Revenue

VAT - local authority making exempt supply of premises to charity for use as arts centre - input tax incurred on construction costs not recoverableWest Devon Borough Council v Customs and Excise Commissioners: ChD (Mr Justice Patten): 31 July 2001A VAT and Duties Tribunal upheld the commissioners' assessment against the taxpayer local authority for VAT in the sum of 89,911 (plus interest) in respect of the period 1-28 April 1995.

The assessment related to tax undeclared as a result of various deductions made in respect of VAT charged to the local authority by a building contractor which were disallowed on the basis that they were attributable to an exempt supply, namely the grant of an underlease to a registered charity in respect of premises intended for use as an arts centre for a term of 35 years at a peppercorn rent but for a de facto premium of 130,000.

The taxpayer appealed.Hugh McKay (instructed by Dario Garcia) for the taxpayer; Kieron Beal (instructed by the solicitor, Customs & Excise) for the commissioners.Held, dismissing the appeal, that section 33 of the Value Added Tax Act 1994 permitted local authorities to recover input tax in respect of an inward supply of services not made for the purpose of any business carried on by the taxpayer; that 'business' bore the same meaning as in section 4(1) of the VAT Act 1994, which gave effect to article 4 of the European Community's Sixth VAT Directive (Council Directive 77/388/EEC); that the determining factor for the purposes of section 33 concerned whether the transaction was governed by the ordinary rules of private law or whether it took effect under a special legal regime applicable to local authorities; that the letting of commercial premises owned by a local authority would not fall within article 4(5) since the transaction would be governed by the same law as a letting by a private landlord; that an activity was unlikely to be a business one if relations between the parties were so informal as to not evidence any intention to create legal relations, but that a serious and regular enterprise would still be a business even if it were run for charitable purposes; that while the purpose of the underlease was to put into operation an Arts Centre for the public benefit, the means adopted to do so involved a business transaction under which the local authority was able to raise an additional 130,000 which was essential to the scheme; that the taxpayer had done so on terms applicable to traders generally and not pursuant to any special regime; and that the assessment should therefore be upheld.