Some welcome clarification on the VAT treatment of supplies made by public bodies acting in the public interest.
In Mid Ulster District Council (formerly Magherafelt District Council) v HMRC (TC/2011/687 & TC/2012/9253), the taxpayers have won an important case against HMRC for the repayment of VAT charged on sports and leisure facilities.
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. 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. However, the tribunal disagreed, noting that: the provision of leisure and recreational services was a core activity of the council; almost all users of the leisure and recreational services paid something for the services; and 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.
Crucially, however, the council succeeded 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 Principal VAT Directive (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 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.’
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 PVD 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 PVD 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)
Some welcome clarification on the VAT treatment of supplies made by public bodies acting in the public interest.
In Mid Ulster District Council (formerly Magherafelt District Council) v HMRC (TC/2011/687 & TC/2012/9253), the taxpayers have won an important case against HMRC for the repayment of VAT charged on sports and leisure facilities.
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. 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. However, the tribunal disagreed, noting that: the provision of leisure and recreational services was a core activity of the council; almost all users of the leisure and recreational services paid something for the services; and 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.
Crucially, however, the council succeeded 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 Principal VAT Directive (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 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.’
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 PVD 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 PVD 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)
