For-profit local authority waste collection services not necessarily 'commercial' court rules

Out-Law Analysis | 07 Oct 2016 | 10:21 am | 3 min. read

FOCUS: Local authorities which charge for waste collection services set up under the Environmental Protection Act (EPA) will take comfort from a recent tax tribunal decision that these services may still be exempt from VAT, even where they make a profit.

However, the decision did not close the door on the possibility that, based on the detailed facts of an individual case, an authority might be found to be acting outside its powers and duties under that Act, or that a different conclusion might be drawn as to the entitlement to the exemption in future.

The decision is also interesting as it relates to the increasing powers local authorities in England have to charge for services and to trade or act for commercial purposes through a company, as established by the 2011 Localism Act or the 2003 Local Government Act. In the view of the judge in this case, neither of these scenarios can apply in waste collection cases, as a local authority is required to provide these services on request by the EPA.

However, although not required to rule on the point, Mr Justice Warren commented that the fact that a service is provided for a charge "even if that charge is set so as to make a surplus or profit", does not necessarily "demonstrate that the purpose of providing the service is commercial".

"Indeed, the fact, if it be a fact, that a local authority is carrying out certain activities – including advertising and negotiating contracts with customers – in the same way as a private sector operator does not necessarily mean that the relevant service is being provided for a commercial purpose," the judge said.

This was down to the "wide social responsibilities" - and, in some cases, statutory duties - applicable to local authorities, something that does not apply to private sector companies, the judge said.

"[The local authority's] purposes in providing a particular service may be to fulfil those responsibilities," he said. "The service is not, in those circumstances, a commercial purpose."

The dispute arose as a preliminary point in judicial review proceedings brought by Durham Company Ltd, a private waste collection company, which was challenging the lawfulness of the VAT treatment of local authorities carrying out commercial waste collection and disposal services. Durham claimed that local authorities providing such services, in competition with commercial operators, could not be said to be doing so under a "special legal regime", as required by the VAT laws. They were effectively "going into business" as a matter of choice, rather than a legal obligation, in order to generate a commercial return.

The Upper Tribunal therefore had to decide whether supplies of trade waste collection services to business customers by a local authority were "activities in which it was engaged as a public authority".

Section 45(1)(b) of the EPA imposes a duty on waste collection authorities to arrange for the collection of commercial waste from premises in its area if the owner of the premises requests it to do so. The premises owner may be liable to pay a reasonable charge for such a service, unless the authority considers it inappropriate.

Local authorities are exempted from EU VAT laws in respect of the activities in which they engage as public authorities even where they collect dues, fees, contributions or payments in connection with those activities - provided that their treatment as non-taxable persons would not lead to significant distortions of competition. The EU courts have interpreted the phrase "as public authorities" to mean that the authority must be acting under a "special legal regime".

In a lengthy judgment, Mr Justice Warren concluded that the relevant EPA provision was capable of being this type of "special legal regime". This was demonstrated by considering the case of a local authority which provides a waste collection service only if requested to do so by an occupier of premises, for a reasonable charge which results in cost recovery and no surplus. Whether any particular local authority was acting "as a public authority" would depend on the relevant facts.

Once it was accepted that the relevant EPA provision was capable of being a "special legal regime", any activities carried out by a local authority in accordance with that regime must be subject to the VAT derogation – subject to the proviso regarding distortion of competition, according to the judge. Durham would have to identify a specific case or cases in which competition was being distorted, which would then have to be investigated in detail, the judge said.

Anne Bowden is a property law expert at Pinsent Masons, the law firm behind Out-Law.com