EXEMPTION – Provision of sporting facilities – Appellant wholly-owned subsidiary of commercial group – Land for golf course etc. made available to Appellant by parent company at no charge – Loans made by Appellant to its parent company at no interest – Interest charged retrospectively – Whether Appellant a not-for-profit organisation - Whether not charging interest constitutes deemed distribution of profits to its member – Whether situation different in period when interest is charged – Value Added Tax Act 1994, Sch 9 Group 10 – EC Council Directive 77/388 art 13A

LONDON TRIBUNAL CENTRE

	MESSENGER LEISURE DEVELOPMENTS LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MISS J C GORT  (Chairman)
						MR MICHAEL SILBERT

Sitting in public in London on 7-9 April, 22 and 23 May 2003

Roger Thomas of counsel, for the Appellant

Andrew MacNab of counsel, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal against assessments of tax notified to the Appellant on 18 June 2001 and 26 June 2001, subsequently amended respectively on 16 and 17 August 2001.  The amount of the first assessment as amended is £322,750 with interest of £53,749.91.  The amount of the second amended assessment is £292,986 with interest of £21,450.37. The periods covered by the assessments are respectively 1/9/98 to 29/2/00 and 1/12/99 to 28/2/01, but the former assessment relates to the period to 31 December 1999 and the latter relates to the period from 1 January 2000 when Schedule 9 Group 10 of the Value Added Tax Act 1994 was amended.  The appeal is also against a further assessment dated 17 August 2001 in the sum of £26,169 VAT and interest of £193.43, which was not originally the subject of an appeal.

The Issue

2.	The main issue is whether or not the Appellant has correctly accounted for output tax on supplies by it of sporting facilities to members of a golf and country club.  The Appellant contends that the relevant supplies were exempt supplies by virtue of  Group 10 of Schedule 9 to the Value Added Tax Act 1994 (VATA), both before and after its amendment, with effect from 1 January 2000, by the Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999, SI 1999/1994, under Article 13A1(m) of the Sixth Directive. The Commissioners contend that supplies were standard rated.  Group 10 exempts supplies of sporting services made to individuals by non-profit-making bodies.  The main dispute is as to whether or not the Appellant was at all material times or at any relevant time a non-profit-making body.   

Legislation

3.	Article 13 of the Sixth Directive provides for exemptions for certain activities in the public interest.  

Article 13A.1. Without prejudice to other community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of  preventing any possible evasion, avoidance or abuse:

…

(m)	certain services closely linked to sport or physical education supplied by non-profit-making organisations to persons taking part in sport or physical education;
…

2(a)	Member States may make the granting to bodies other than those governed by public law of each exemption provided for in (1) … (m) … of this Article subject in each individual case to one or more of the following conditions:

-	they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied,
-	they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned, 
…

(b)	the supply of services or goods shall not be granted exemption as provided for in (1) … (m) … above if:

-	it is not essential to the transaction exempted,
-	its basic purpose is to obtain additional income for the organisation by carrying out transactions which are in direct competition with those of commercial enterprises liable for value added tax.

4.	Section 4 of the Value Added Tax Act 1994 gives effect to Article 2 of the Sixth Directive as follows:

4.	Scope of VAT on taxable supplies 

(1)	VAT shall be charged 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.

(2)	A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

5.	Section 31 of the Value Added Tax Act and Group 10 of Schedule 9 to VATA give effect to  Article 13.A(1)(m) of the Sixth Directive.  Section 31 provides:

31.	Exempt supplies and acquisitions

(1)	A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 …

6.	Before 1 January 2000 Schedule 9, Group 10 (“Sport, Sports Competitions and Physical Education”) provided (so far as is material):

Item No

3.	The supply by non-profit making body to an individual, except, where the body operates a membership scheme, an individual who is not a member, of services closely linked with and essential to sport or physical education in which the individual is taking part.

7.	Group 10 was amended with effect from 1 January 2000 by the Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999, SI 1999/1994. It now provides (so far as material):

Item No.

3.	The supply by an eligible body to an individual, except, where the body operates a membership scheme, an individual who is not a member, of services closely linked with and essential to sport or physical education in which the individual is taking part.

Notes

…

(2A)	Subject to Notes (2C) and (3), in this Group “eligible body” means a non-profit making body which –

(a)	is precluded from distributing any profit it makes …;
(b)	applies in accordance with Note (2B) any profit it makes from supplies of a description within Item 2 or 3; and 
(c)	is not subject to commercial influence.
(2B)

(2C)	…

…

(4)	For the purposes of this Group a body shall be taken, in relation to a sports supply, to be subject to commercial influence if, and only if, there is a time in the relevant period when –

(a)	a relevant supply was made to that body by a person associated with it at the time; …

(5)	In this Group “the relevant period”, in relation to a sports supply, means –

(a)	where that supply is one made before 1 January 2003, the period beginning with 14 January 1999 and ending with the making of the sports supply; …

(6)	Subject to Note (7) in this group “relevant supply”, in relation to any body, means a supply falling within any of the following paragraphs –

…

(b)	the grant of any licence to occupy any land which at any such time was or was expected to become sports land;

…

(7)	A supply which has been, or is to be or may be, made by any person shall not be taken, in relation to a sports supply made by any body, to be a relevant supply for the purposes of this Group if –

…

(e)	the supply in question –

(i)	is a grant falling within Note (6)(a)-(c) which is made for no consideration; but
(ii)	falls to be treated as a supply of goods or services, or (if it is made) will fall to be so treated, by reason only of the application, in accordance with paragraph 9 of Schedule 4, of  paragraph 5 of that Schedule.  

(8)	Subject to Note (10), a person shall be taken, for the purposes of this Group, to have been associated with a body at any of the following times, that is to say –

(a)	the time when a supply was made to that body by that person;
…

if, at that time, or at another time (whether before or after that time) in the relevant period, that person was an officer or shadow officer of that body …

(9)	Subject to Note (10), a person shall also be taken, for the purposes of this group to have been associated with a body at a time mentioned in paragraph (a), (b) or (c) of Note (8) if, at that time, he was connected with another person who in accordance with that Note –

(a)	is to be taken to have been so associated at that time; …

(10)	Subject to Note (11), a person shall not be taken for the purposes of this group but have been associated with a body at a time mentioned in paragraph (a), (b) or (c) of Note (8) if the only times and the relevant period when that person or that person connected with him was an officer or shadow officer of the body are before 1 January 2000.

