in its role as a public authority acting under a special legal regime, within the meaning of article 13. The council was therefore not a taxable person in respect of those supplies; and, because the council’s strong evidence to the tribunal demonstrated that the private sector could not possibly provide the same level and scope of services, to provide community equality, to enhance community integration, and reduce social deprivation, without financial viability being primary, the services could not lead to significant distortions of competition.
This case brings some welcome clarification on the VAT treatment of supplies made by public bodies in their role as a public authority acting in the public interest. The case emphasises that the absence of significant distortions of competition is fact driven but explains how this test can be satisfied where the private sector cannot possibly provide the range of services where the motive is the benefit of the community, as opposed to financial viability. The case opens the door to similar claims being made by local authorities under a public law obligation where the services have been provided with the benefit of the community primarily in mind, and consequently where the range and types of services cannot be matched by the private sector. That the council lost its argument that it was not carrying on an ‘economic activity’ within the meaning of article 9, additionally again emphasises that the bar is very low here.
Richard Woolich & Maud Murcia, DLA Piper (note: the authors represented the council in this case)
