Flashback on ECJ Cases C-155/94 (Wellcome Trust Ltd) – Purchase and sale of shares and other securities by a trustee in the course of the management of the assets of a charitable trust is not an economic activity

On June 20. 1996, the ECJ issued its decision in the case C-155/94 (Wellcome Trust Ltd)

Context: Tax provisions — Harmonization of laws — Turnover taxes — Common system of value added tax — Economic activities within the meaning of Article 4 of the Sixth Directive — Purchase and sale of securities in the course of the management of a charitable trust — Excluded (Council Directive 77/388, Art. 4(2))

Article in the EU VAT Directive

Article 4(2) of the Sixth VAT Directive (Article 9 of the EU VAT Directive 2006/112/EC)

Article 9 (Taxable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
2. In addition to the persons referred to in paragraph 1, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.

Facts

In 1924, the Wellcome Foundation Ltd (hereinafter ‘the Foundation’) took over the pharmaceutical business of Burroughs, Wellcome and Co., founded as a partnership in 1880 by two pharmacists, Silas Burroughs and Henry Wellcome. Sir Henry Wellcome, who died in 1936, provided in his will that the management of all his shares in the Foundation was to be entrusted to the Wellcome Trust, the trustees of which were to use the proceeds from the shares for research into human and animal medicine and for the study of the history of medicine. Pursuant to a court order of 1 June 1992, the appellant was appointed to act as sole trustee in place of the natural persons who had previously exercised that function.
In 1980, the value of the Trust’s holding in the Foundation was £250 million. In 1984, it was considered prudent to diversify this holding, the assets of the Trust having consisted until then of shares and securities in the Foundation.
In 1985, the Charity Commissioners drew up a scheme authorizing the sale of part of the shareholding in the Foundation, subject to the condition that the Trust retained 50% of its voting shares. The shares in the Foundation were also exchanged for shares in a new holding company, Wellcome pic.
The sale effected in 1985 made available £200 million, which was used for making other investments.
By a court order of July 1987, the Trust’s investment powers were widened considerably. However, the order required the trustees to make all reasonable efforts to avoid engaging in trade when exercising their investment powers.
It also appears from the order for reference that, at the end of September 1991, the Trust’s investment portfolio was valued at £277 million. Purchases in that year amounted to £126 million, while sales totalled £94 million. Turnover in fixed investment securities amounted to £44 million and was greater than that relating to shares. The remaining assets consisted of 632 million shares in Wellcome plc, valued at £4 772 million, term deposits of £57.5 million, bank deposits and cash amounting to £12.5 million, along with debts, prepayments and tax credits totalling £4.2 million. Liabilities were £102 million, of which £92 million was for grants committed but not yet paid. Expenditure was £78 million, of which £61 million was on grants and £10 million on direct research. Total income for the year was £90.2 million, of which £67.4 million came from dividends from Wellcome plc; quoted dividends and interest came to £13.7 million and interest on term and bank deposits was £9.7 million. There was a loss of £670 000 on disposal of shares and securities.
On 2 March 1992, a joint statement made by the Trust and Wellcome pic gave details of the sale of a further tranche of shares by Wellcome plc (hereinafter ‘the Second Share Sale’). By a court order of 30 April 1992, approval was granted for an extension of the Trust’s powers with regard to the sale of securities, subject to the condition that the Trust retain 214 951 378 shares in Wellcome plc.
Since the scale of the Second Share Sale had been considered too big to be carried out through normal channels, namely by public subscription, it was decided to use the ‘bookbuilding’ method, a form of auction under which potential investors are given the opportunity to submit tenders for shares during a predetermined period, at the end of which the size and price of the offer are fixed in light of demand. This method of sale involved a long period of planning and considerable fees for the services of lawyers, financial consultants and public-relations experts, whose involvement was required in order to carry out the transaction.
The tender period began on 6 July 1992. The public offer closed on 21 July 1992, while the tender period ended some five days later. 288 million shares were sold at £8 per share, 33.22% of which went to purchasers outside the Community. The aim of the sale by tender was to raise funds for purposes of more diversified reinvestment. In fact, the transaction raised £2.18 billion. As in 1987, the Trust allocated the management of the funds to outside institutions, while keeping a very close watch on their results. nvestments in excess of £1.8 billion were made prior to 15 September 1992.
According to the order for reference, the Trust is also authorized to invest in options and a variety of other instruments not traditionally regarded as investments. At the time of the hearing, investments in futures and options represented between 1% and 2% of total investments. Their use is entirely defensive and nonspeculative. The Trust’s Director of Finance monitors all portfolios in order to ensure that the Trust does not accidentally acquire a reportable interest in any company.
Around the same time, investments of approximately £72 million had been made in a property portfolio including offices, shops and a distribution warehouse. In respect of some of the properties, the Trust elected to waive the exemption provided for by the 1983 Value Added Tax Act (‘the 1983 VAT Act’), an option permitted under Article 13C(a) of the Directive. The Trust also invests in venture capital projects, which are limited in time and liability. Finally, quite apart from any investment in marketable securities, the Trust earns interest from cash balances by making direct loans to institutions and banks.
By letter of 11 March 1993, the Trust, relying on Article 17(3)(c) of the Directive, applied for a refund of £297 832.65 as input VAT on expenditure incurred in the preparation of the Second Share Sale, which the Trust considers to be an economic activity within the meaning of the Directive. This amount represented 33.22% of the total tax paid on the expenditure incurred and corresponds to the percentage of shares sold to persons resident outside the Community.
Article 17(3)(c) of the Directive requires Member States to grant to every taxable person the right to a deduction or refund of the VAT due or paid in respect of goods or services supplied or to be supplied to him by another taxable person in so far as they are used for the purposes of:
‘…
(c) any of the transactions exempted under Article 13B(a) and (d), paragraphs (1) to (5), when the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community’.
Under Article 13B(d)(5) of the Directive, the following are exempted: ‘transactions, including negotiation, excluding management and safekeeping, in shares, interests in companies or associations, debentures and other securities, excluding:
— documents establishing title to goods,
— the rights or securities referred to in Article 5(3)’.
Under section 2(1) of the 1983 VAT Act, VAT is chargeable on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
By decision of 20 March 1993, the Commissioners rejected the above application on the ground that the shares and other securities held by the Trust were held for charitable purposes and that the disposals in question had not been made in the course or furtherance of any business carried on by the Trust, but in pursuance of the normal management of investments in order to fund charitable activities. Consequently, they concluded that the sums of tax charged on the provision of the professional services of which the Trust had availed itself in connection with the Second Share Sale did not constitute input tax for the purposes of the 1983 VAT Act.
The Trust appealed against that decision to the Value Added Tax Tribunal, London. According to the Tribunal, the issue is whether the appellant is a taxable person, either in relation to its activities specifically connected with the Second Share Sale or in relation to its general investment activities, of which that sale was a part.