…

(17)	For the purposes of this group any question whether a person is connected with another shall be determined in accordance with Section 839 of the Taxes Act (connected persons).

8.	Section 839 ICTA 1988 provides as follows:

839	Connected persons

(1)	For the purposes of, and subject to, the provisions of the Tax Acts which apply to this section, any question whether a person is connected with another shall be determined in accordance with the following provisions of this section (any provision that one person is connected with another being taken to mean that they are connected with one another).

…

(5)	A company is connected with another company –

(a)	if the same person has control of  both, or a person has control of one and persons connected with him, or he and persons connected with him, has control of the other; …

(6)	A company is connected with another person if that person has control of it or if that person and persons connected with him together have control of it.

…

(8)	In this section –

…

“control” shall be construed in accordance with section 416; … 

The facts

9.	The Tribunal heard evidence from Mr S J Shah, Director of the Appellant company, Mr A H Stone, solicitor and Mr D Z Lopian, Chartered Accountant on behalf of the Appellant. Until 1 September 1998 a company known as Messenger Leisure Ltd (“Leisure”) had carried on the business of providing golf and country club facilities at various places as follows: the Essex Golf and Country Club at Earls Colne in Essex; the Suffolk Golf and Country Club at Bury St Edmunds and the Norfolk Golf and Country Club near Norwich.

10.	Prior to 1 September 1998 the Appellant had been a dormant company known as the Suffolk Ltd which formed part of the Messenger Group of companies.  The Messenger Group Ltd (“MGL”) is a holding company whose Abbreviated Accounts for the year ended 30 April 1999 show that its authorised, allotted, called-up and fully paid share capital was at that time as follows:

£1,496,660 A Ordinary shares at 10p each … £149,666
£399,080 B Ordinary Shares at 10p each … £39,908
All A Ordinary Shares were owned by S J (Eddy) Shah, MGL’s sole director.  MGL is controlled by Mr Shah.

11.	The Appellant company was formed in August 1998 when the Suffolk Ltd changed its name and constitution to “Messenger Leisure Developments Ltd” which was registered for VAT on 1 September 1998.  The Appellant then began to provide the sporting services from the Essex and Suffolk Clubs which had previously been provided by Leisure. It took over the supply of sporting facilities at the Norfolk on 1 November 1998. It was the intention of both the Appellant and Leisure that Leisure would supply social and non-sporting services to their clientele and the Appellant would supply all the sporting services.  It was enabled to do this having been granted an oral rent-free licence to make use of the sporting facilities, including the golf courses, belonging to Leisure.

12.	Leisure itself is a wholly owned subsidiary of MGL, which is owned by Mr & Mrs Shah. Mr Shah is its chairman and managing director and, ultimately, its controller. Its principal activity is “the acquisition, development and operation of leisure complexes”. At the relevant time its interests and activities were as follows:

(i)	From about 1994 it owned the lease of and operated the Essex Golf and Country Club in Essex (“the Essex”).  It sold the Essex to Clubhaus Plc in about 2000.

(ii)	In or about 1996 it bought the Suffolk Golf and Country Club (“the Suffolk”).

(iii)	In or about 1997 it acquired a club in Reymerston, Norfolk (“the Norfolk”).  

13.	By a letter dated 12 August 1998 Leisure had informed the Commissioners of  its intention to transfer to the Appellant, which was described as a non-profit making company, the operation of the sports facilities at three golf and country clubs which at that time were operated by Leisure.  The Commissioners were informed that all club membership subscriptions would be collected by Leisure and that it was Leisure’s understanding that those club membership subscriptions would be exempt from VAT.  It was never disputed on behalf of the Appellant that it was brought into operation to enable sporting facilities to be supplied to individuals without the imposition of VAT.  It was claimed on behalf of the Appellant that whilst what happened may have been tax mitigation, in the sense that the company did what the legislation encouraged it to do, it was not tax avoidance.  

14.	On 1 September 1998 Leisure acquired the entire issued share capital of the Appellant for a cash consideration of £2, which, according to the Respondents’ skeleton submissions, represented both the book value and fair value of net assets of the company at the date of acquisition. Since then the Appellant has been a wholly owned subsidiary of Leisure. On its form VAT1  the Appellant’s main business activity is described as “managing the playing facilities of golf and country club”.  Mr Shah is its sole director.

15.	The clubs operated by Leisure are all different from each other but all have golf courses.  The Essex had a leisure centre as well as a golf club.  It had family centres which were based around sport.  It had changing rooms, six tennis courts, a restaurant, a bar, and later on had a hotel, a swimming pool and a gymnasium.  These were all funded from the Messenger Group Pension Fund.

16.	The Norfolk did not have tennis courts, but it had a gymnasium, a pool, a restaurant, a function room, a golf club area, including an 18-hole and a 9-hole course, but it had no driving range.  The Norfolk was eventually sold in March 2002.  

17.	The Suffolk has a gymnasium, a swimming pool, changing rooms, an 18-hole golf course, an aerobics hall and a hotel.  The money for this came from the parent company, MLG.  The freehold of the land is owned by Leisure.  

18.	Mr Shah gave evidence to the Tribunal.  He is a director of the company which owns Wentworth club.  MGL is a shareholder of Wentworth.  Mr Shah is a sole director of the Appellant company.  

19.	It was Mr Shah’s stated intention to create something different from either an elite private members club or a municipal golf course.  He wished to provide golf and other sporting facilities which families could use and enjoy without the cost being prohibitive.  He wished to invest properly in sporting facilities at these clubs as it was his view that it was often the case in both members and proprietary clubs that they were over-used, not looked after sufficiently, and deteriorated to the detriment of the players.  It was his stated aim to provide improved facilities, and he said he was not interested in extracting profit from the business.  He was not challenged on this in cross-examination.

