Introduction

The dispute in this case was whether the PDSA was entitled to recover VAT on the fees charged by veterinary practices under the Pet Aid scheme operated by PDSA. While the Tribunal found in favour of the Revenue, in my view there are good arguments that the matter would be decided differently in Australia and the case provides a useful example of the differences between the VAT legislation in the UK and the GST in Australia.

The facts

PDSA is a large national charity which undertakes significant charitable activities.  In 2010 PDSA spent 6 million pounds on the Pet Aid scheme which was sourced from charitable income of 5.6 million pounds and fees from registered pet owners of 0.4 million pounds.

The Pet Aid scheme was open to pet owners who did not have the financial resources to pay for veterinary services.  An application for registration had to be supported by a payment of 5 pounds, which was described as an administration charge.  The evidence was that the fee was imposed so that pet owners understood the value of the services offered by the PDSA.  Veterinary practices were required to enter into formal signed contracts with the PDSA to offer Pet Aid services.  The guidance notes to the contracts confirmed that registered pet owners were to receive free of charge veterinary attention within the scope of the services.

The PDSA paid to the Pet Aid practice a monthly capitalisation charge for each registered client irrespective of whether or not treatment was provided.  Additional payments were made for registered pets which suffered from chronic conditions.  The purpose of the payments was to provide a pool of money out of which those registered pets that fell sick or were injured to be treated free of charge.

The Tribunal identified the following relationships that made up the Pet Aid scheme:

• PDSA and registered pet owners – the owners paid a charge to PDSA who issued a certificate of eligibility which entitled the owners to free veterinary services from Pet Aid practices
• PDSA and Pet Aid practices – PDSA supplied the practices with a pool of money to fund the treatment of sick and injured animals
• The Pet Aid practices and registered pet owners – the practices provided diagnosis and treatment of sick and injured animals belonging to registered pet owners

The parties differed in their characterisation of these relationships:

• PDSA contended that there was a tripartite arrangement whereby the pet owner paid consideration to PDSA for veterinary services, which were provided by Pet Aid practices.  PDSA was making taxable supplies to the pet owners for consideration (the registration fee) and the Pet Aid practices were making taxable supplies to PDSA.  The VAT on the supplies from the Pet Aid practices was attributable to PDSA making taxable supplies to the registered pet owners.
• The Revenue contended that there were three separate transactions.  The transaction between PDSA and the registered pet owners was not a taxable supply for consideration – the predominant purpose of PDSA was to further its charitable objects of providing free veterinary services to those who cannot afford them.  The Pet Aid practices provided their veterinary services to the pet owners and not to PDSA.  The pool of money provide by PDSA constituted third party consideration for the supplies by the practices to the pet owners.

Looking at the facts and the contentions by the parties, there are some similarities between this case and Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84.  That case involved the question of whether the government entity was entitled to input tax credits in respect of payments made to taxi-cab operators under a program for the transport of individuals with disabilities.  The Full Federal Court agreed with the decision of the Federal Court that the government entity was entitled to input tax credits as the taxi-cab operators were making taxable supplies to the government entity.

Was PDSF carrying on economic activity?

The Revenue contended that the activities of PDSF in relation to the Pet Aid scheme was not an “economic activity” and therefore it was not making a taxable supply  to the pet owners. It is relevant to extract the whole of the Revenue’s argument:

Further the provision of Pet Aid to those eligible was not a taxable supply made by the Appellant in the course or furtherance of any business carried on by the Appellant.  According to HMRC the true nature of the Appellant’s activity was to provide charitable support to ensure that veterinary treatment was available to sick and injured animals for pet owners who appeared to the Appellant to the unable to afford private veterinary fees.  The Appellant was not concerned with the supply of services to the pet owners for consideration.

HMRC submitted that the registration fee paid by pet owners wishing to register with the Pet Aid scheme was outside the scope of VAT.  The fee was paid to cover the Appellant’s administration costs and was a flat fee entirely unrelated to the cost of the services provided by the Pet Aid practices.  There was no direct link between the payment made by the pet owners and the supply of services from Pet Aid practices.  Thus the Appellant was not making a taxable supply to the pet owners in the course or furtherance of any business carried on by it.

