In RJ Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Tax provisions) [1994] EUECJ C-16/93 (3 March 1994), Mr Tolsma played a barrel organ on the public highway in the Netherlands. During his musical performance he offered passers-by a collecting tin for their donations; he also knocked on the door of houses and shops to ask for donations, but without being able to claim any remuneration by right. Following the conclusion in Staatssecretaris van Financiën v Hong Kong Trade Development Council [1982] ECR C-89/81 paragraphs 9 and 10 that taxable transactions, within the framework of the VAT system, presuppose the existence of a transaction between the parties in which a price or consideration is stipulated, the Court concluded at paragraph 20 that where a person’s activity consists exclusively in providing services for no direct consideration there is no basis of assessment and that the services are therefore not subject to VAT: ‘the ‘supply of services effected for consideration’ … does not include an activity consisting in playing music on the public highway, for which no remuneration is stipulated, even if the musician solicits money and receives sums whose amount is however neither quantified nor quantifiable’.

In Hillingdon Legal Resource Centre (LON/90/12Y) the charity operated a citizens’ advice centre and received grant funding from a local authority. It argued that the payment was consideration for a supply on the basis that there was a condition requiring a detailed report and accounts be submitted to the local authority to show that the grant was being used as originally intended. The Tribunal ruled that the conditions were simply ‘good housekeeping’ to ensure the correct use of the payment. Therefore no supply was made and the grant was outside the scope of VAT. Read HMRC’s summary of the case here.

Similarly in Wolverhampton Citizens Advice Bureau (MAN/96/1145), the CAB provided free legal and other advice and received grant funding from, among others, the local authority. The local authority, as a condition of grant funding, required a service level agreement to be entered into by the CAB, detailing opening times, levels of service etc. On this basis the CAB viewed the funding to be consideration for a taxable supply of services to the local authority. The VAT tribunal found that there was nothing in the service level agreement to support the CAB’s view. Although strings were attached to the grant given by the local authority, that in itself did not create a supply, because the local authority itself did not derive any direct benefit from the advice given: its only benefit was the indirect knowledge that it had helped fund a service that might be of benefit to its citizens. The only supplies made were to the local citizens; and because these were mainly free of charge, there was no supply for VAT purposes. Read HMRC’s summary of the case here.

In Bath Festivals Trust Ltd v Revenue & Customs [2008] UKVAT V20840 (22 October 2008), the Trust, which ran an international music festival, had a service level agreement with Bath City Council and received funding from the Council. The festival would have been run by the Council if the Trust had not run it. It was found that the Trust was supplying services to the Council and that the payments made by the Council were consideration for those services and not the payment of a grant. For this reason the payments made were within the scope of VAT. Read HMRC’s summary of the case here.

HMRC’s VAT Manual: Consideration: Payments that are not Consideration: Grants includes an extensive summary of relevant case law.