20.	A considerable investment was made in the Essex prior to its sale in November 2000, and there was also investment in the facilities of the Suffolk and the Norfolk.  Mr Shah stated that the intention of all the clubs was to make a profit in order to re-invest in the sporting facilities.  It was also Mr Shah’s intention, having built up a surplus in the Appellant, that the Appellant purchase a club of its own which could become a flagship club.  It was his intention to build a chain of such clubs.

21.	Mr Shah was aware of the legislation enabling providers of sporting facilities to be exempt from VAT and sought professional advice on how best to benefit from this. Details were obtained from the Wentworth Club as to how they operated. He was concerned that other clubs which were not true membership clubs were enabled by the VAT exemption to cut their subscription rates and green fees to the detriment of his own clubs.  

22.	The authorised share capital of the Appellant is £1 million, divided into 999,999 `A’ Ordinary Shares and 1 `B’ share each of £1.  There are two issued shares, one of each class.  The `B’ share entitles the holder thereof to nothing but the return of  the £1 paid up share capital.  However, the `B’ share carries the right to out-vote the `A’ shares on any attempt by the `A’ shareholders to amend Clause 3(v) of the Memorandum of Association of the company (see below).  The Tribunal was not informed who owns the `B’ share.

23.	The principal object of the Appellant is set out in Clause 3 of the Company’s Memorandum of Association:

“(a)	To carry on the business of managing the playing facilities of a golf and country club (`the Club’) at such locations as the company may in its absolute discretion decide and to provide all manner of golf, sporting and recreational facilities, for the benefit of members of the club for the benefit of visitors to the club and for the benefit and promotion of golf and other sporting and recreational facilities generally in the United Kingdom.”

24.	Until 21 December 1999 Clause 3(v) of the Memorandum was in the following form:

“(v)	Not to distribute any profits of the company to its shareholders (so that this restriction shall override any other provisions of this Clause 3) but to utilise any surplus funds to improve the playing facilities provided by the company for the benefit of the persons using those facilities, for the benefit of employees of the company, for any charitable or public purposes having as their objects the promotion of golf and other sporting activities in the United Kingdom and otherwise for the attainment of the objects herein set out.”

25.	That provision was deleted and replaced by the following provision which took effect as from 21 December 1999:

“(v)	Not to distribute any profits of the company except to its shareholders on winding up or dissolution of the company or to another non-profit making body (so that this restriction shall override any other provisions of this Clause 3) and to utilise any surplus funds for the continuance or improvement of the facilities for sport or physical education made available or provided by the company for the benefit of individuals using those facilities.”

26.	This amendment was designed to conform to an amendment to the VAT legislation relating to the sports exemption in Item 3 of Group 9 to Schedule 9 which was introduced with effect from 1 January 2000.  At the same time the Articles of Association of the Appellant were amended to remove any power it might have had under Articles 102 to 108 of Table A to declare and pay dividends, or, under Article 110, to capitalise profits or appropriate the same to members.  The amendments were effected by a special resolution dated 21 December 1999 at a meeting at which Mr and Mrs Shah were both present.  It was signed on behalf of Leisure.

27.	The annual report for Leisure for the year ended 30 April 1999 shows that in addition to Mr and Mrs Shah there were five other directors of  Leisure who had held office since 1 May 1998, although a Mr M I Jones resigned on 29 April 1999.  It also states that none of the directors of the company have any beneficial interests in the shares of the company or its subsidiary company.  The interests of the directors in the share capital of the ultimate parent company are said to be shown in its financial statements.  The Tribunal did not see the financial statements of the parent company. It was not however disputed that Mr Shah at all relevant times was in control of the group.

28.	The director’s report of the Messenger Group Ltd for the year ended 30 April 1999 shows that Mr Shah owned 1,496,660 `A’ shares but did not own any `B’ shares.  It was wrongly stated in the Commissioners’ statement of case that the Appellant owned a golden share in Leisure which gave it the majority of the vote and thus controlling interest.  This is not the case. 

29.	Up until December 1999 the Appellant did not have a bank account.  Initially its income was paid into Leisure’s bank account and its expenses were paid out from this account.  A separate bank account was subsequently set up.  The money generated by the Appellant was held in an intercompany loan account which was in Leisure’s name.  No interest was provided for in the company’s first set of accounts to 30 April 1999.  Following a visit by Customs and Excise to the Appellant this matter was remedied in the company’s accounts for the year ended 30 April 2000.  Not only was interest paid on the loan to Leisure at the rate of 1.625% over base rate, which is the rate at which Leisure was charged interest by its bankers, but interest at the same rate was also paid retrospectively as from the start of the loan arrangement.  £108,890 87,112 net of tax) was paid by Leisure to the Appellant in the period to 30 April 2000.

30.	It was an issue between the parties as to whether this loan represented a distribution by the Appellant.

31.	At the time the Appellant was set up no thought was given to the fact that it would be necessary to charge interest on the money in the Leisure account.  The fees paid by the members of the different Clubs were divided between Leisure and the Appellant to represent the contribution each made.  Because the members at the time had already set up direct debits, and to avoid the necessity of issuing new direct debits, it had been arranged that the money would continue to go into Leisure’s account.  It was a further issue between the parties as to whether the arrangement for the payment of interest which was subsequently arrived at  was at arms length.

32.	Clause 29.1 of the Rules and Regulations of the Club state:

“It is understood by each Member that the Proprietor has provided the Club and the Club premises in the furtherance of the proprietor’s business and the Club is to be run as a business for profit.”

Clause 23 provides that:

“The Club may be dissolved at any time by the Proprietor”.

33.	The Appellant is a company and not a Members Club.  Members of the Club pay an annual membership fee.  The Rules of the Norfolk state at paragraph 3.1: “The Club is a proprietary Club, the proprietor being Messenger Leisure Ltd & Associated Companies (“the Proprietor”).”  Paragraph 3.4 states: “The members of the Club are under no financial liability by reason of their membership of the club, save the annual membership fee, which is to be determined by the Proprietor from time to time.  All members have sporting services and facilities supplied by an associated company, Messenger Leisure Developments Ltd. All non-sporting services and facilities are supplied by Messenger Leisure Ltd.”

34.	The Norfolk by rule 23 may be dissolved at any time by the Proprietor.  Clause 29(1) provides: “It is understood by each member that the Proprietor has provided the club and the club premises in the furtherance of the Proprietor’s business and that the club is to be run as a business for a profit”.

