Wakefield College v HMRC [2018] EWCA Civ 952

A further education college that heavily subsidised its own course fees still ended up conducting a VAT "business." The Court of Appeal used the case to retire six competing, overlapping tests that had accumulated in the case law and replace them with a clean two-stage framework that HMRC now applies to every economic activity dispute.

The Facts

Wakefield College, a charity providing further and higher education, constructed a new building. Most of its students, particularly those aged 16 to 19, received fully funded, free education under government grant arrangements, an activity everyone accepted was non-business. However, a minority of students, generally those aged 19 or over pursuing certain courses, paid a fee themselves, heavily subsidised by grant funding but nonetheless a real payment required as a condition of enrolment on those courses.

The college argued that because these fees were subsidised and did not come close to covering the actual cost of provision, the activity remained non-business in nature, meaning the whole new building was used for a wholly or mainly non-business, charitable purpose, entitling the college to the beneficial VAT zero-rating available for such buildings and full input tax recovery. HMRC disagreed, contending that the presence of a genuine fee, however subsidised, meant this cohort of provision was an economic activity, restricting the relief and input tax position accordingly.

Procedural History

• First-tier Tribunal: found in the college’s favour, holding the subsidised fee-paying provision was not a business activity given the scale of subsidy and the college’s charitable, non-profit character.
• Upper Tribunal: reversed, holding that the existence of a genuine fee paid in return for a genuine supply was sufficient to constitute economic activity, regardless of the level of subsidy.
• Court of Appeal [2018] EWCA Civ 952: dismissed the college's further appeal, upholding the Upper Tribunal and setting out, for the first time in a single coherent statement, the two-stage test now applied to every VAT economic activity dispute.

The Issues

1. What is the correct legal test for whether an activity is an "economic activity" (a "business") for VAT purposes?
2. Does the fact that a fee is heavily subsidised, and does not reflect the true commercial cost of provision, prevent that fee from being "consideration" for a supply?
3. Which of the various tests developed in earlier case law, several of which appeared to point in different directions, correctly stated the law?

The Ratio: The Two-Stage Test

Lewison LJ, giving the leading judgment, expressly retired the six-factor, more impressionistic approach that had developed across earlier domestic and CJEU authorities, describing it as productive of uncertainty and inconsistent results. Going forward, the two-stage test would be the operative framework, aligning English domestic practice more closely with the CJEU's own more consistent approach to the underlying EU concept of economic activity.

Why the Subsidy Did Not Matter

The critical, and for many charities counter-intuitive, aspect of the decision is that the level of subsidy is simply not part of the test. A payment can be consideration for a supply, and the activity can be economic, even where the fee charged is a small fraction of the true cost of provision, provided the payment is genuinely and directly linked to that specific supply, rather than being, for example, a general, unconditional grant paid regardless of what the recipient does with it. The distinguishing feature is not the adequacy of the price but the existence of a reciprocal legal relationship: the student paid a required fee in exchange for a defined course of education, and that reciprocity was enough.

Authorities Considered

Customs and Excise Commissioners v Yarburgh Children's Trust [2002] EWHC 2201 (Ch), and Customs and Excise Commissioners v St Paul's Community Project Ltd [2005] EWHC 106 (Ch)

Earlier High Court authorities the Court of Appeal considered as part of the line of cases producing the fragmented, multi-factor approach it replaced. Both had focused heavily on subsidy levels and charitable purpose in a way Wakefield College confirmed was not, strictly, the correct legal question.

Longridge on the Thames v HMRC [2016] EWCA Civ 930

A Court of Appeal authority decided shortly before Wakefield College, addressing similar territory in the context of a charity providing subsidised outdoor activities largely staffed by volunteers, illustrating the same underlying tension the Court in Wakefield College set out finally to resolve with a single clear test.

Commission v Finland (C-246/08), and CJEU economic activity case law generally

The Court of Appeal drew on the CJEU's settled approach that economic activity is assessed objectively, without regard to the purpose or results of the activity, aligning the domestic two-stage test more closely with the underlying EU law concept the UK VAT system was, at the time, required to implement.

Relevance to VAT Registration Disputes

Wakefield College is now the standard starting authority whenever a charity, membership body, educational institution or grant-funded organisation disputes with HMRC whether its activities are business or non-business for VAT purposes, a question that determines VAT registration liability, the availability of the zero rate for charitable buildings, and the scope of input tax recovery. The two-stage test is applied by HMRC's own internal guidance and by the tribunals in every subsequent case in this area.

Practitioner Application

Applying the two-stage test

• Identify the specific payment and the specific supply it is said to relate to. A direct link to an identifiable, defined service is the key evidential building block; a payment with no corresponding defined service is more likely to fall outside the test.
• Do not rely on subsidy level or charitable status as a defence. Following Wakefield College, arguing that a fee is "too low to be real consideration" is very unlikely to succeed if a genuine reciprocal obligation exists.
• Distinguish genuine unconditional grants from conditional funding. Grant funding that comes with no obligation to supply anything specific to the grant-maker or a defined beneficiary sits outside the test; funding that is really a subsidised price for a defined service to an identified recipient does not.
• Consider the VAT consequences holistically. A finding of economic activity can be advantageous (input tax recovery), or disadvantageous (loss of a beneficial zero rate, or a registration threshold being crossed) depending on the wider facts, so model both directions before advancing an argument.

Common mistakes

• Assuming a subsidised or below-cost fee cannot be consideration: Wakefield College confirms the opposite.
• Applying the older, multi-factor tests from pre-2018 case law rather than the two-stage test now settled by the Court of Appeal.
• Failing to separate genuinely unconditional grant income from fee income that happens to be subsidised, which can lead to an entire funding stream being wrongly characterised in one direction or the other.

Frequently Asked Questions