Church Schools Foundation Ltd v Commissioners of Customs & Excise

For VAT purposes, a payment is taxable only where an identifiable supply is made for that payment. The necessary connection is a direct link or reciprocity between the supply and the consideration. A legal relationship may evidence that link, but a contract is not an additional requirement.

A donation to a charity, including a donation for a specific purpose, is not consideration for the charity’s activities merely because the donor benefits from them. Finance used towards building works remains finance, rather than payment for those works, where the works are not supplied in return for the payment. A landlord’s lease and rent-review provisions do not change that analysis.

The Foundation and its parent company were separate charitable companies registered for VAT. The Foundation owned and improved school properties which it leased to the Company. The Company transferred surplus funds to the Foundation as grants.

Customs assessed one grant to VAT, contending that it was consideration for building works or improvements supplied by the Foundation to the Company. The VAT and Duties Tribunal allowed the Foundation’s appeal, but Neuberger J allowed Customs’ appeal, holding that the grant was consideration for services. The Foundation appealed. The central issue was whether the grants were payments for an identifiable supply of services.

1. Appeal allowed by a majority. The Vice-Chancellor and Arden LJ held that the grants were not consideration for a supply of services. Buxton LJ dissented.
2. Article 2 of the Sixth Directive and sections 4 and 5 of the Value Added Tax Act 1994 require a supply to be made for consideration. The court must first identify the alleged supply and then ask whether the payment was made for it.
3. The European authorities establish a requirement for a direct link or reciprocal connection between the supply and the payment. The reference in Tolsma to a legal relationship explains how that link may be established; it does not impose a separate requirement for an enforceable domestic-law contract.
4. The grants were part of the Foundation’s general financing of works and acquisitions. They were not attributable to particular works, were substantially less than the total expenditure, and were no different in principle from other sources of finance. They were therefore not consideration for the execution of the works.
5. The leases did not alter the result. The Foundation was not obliged to carry out improvements, and the rent-review mechanism separately dealt with the value of improvements. The grants could not be treated as additional consideration for the supplies under the leases. The absence of a lease in relation to Caterham and the financing of acquisitions also exposed the anomalies in Customs’ case.
6. It was not open to Neuberger J to find an enforceable contract requiring the Company to provide financial support. The Tribunal’s factual conclusions did not support that inference. The Tribunal had made no reviewable error in treating the payments as grants rather than remuneration.
7. Order: appeal allowed with costs; costs subject to detailed assessment if not agreed; permission to appeal to the House of Lords refused.

1. Court of Appeal (Civil Division) [2001] EWCA Civ 1745: appeal allowed, with Buxton LJ dissenting.
2. Chancery Division [2000] STC 651: Neuberger J allowed Customs’ appeal from the VAT and Duties Tribunal and treated the grant as consideration for services.
3. VAT and Duties Tribunal: appeal against the VAT assessment allowed; the grants were treated as optional co-operation without a sufficient direct link to a supply of services.