35.	The membership application form for the Suffolk (we were not told what year this relates to) shows that there are separate membership fees for leisure activities and for tennis and golf.  Leisure takes £60 per member as its share of the membership fee.  The membership fees for joining vary between £70 (tennis only) and £300 for golf and tennis together. The joining fee for Leisure use (including tennis) is £130.  In addition there are monthly subscriptions of varying amounts to be paid by direct debit.

36.	It is to be noted that the Club itself is a company which is a profit-making body which supplies services to its so-called members. The Rules and Regulations set out the contract which exists between the club members and Leisure and its associated companies, including the Appellant. The “members” of the respective clubs are in fact no more than customers of the Appellant and Leisure. The arrangement that Leisure receives £60 a year as its share of the membership fees of the Suffolk is the same arrangement as pertains to all the different clubs owned by Leisure.  The rules of the Norfolk are the same as those that exist for each of the other clubs.  

37.	On 6 November 2000 the Essex was sold. The total consideration negotiated for the sale of the whole complex which included golf courses, a main leisure complex and a hotel, was £5.5m. The land and buildings of the hotel were owned by the Messenger Group Pension Fund. Savilles had earlier valued the hotel at approximately 23.7% with the balance to the actual club. This percentage was applied to arrive at the value of the hotel in the pension fund so that approximately £1.3m of the total consideration was paid to the pension scheme for the bricks and mortar of the hotel.  The land and leasehold property were valued at £3.3m and the fixed and loose plant were valued at just over £497,000, with nominal values being put in for business information, contracts and business intellectual property at £1 each.  A balance of £400,000 was left representing goodwill. There was discussion between the accountants and the lawyers to ensure that the Appellant and Leisure received the consideration to which each was entitled, including any goodwill attributable to each separate legal entity. The Appellant had the membership lists and the green fee income, Leisure had all the other operations, including the operation of the hotel, and as at the time both companies had a similar level of turnover, it was agreed that the sum representing goodwill should be split equally between the two and each should receive £200,000 in respect of it.  

38.	The Essex was previously held on a lease which cost £¼ million per annum.  The money which was received from the sale of the Essex was later re-invested in the Wiltshire club.  It was by virtue of the fact that the Appellant and Leisure were the joint owners of the Essex that the goodwill was apportioned between the two companies.  

39.	The Appellant’s accounts for the year ending 1999 show at Note 7 that it had a retained profit for the period of £557,016.  Those accounts refer to Clause 3(v) of the Companies Memorandum of Association and under paragraph 9, which is headed “Control”, is stated: “The ultimate parent company is Messenger Leisure Ltd, a company incorporated in Great Britain, and the company is under the ultimate control of its director Mr S J Shah.”

40.	The Appellant’s accounts for the year ending 2000 show a retained profit of £1,492,636.  Added to the balance of 1 May 1999 of £557,016 the total retained was £2,049,652.  These large surpluses were made because the company pays no rent for the use of the land nor for the administrative facilities provided by Leisure. 

41.	Leisure is the only shareholder in the Appellant.  Mr Shah is the chairman and managing director of MGL. It is open to Leisure to change the constitution of the Appellant. MGL is the only member of Leisure and it is open to MGL to change Leisure’s memo.  

42.	The individual clubs accounts are consolidated on the computer system but the accountants split up the expenditure retrospectively.  Whilst the accounts of the Appellant and Leisure are consolidated, each company also provides its own accounts.  The Appellant’s account for the year ended 30 April 1999 showed that it was owed £917,731 by Leisure.  It had a turnover of £1,447,192.  It made a profit on ordinary activities after taxation of £557,016.  

43.	The Appellant’s accounts for the year ended 30 April 2000 show that it made a profit on ordinary activities after taxation of £1,492,636.  Shareholders’ funds stood at £2,049,654.  The amount owed by Leisure was £2,077.473.

44.	The Appellant’s accounts for the year ended 30 April 2001 show a profit on all activities before taxation of £897,088.  The shareholders’ funds stood at £2,534,878.  Leisure owed the Appellant £3,295,288.  Under the reconciliation of the operating profit to a net cash outflow from operating activities an increase in debtors shows the figure £1,214,977.  The profit the Appellant company made in each of these three years was ascribed by Mr Shah to the loan by it to Leisure.  

45.	It was Mr Shah’s opinion that the companies would not be able to continue in business if the Appellant had to charge value added tax because there was no longer a level playing field.  If it were obliged to charge value added tax it would have to charge an additional £150-£200 per annum per member.  

46.	The accounts show that a sum of money was spent by the Appellant on equipment for the gymnasium.  Other money was spent on improving the greens, putting in new tees and bunkers on the golf course and building a swimming pool.  Money had also been spent on landscaping the course at the Essex.  A large amount of money was spent on the Norfolk on reseeding the fairways.  Irrigation had been put in at the Essex.  All the fixed assets were held by Leisure.  

The Appellant’s case

47.	The grounds of appeal as stated in the Notice of Appeal are:

“The Appellant is a company limited by shares which is unable to distribute its profits except as provided for in Notes (2A)(a) and (2A)(b) Group 10 Schedule 9 VATA 1994.  Its supplies to those persons taking part in sport and physical education are accordingly exempt from VAT. This appeal lies under s.83 VATA 1994.”

48.	The Appellant’s principal contention was that it was at all material times a non-profit-making body.  Not only did the Appellant satisfy the criteria laid down in the Sixth Directive, but it also satisfied certain other tests which the United Kingdom has included in the Notes to the relevant exemption.  It was however part of the Appellant’s case that the United Kingdom has never properly implemented the Directive at all, and if it were to be found that it had failed one or more of the tests laid down in the United Kingdom legislation that would not affect the outcome of the case, since those tests have no community validity.

49.	Prior to 1 January 2000 the United Kingdom had not sought to implement any part of Article 13A(2)(a).  The first assessment in this appeal is therefore governed by the provisions of Article 13A 1(m). In 1994, with retrospective effect, the United Kingdom amended what was then the Value Added Tax 1983 Schedule 6 Group 10, which subsequently became Value Added Tax Act 1994 Schedule 9 Group 10, by adding the exemption contained in Item 3 of the Group.