Questions

(1) Is the term “economic activities” in Article 4(2) [of the Directive] capable of covering sales of shares and securities by a person who is not a dealer in shares and securities?
(2) Can a multiplicity of share sales by a person who is not a dealer in shares to a large number of purchasers on the same day involving sophisticated preparation over a considerable period of time of itself constitute “economic activities” within Article 4(2)?
(3) If the reply to Question 1 and/or 2 is in the affirmative, are share sales by such a trustee to be regarded as effected by a “taxable person acting as such” within Article 2(1)?
(4) In answering Questions 1 and/or 2 and/or 3, is it relevant to consider whether the sale of shares and securities is the predominant concern of the activity in the course of which the sales take place; and, if so, how should such activity and its extent be defined?

AG Opinion

(1) The term ‘economic activities’ in Article 4(2) 12 does not cover sales of shares and securities by a person who is not a dealer in shares and securities but is acting in the management of his own assets.
(2) A multiplicity of share sales by a person who is not a dealer in shares, but is managing his own assets, to a large number of purchasers on the same day involving sophisticated preparation over a considerable period of time cannot of itself constitute ‘economic activities’ within Article 4(2).
(3) In the alternative: If the reply of Question 1 and/or 2 is in the affirmative, share sales by such a trustee are to be regarded as effected by a ‘taxable person acting as such’ within Article 2(1).
(4) In answering Questions 1 and/or 2 and/or 3, it is not relevant to consider whether the sale of shares and securities is the predominant concern of the activity in the course of which the sales take place.

Decision

The concept of economic activities, within the meaning of Article 4(2) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, is to be interpreted as not including an activity, such as that at issue in the main proceedings, consisting in the purchase and sale of shares and other securities by a trustee in the course of the management of the assets of a charitable trust.

Summary

The concept of economic activities within the meaning of Article 4(2) of the Sixth Directive must be interpreted as meaning that it does not include an activity such as that at issue in the main proceedings, which consists in the purchase and sale of shares and other securities by a trustee in the management of the assets of a charitable trust.

Source