The Commissioners for HMRC v Mid-Ulster District Council

For Article 13(2) of the Principal VAT Directive, actual or potential competition is assessed by reference to the activities as perceived by the consumer. The public authority’s special legal regime is not ordinarily part of the definition of those activities. It is relevant only where differences in the regulatory framework create a distinction in the services in the eyes of consumers.

Whether competition is real rather than purely hypothetical forms part of the Article 13(2) assessment. The appeal was allowed because the FTT adopted an unduly narrow construction, and the issue was remitted for further evidence and determination.

HMRC appealed against the decision of the First-tier Tribunal, reported at [2020] UKFTT 434 (TC), which had allowed Mid-Ulster District Council’s appeal concerning VAT repayment claims for sports and leisure facilities.

The FTT accepted that the Council’s supplies were economic activities and that it acted as a public authority under a special legal regime for Article 13(1) purposes. It concluded that treating the Council as a non-taxable person would not create significant distortion of competition because private operators could not provide facilities subject to the same equality and recreational obligations.

The central issue was the meaning of “such activities” in Article 13(2), and whether competition had to be assessed by reference to the Council’s special legal regime or to the services supplied from the consumer’s perspective.

1. Appeal allowed and matter remitted. The Upper Tribunal remitted the matter to the same FTT, so far as possible, because further evidence and a further hearing were required.
2. Article 13(2) must be interpreted in the context of the common VAT system, the structure and purpose of Article 13, and fiscal neutrality. Article 13(1) is a derogation from the general rule that economic activities are subject to VAT. Article 13(2) restores that rule where treating a public authority as non-taxable would lead to significant distortions of competition. It must therefore not be construed narrowly.
3. There is no preliminary gateway requiring a separate finding that private competition is real before Article 13(2) is engaged. Whether competition is actual or potential, and whether a potential competitor’s entry is real rather than purely hypothetical, forms part of the Article 13(2) inquiry.
4. For that inquiry, the activities must ordinarily be defined from the perspective of the consumer, having regard to their characteristics and the needs they meet. The legal regime governing the public authority is generally irrelevant to comparability, unless differences in the regulatory framework create a distinction in the services supplied in the eyes of consumers.
5. The authorities relied on by the Council did not establish that activities must be defined by the public authority’s special legal regime. They concerned circumstances in which private operators could not engage in the relevant activity or addressed a different Article 13 issue.
6. The FTT had therefore erred in law by defining the activities as the provision of sports and leisure facilities subject to the Council’s special legal obligations. The Upper Tribunal could not remake the decision because there was no evidence concerning provision across Northern Ireland, the relevant geographical area, or concerning individual sporting and leisure activities.

• Upper Tribunal (Tax and Chancery Chamber): allowed HMRC’s appeal against the FTT’s decision and remitted the matter for a further hearing and determination.
• First-tier Tribunal (Tax Chamber): allowed the Council’s appeal against HMRC’s VAT determination: [2020] UKFTT 434 (TC).