50.	Between 1 September 1998 and 31 December 1999 the only limitations imposed by the United Kingdom on the availability of the Item 3 exemption were to be found in Notes 1-3 of Group 10:

(1)	Item 3 does not include the supply of any services by a non-profit-making body of residential accommodation, catering or transport. 

(2)	An individual shall only be considered to be a member of a non-profit-making body for the purpose of Item 3 where he is granted membership for a period of three months or more.

(3)	In Item 3A “non-profit-making body” does not include:

(a)	a local authority; 
(b)	a government department within the meaning of section 41(6); or
(c)	a non-departmental body which is listed in the 1993 edition of the publication prepared by the Office of  Public Service and Science and known as public bodies.

51.	It was submitted that the United Kingdom (at least prior to the amendments made to Group 10 which took effect as from 1 January 2000) took no (or no other) steps to implement article 13A(2) of the Sixth Directive.  It was not accepted that Notes (1) and (3) were founded on Article 13A(2)(b).  The Appellant relied on the      serious doubts which were expressed as to the vires of the membership conditions built into the legislation in Notes 2 and 3, and adopted the reasoning of the learned chairman in the tribunal in the case of Basingstoke and Districts Sports Trusts Ltd (VAT decision 13347) to the effect that Note 3 is incompatible with the Sixth Directive.

52	It was submitted that in relation to the assessments for the prescribed accounting periods prior to 1 January 2000 all that the Appellant needed to prove to succeed in the appeal is that it was a non-profit-making body.

53.	It was accepted by Mr Thomas that the exemption relied on in the Sixth Directive must be interpreted strictly, but he submitted that this did not mean that an exempting provision such as Article 13A(1)(m) must be interpreted restrictively.  Provided that the taxpayer was able to show that his tax position fell within the category of exemption laid down by the Directive, the Member State had a clear and unconditional obligation to exempt the supplies that he makes: see EC v Spain [1998] STC 1237 referring to its earlier decision in Ursula Becker [1982] ECR 53, at paragraph 32.  The Tribunal was also referred to Customs and Excise Commissioners v Zoological Society of London, the opinion of the Advocate General Jacobs at paragraphs 17ff.

54.	It was submitted that not only must the terms of the Sixth Directive be given a community meaning, but they must also be given a community-wide application: see EC v Germany [2002] STC 982, the judgment at paragraph 44.  There was no scope in Article 13A for individual Member States to tailor the extent or availability of an exemption by reference to circumstances or legal situations prevailing in the local state: see EC v Spain [1998] STC 1237 at paragraph 14, 18, and 21; Customs and Excise Commissioners v London Zoological Society [2002] STC 521, Advocate General paragraphs 22-23; Criminal Proceedings v Hoffman Case C-144/00, judgment, paragraph 38.  The Commissioners sought to limit the application of article 13A(1)(m) to members clubs which they envisaged as a paradigm example of a “non-profit-making organisation”, whereas the exemptions must be available to all forms of organisation which can be identified as non-profit-making.  

55.	The effect of the United Kingdom authorities is that the meaning of non-profit-making is:

(a)	that an organisation that seeks to make profits systematically is not disqualified from the status of a non-profit-making body; rather
(b)	what is crucial is that it should not  pursue the objective of achieving profits for its members; and
(c)	it should not distribute any profits it makes to its members.

It was submitted that the Appellant satisfied all these tests.

56.	In the present case the Commissioners had erroneously concluded that the Appellant was either a profit-making body or formed part of Mr Shah’s profit-making empire.  This was not in fact the case.  The company was not able to distribute profits and Mr Shah was not the proprietor, as was clear from the Rules, and it was not the Club which was the non-profit-making body, it was the Appellant.  

57.	The amendment of Clause 3(v) of the Companies Memorandum of Association was designed to conform to the amendment to the VAT legislation introduced with effect from 1 January 2000.  At the same time, for the avoidance of doubt, the Articles of Association of the company were amended to remove any power the Appellant might otherwise appear to have had – under  articles 102-108 of Table A – to declare and pay dividends or, under article 110, to capitalise profits or  appropriate the same to members.  As a  matter of company law it in fact had no such power since it was settled law that the Articles of Association are subordinate to, and controlled by, the Memorandum of Association. The wording of the Special Resolution of 21 December 1999 did not add a non-distribution of profits clause, but modified one which already existed.  The inclusion of such objects in the company’s Memorandum of Association was designed to entrench corporate obligations not to distribute profits and to assign them to the kind of purposes approved by article 13A(1)(m).  The Appellant had taken all possible constitutional steps to secure the retention of surpluses within the company and their assignment to the continuance or improvement of services closely linked to sport or physical education.

58.	At no time had the Appellant sought to distribute in any form any part of the surpluses it has made from the pursuit of its principal object. While surpluses for each year may have been carried to “shareholders funds” in each set of accounts, this was simply because there was nowhere else in the accounts for the surpluses to be taken;  the accounts in fact should be read in the light of the Memorandum of Association and Note 7 to the accounts.  

59.	The Tribunal was referred to the decision of the Court of Justice in Kennemer [2002] STC 502 for the principle that an organisation is to be classified as being non-profit-making by having regard to the aim which the organisation pursues.  That is to say, it must not have the aim of achieving profits for its members: see the judgment at paragraph 26.  Provided that it was not commercial in that narrow sense identified by the Court of Justice, an organisation may be accepted as non-profit-making.  The test was thus not one of whether it was commercial in a wider sense, whether it intended to make profits, or services, for its own purposes, but whether it aimed to make profits with the intention of distributing them to its members as profits.

60.	It was accepted that insufficient thought was given at the commencement of the Appellant’s business to the effect of banking the takings in Leisure’s account.  The motivation for using Leisure’s bank account was the convenience of keeping  the existing direct debits, and part of that sum (£60 per member per annum) belonged to Leisure in any event.  As soon as this matter was drawn to their attention, the parties had agreed that Leisure would pay the Appellant interest at a commercial rate on all the sums belonging to the Appellant standing in Leisure’s account at the bank.  The rate was charged retrospectively as well as prospectively and was the same as that charged by Leisure’s bankers on overdraft, and was thus higher than that which the Appellant could itself have obtained by the employment of the same funds in the market. Any benefit to Leisure was obtained unintentionally. The countervailing advantages being received by the Appellant in the form of the provision of the use of the various facilities for no consideration should be taken into account.  There had been no reduction in the net assets of the Appellant as a result of  the loan.  In the alternative, if this were not accepted, then the Tribunal was asked to conclude that the Appellant was a non-profit-making company entitled to the exemption from the date when the loans were subject to interest.