Before looking at the Tribunal’s response, it should be noted that under the GST Act these contentions would appear to fall away because:

• In the GST Act, the concept of “enterprise” extends beyond the activities of a business or “economic activities”.  For example, paragraph 9-20(e) extends the definition to include an activity, or series of activities, done “by a charitable institution”.  The focus of the Revenue on the purpose of PDSA’s activities would not appear to be relevant here as it would be clear that those activities were done in the course of carrying on an enterprise
• The underlined part of the extract refers to the requirement in VAT for there to be a “direct link” between consideration and supply for there to be a taxable supply.  The GST Act is very different – as it applies a much broader nexus, being “in connection with” or “in relation to”.
• Finally, the concept of “creditable purpose” in s 11-15 of the GST Act simply requires that the acquisitions be made to the extent that they are acquired in carrying on an enterprise (unless they relate to making input taxed supplies or of a private or domestic nature – neither of which would be relevant here).

In looking at the issue, the Tribunal outlined the impact of VAT on charities as follows:

It is common ground between the parties the wide definition of economic activity enables charities to make taxable supplies and recover input tax attributable to those taxable supplies.  The fact that an activity may be performed in the furtherance of charitable aims and objectives does not by definition prevent it from being deemed a business activity for VAT purposes.  In VAT terms charities are generally regarded as making a mixture of business and non-business supplies.

In finding for the Revenue, the Tribunal stated:

The Tribunal concludes from its findings that there was no direct link between the registration fee paid by the pet owners to the Appellant and the veterinary services supplied by the Pet Aid practices.  The registration fee was paid regardless of whether the animal of the registered Pet Owner received treatment during the currency of the eligibility certificate. The amount of the registration fee was flat and had no relationship to the costs of the veterinary services provided under the Pet Aid scheme.  The pet owner paid no consideration to the Pet Aid practice which was required to provide the veterinary services free of charge.  The Appellant did not provide the veterinary treatment direct to the pet owners…There was no element of sufficient reciprocity between the payment of the fee and the treatment received.

…

The fee was a contribution to cover the administration costs of the Appellant, and not a taxable supply by the Appellant in the course or furtherance of any business carried on by it.

Looking at this matter through the lens of the GST Act, it could be argued that PSDA was making a taxable supply to registered pet owners.  In return for the registration fee, pet owners acquired a right to have their pets receive free veterinary treatment and PDSA entered into an obligation to ensure that pet owners received free veterinary treatment.  Both those matters fall within the definition of “supply” in s 9-10(2) and it would appear clear that while the registration fee may not have had a “direct” relationship with the veterinary services actually provided, the registration fee was nevertheless paid “for, or in connection with” that fee.

To whom did the Pet Aid practices make supplies?

The dispute was whether the veterinary services were provided by the Pet Aid practice to the pet owner alone, to PDSA alone or to both PDSA and the pet owner.  If the supply was to the pet owner alone, PDSA could not claim credits – this was similar to the issue in Department of Transport.

PDSA contended that it received benefits from paying for the veterinary services, namely, enabling fulfilment of its charitable object and simultaneously discharging  its obligations to the pet owners.  The Revenue contended that the pet owners were the clients of the practices and those clients were liable to pay for those services.  The pool of money provided by PSDA constituted third party consideration meaning that the VAT was irrecoverable as the supplies were to the pet owners as final consumers.

In agreeing with the Revenue, the Tribunal characterised the transaction as follows:

The nature of the transactions between Pet Aid practices and registered pet owners comprised taxable supplies of veterinary services.  The Tribunal finds that it was the registered pet owners who initiated the treatment from the Pet Aid practices by taking their sick or injured animals to the practice.  The diagnosis of the illness and the treatment of the animal were carried out by the veterinary surgeon in consultation with the pet owners. The veterinary surgeon was required by his professional code of ethics to administer the necessary treatment.  The PET Aid documentation emphasised that the registered pet owners were the clients of Pet Aid practices.  On these facts the registered pet owners were the recipients of the taxable supplies.

The Tribunal also found that the role of PSDA was essentially a funding one and that the benefits received by PDSA were incidental and indirect to the services provided by Pet Aid practices.  The payments by PDSA were third party consideration.

In light of the findings of the Full Federal Court in Department of Transport, it can be argued that a different result would occur here, with the effect that the Pet Aid practices made two supplies, being the supply of the services to the pet owners and the supply to PSDA of the supply of services to pet owners. Further, it would not be necessary to find a direct link between the payments by PSDA (the pool of money) and the provision of the services, but rather only that those payments were “connection with” or “related to” those supplies.

Conclusion

The decision provides an insight into the difficulties in determining the GST implications of tripartite arrangements.  Also, it illustrates the potential dangers in relying on overseas decisions which involve different statutory regimes.  There is no doubt that the decisions in the UK, New Zealand and Canada can assist, but caution must always be had.