61.	The Appellant relied on Kennemer Golf Club in support of its contention that it was at all times a non-profit-making body.  In particular it relied on the following passages:

“26.	On that point, it must be observed first of all that it is clear from Art 13A(1)(m) of the Sixth Directive that an organisation is to be classed as being “non-profit-making” for the purposes of that provision by having regard to the aim which the organisation pursues, that is to say that the organisation must not have the aim, unlike a `commercial’ undertaking of achieving profits for its members (see, as regards the exemption provided for in art 13A(1)(n) of the Sixth Directive, the judgment given today in Customs and Excise Commissioners v Zoological Society of London (Case C-267/00) [2002] STC 521, paragraph 17).  The fact that it is the aim of the organisation which is the test of eligibility for the VAT exemption is clearly borne out by most of the other language versions of art 13A(1)(m), in which it is explicit that the organisation in question must not have a profit-making aim … .

27.	It is for the competent national authorities to determine whether, having regard to the objects of the organisation in question as defined in its constitution, and in the light of the specific facts of the case, an organisation satisfies the requirements enabling it to be categorised as a `non-profit-making’ organisation.  

28.	Where it is found that this is indeed the case, the fact that an organisation subsequently achieves profits, even if it seeks to make them or makes them systematically, will not affect the original categorisation of the organisation as long as those profits are not distributed to its members as profits.  Clearly, art 13A(1)(m) of the Sixth Directive does not prohibit the balance.  Otherwise, as the United Kingdom points out, such organisations would be unable to create reserves to pay for the maintenance of, and future improvements to, their facilities.  

29.	The referring court is also unsure whether this interpretation can be maintained in cases where the achievement of surpluses is systematically sought by an organisation.  It refers in this regard to the first indent of art 13A(2)(a) of the Sixth Directive which would seem to suggest that the VAT exemption is to be disallowed when an organisation systematically seeks to make profits …

32.	It must be observed, with regard to this point, that the first condition set out in the first indent of art 13A(2)(a) of the Sixth Directive, namely that the organisation in question must not systematically aim to make a profit, clearly refers, in the French version of that provision, to `profit’, whilst the two other conditions set out there, namely that no profits should be distributed and that any profits be assigned to the continuance or improvement of the services that supplied, refer, in the French text, to `bénéfices’.  

33.	Although that distinction is not to be found in any of the other language versions of the Sixth Directive, it is borne out by the objectives of the provisions contained in art 13A thereof.  As the Advocate General points out in paragraphs 57-61 of his opinion, it is not profits (`bénéfices’), in the sense of surpluses arriving at the end of an accounting year, which preclude categorisation of an organisation as `non-profit-making’, but profit (`profit’) in the sense of financial advantages for the organisation’s members. Consequently as the Commission also points out, the condition set out in the first indent of art 13A(2)(a) essentially replicates the criterion of non-profit-making organisations contained in art 13A(1)(m).

34.	The Netherlands government argues that such an interpretation does not take account of the fact that the first indent of article 13A(2)(a) must, as an additional condition, necessarily have a content extending beyond that of the basic provision.  In response to that argument, it suffices to observe that that condition does not refer only to art 13A(1)(m) of the Sixth Directive but also to a large number of other compulsory exemptions which have a different content.

35.	Consequently, the answer to be given to the third question must be that art 13A(1)(m) of the Sixth Directive is to be interpreted as meaning that an organisation may be categorised as `non-profit-making’ even if it systematically seeks to achieve surpluses which it then uses for the purposes of the provision of its services.  The first part of the optional condition set out in the first indent of art 13A(2)(a) of the Sixth Directive is to be interpreted in the same way.”
 
62.	It was submitted that the Appellant satisfied all the requirements of article 13A(1)(m) as explained by the Court of Justice in that: 

(a)	its constitution had at all times precluded the distribution of profits;

(b)	its constitution required that all surplus funds be assigned either to the improvement of the playing facilities or for sporting charitable purposes; and after 1999, all surplus funds had to be utilised for the continuance or improvement of the facilities for sport or physical education provided by the company for the benefit of individuals using the facilities;

(c)	at no time had it distributed profits to its members, neither had it or any of its members any intention of  ever doing so;

(d)	if (which was denied) the use of Leisure’s bank account constituted the provision of a benefit to Leisure, this benefit was unintentionally conferred and was counteracted as soon as it came to light by the subsequent agreement of the parties to charge and pay interest at a rate higher than that which the Appellant itself could have achieved in the market.  The Appellant relied on the direct tax cases of  IRC v Helen Slater Charitable Trust [1981] STC 471 and Nightingale Ltd v Price (Inspector of Taxes) [1996] STC 116 in support of the proposition that where a charitable or other non-profit-making body applies its funds by lending them at a proper rate of interest to a connected person, that use of the funds constitutes an application for charitable (or, here, non-profit-making) purposes only, and there is no duality of purpose.  Any benefit to the borrower is purely incidental and is not to be regarded as a distribution of profit.  Further, or in the alternative, it was submitted that in order to demonstrate such a distribution one would have to find a reduction in the net assets of the lender, and there was none here;

(e)	the Appellant received substantial benefits from its shareholder in the form of the free use of  the land from which it carried on its business; this fact could not be used to support the Respondent’s argument that the Appellant was not a non-profit-making body.

(f)	Leisure has made use of the funds lent to it at interest to maintain and improve the sporting facilities used by the Appellant.  In the circumstances, far from providing a benefit to Leisure, the Appellant has achieved the application of its funds in a way which satisfied its objects without incurring long-term cost in doing so.

63.	The Appellant relied on paragraphs 21-31 of the decision of the Tribunal in the case of  Chobham Golf Club v Customs and Excise Commissioners [1997] V&DR 36 where substantial sums moved between the club and a management company and another company which owned the land on which the club operated as consideration for the provision of services and the lease of the land.  Despite these agreements, and relying on an earlier decision of the Court of Appeal in Bell Concorde Educational Trust v Customs and Excise Commissioners [1989] STC 263, it was the conclusion of the tribunal that no part of the income or property of the club was paid by way of bonus, dividend or profit to any members of the club and that the club was a non-profit-making body falling within the scope of article 13A(1)(m) of the Sixth Directive.

64.	It was irrelevant that Mr Shah owned the shares in the ultimate parent company of the Messenger group; he owned no shares in Leisure or in the Appellant.  His position was no different from that of any other member in a non-profit-making body.  

65.	With regard to the loan to Leisure, the question must be asked whether it was done with the aim of distributing profits to the members.  Profit distribution was no more than evidence of an organisation’s aim.  If other factors supported the analysis that the distribution was unintentional, then the organisation will have proved true to its constitution and should be accepted as non-profit-making.  

66.	It was not accepted that there are separate tests in Kennemer which must be satisfied independently. A distinction should be drawn between an organisation which intends to make a distributable “profit” and an organisation which intends to make a non-distributable “surplus”.

67.	Provided that an organisation’s constitution indicates that it does not have the aim of making distributable profits to its members, the fact that it systematically both seeks to make and makes surpluses is irrelevant to its entitlement to exemption under article 13A(1)(m). The Court of Justice emphasised that an organisation must do what its constitution says it does and it must not distribute profits to its members as profits. These words are not mere surplusage, they emphasised that the surpluses generated by the organisation must come out by way of a deliberate act of policy on the part of the organisation which has the effect of reducing the net assets of the organisation.  

68.	With regard to the Commissioners’ reliance on paragraph 33 of the judgment in Kennemer where a reference is made to “profit in the sense of financial advantages for the organisation’s members” as purportedly demonstrating that the Court of Justice intended that any indirect advantage obtained by a member of a non-profit-making organisation would constitute a “distribution of profit”, even if it did not result in a depletion of the organisation’s financial resources. This was a misreading. All the paragraph was doing was confirming the observation of the Advocate General that the first part of article 13A(2)(a) essentially replicates the test of “non-profit-making organisation” in article 13A(1)(m).  The prohibition was on making profits to provide financial advantages to members rather than making profits for use in the organisation’s activities.  Since the Court of Justice was equating the first part of the first indent with the non-profit-making test in paragraph (m), there was reason to suppose that it intended that while the prohibition under article 13A(1)(m) was on distribution of profits to members as profits, there should be a different prohibition in article 13A(2)(a) on the distribution of profits by way of financial advantages to members.  Each meant the same, and in the Appellant’s submissions each required a consequential depletion in the resources retained by the organisation, which were thereafter no longer available to be assigned to the provision of its services (see paragraph 35 of the judgment).

69.	It was further submitted that it was not open to the Commissioners to rely on paragraph 47 of the opinion of the Advocate General as there was nothing in the judgment of the Court of Justice which supported the wider views there expressed.  Furthermore the examples given by the Advocate General were no more than tentative.   

70.	In the case of Kennemer the Court of Justice concluded that indent one of article 13A(2)(a) “essentially replicates the creation of non-profit-making organisation as contained in article 13A(1)(m)”.  Accordingly it had no separate existence with the consequence that, if the Tribunal decided that the Appellant was a non-profit-making body under the old legislation, it must also find that it was a non-profit-making body under the new.  The European legislation required profits to be “assigned” to the continuance or improvement of the services supplied, the United Kingdom required those profits to be “applied”. In this context “applying” must be given the same meaning as “assigning”. It sufficed if the body had resolved or was legally required not merely not to distribute its profits, but also to apply them in due course in the continuance or improvement of sporting services, as the Appellant has done both by its constitution and by the resolve of Mr Shah, the only director of the company.  Helen Slater Charitable Trust v IRC (supra) and Nightingale Ltd v Price (supra) were clear authority at United Kingdom level that the investment of funds pending their expense on a charity’s purposes was itself the application of funds in the appropriate fashion.  The Appellant  had both assigned and applied all such profits.  

71.	Within the meaning of the Sixth Directive, Mr Shah, as the sole director of  the Appellant, was the only person who managed and administered the Appellant within article 13A(2)(a) indent two. Customs and Excise Commissioners v Zoological Society of London (supra) was authority for this. 

72.	It was a fundamental principle that the United Kingdom courts must construe domestic legislation so as to accord with the interpretation of the legislation as laid down by the Court of Justice if that can be done without distorting the meaning of the United Kingdom legislation: see Webb v EMO Air Cargo Ltd [1992] 4 All ER 929, 939 per Lord Keith; but that approach was only sufficient to meet the problems of Notes (4) to (17) of Group 10. The Notes bore no resemblance to the legislation which they were supposed to implement.  For example, the domestic legislation tested the entitlement to exempt a sports supply by reference not to the interest of the manager at the time when the supply was made, but by reference to the making of supplies or the payment of emoluments at any time in the three years prior to the supply.  There was no justification for this.  The European tests were clearly looking at the position which obtained at the time of the sports supply.  Article 13A(2)(a) requires supplies to be tested on a case by case basis: “subject in each individual case”.  This was the error made by the Member State in EC v Kingdom of Spain [1998] STC 1237.  The effect of applying the Note is to disregard the actual test imposed by article 13A(2)(a) which was whether the effect or result of the earlier supply was that the individual did have an interest in the results of the relevant supplies presently being made see Kingdom of Spain p.1240 : “In this case the Kingdom of Spain has simply introduced a presumption juris et de iure concerning the non-profit-making character of the sports bodies”. 

73.	It was submitted that Article 13A(1)(m) had direct effect whereas the restricting provisions of article 13A(2) were optional. The United Kingdom had improperly incorporated those restraints in the domestic legislation, therefore they did not have effect.  Since the provisions were optional, there was no need to pretend that they were indirectly given direct effect by ineffectual implementation in the Notes to Group 10.

74.	If on the other hand the Notes did have effect, then the Appellant had satisfied the various conditions. The Appellant was entitled simply to apply the European provisions which the domestic legislation purported to implement, namely, the second indent of article 13A(2)(a).  Mr Shah had managed and administered the Appellant  on an essentially voluntary basis.  He had received nothing from the company by way of remuneration or any other form of reward for the services he had supplied, nor did he have any interest whether direct or indirect in the result of the Appellant’s activities.

75.	Secondly, no one who was associated with the Appellant within the meaning of Note 8 had made any relevant supplies within the relevant period:

(a)	Although Leisure had granted the Appellant a licence to use sports land which might be set forward in Note 6(b) it has done so for no consideration. Accordingly, Note 7(e) applied and the grant was excepted from the definition of a relevant supply.

(b)	There has been no “supply of any services consisting in the management or administration of any facilities provided by the Appellant” within Note 6(e) but the only person who had provided such services was Mr Shah (see London Zoo) and he had done so for no consideration.  The services did not therefore constitute a “supply”: see section 5(2)(a) of the Value Added Tax Act 1994.

(c)	There had been no provision of goods or services to the Appellant by any person who was associated with it for a consideration in excess of what would have been agreed between parties entering into a commercial transaction at arms length.  The only associated person who had provided any such services was Leisure and it had charged nothing for the services it had provided.  For the reasons given above, they were not “supplies” for the purposes of Note 6(f) and satisfied the condition in that paragraph in any event.

76.	With regard to the argument that Leisure received consideration from the Appellant for the provision of the land, this must be on the basis that a “relevant supply” had been made by an “associated person”.  No evidence had been produced by Customs and Excise that this was so.  From the European legislation it was clear that it was only persons who are within the narrow class of  “the directing organs or, as the case may be, those who actually direct without being designated by the constitution (who) are to be scrutinised to see what reward, if any they are receiving”: see London Zoo.  The difficulty faced by the Commissioners was that Leisure did not control or manage or administer the Appellant, which was done by Mr Shah.  

77.	No assessment had been raised on Leisure to recover the VAT inherent in any consideration said to be given by the Appellant  to Leisure.  The loans to Leisure were not made because Leisure let the Appellant use the land for free, but because it was administratively convenient to use existing banking facilities.  In VAT terms, the loan was not consideration for the licence to use the facilities. There was absolutely no evidence that the loan was a quid pro quo for the licence.

78.	The Appellant sought to distinguish the case of  De Vere Golf and Leisure Ltd & Another v CCE, unreported.  It was submitted that in that case there was no intention that the operating profits of the Appellant be left in the Appellant to improve the facilities, it was no more than a tax avoidance scheme designed to give the appearances of activities within Group 10, whilst stripping out all the exempted surpluses to the other group members.  This was to be contrasted with the position in the present case where the complaint was not that the profits were stripped out but that they were left behind in the Appellant.  There was no public interest in the De Vere scheme, only self-motivated avoidance of VAT.  In the present case Mr Shah’s intention throughout had been philanthropic; he had sought to benefit the general public by the provision of the various facilities and the retention of the VAT enabled the Appellant better to achieve that.

79.	The decision in De Vere was criticised by Mr Thomas in a number of ways.  In particular it was submitted that paragraph 132 was an example of the unnecessary multiplication of the tests which are to be satisfied before article 13A(1)(m) applies, effectively making the exemption subject to additional conditions beyond those laid down by paragraph (m) itself.  The Tribunal also assumed that the observations of the Advocate General were to be accorded the same status as the reasoning of the Court of Justice.  As a matter of principle one should not assume that the Court of Justice tacitly adopted those parts of the opinion of the Advocate General to which it made no reference.  

80.	The Tribunal in that case was criticised by Mr Thomas for failing to pay any, or any sufficient, attention to the actual reasoning of the Court of Justice in Kennemer.  

81.	In the present case the Appellant denied that it had any tax avoidance motivation whatsoever, unlike the Appellant in De Vere.  It was wrong to equate loss of revenue from the legitimate reliance on available exemptions with tax avoidance.

82.	In the present case also, as in De Vere, (see paragraph 143) the Appellant could not distribute its profits under its Memorandum of Association.  The paradigm example of a members club was no more secure as a distribution-tight entity: there were regular examples of members’ sports clubs which decided to sell their facilities to developers and divide up the profits.  It was difficult to conceive of any organisation other than a charity which could prevent the profits being distributed under English law. Article 13A(1)(m) did not refer to “charities”.  

83.	With regard to the way the Tribunal in de Vere dealt with the relevance of the way in which interest due to and from the first Appellant in that case was dealt with, the question was whether an Appellant had the aim of making profits to distribute to its members.  Where, as here, interest was charged at a market rate there was no distribution of profit, overt or covert.  There was merely an employment of the Appellant’s surplus funds by investment at interest.  That was an application of resources, not a distribution of them.  

84.	In paragraph 207 the Tribunal had stated that “the whole Group was enriched by the activities of the Appellant because [its] cash resources were made available to other members of the Group.”  This concept of enrichment would appear to derive from indent two of article 13A(2)(a) and was based on a misconception of the law.  The only reference the Appellant had been able to find to “enrichment” in Kennemer was at paragraph 54 of the opinion of the Advocate General, where he defined “enrichment of natural or legal persons” as follows:

“Moreover, the word `profit’ must be construed here as `surplus of income over expenditure’ rather than `enrichment of natural or legal persons’ that is to say profit which by its very nature is distributed”. 

He therefore defined ‘enrichment’ by reference to distributions of profit, and not by reference to some evanescent form of enrichment by osmosis.

85.	In the present case there was no parent company which had a duty to its shareholders unlike the De Vere case where the group was a commercial entity.

86.	The fact that profits had flowed into the Appellant where they had flowed out of De Vere was a crucial distinction between the cases.  All surpluses in De Vere were expended on its shareholders for whom the parent company was responsible.  In that case the surpluses were no longer available to de Vere to apply in improving its facilities.  In the present case the profits made by the Appellant were simply unavailable to the shareholder.  

87.	There was no substance in the reliance by the Commissioners on article 3(a) of the Appellant’s Memorandum of Association. Their argument that an organisation which was in the business of supplying sporting services was thereby precluded from non-profit-making status was not right. It was only if an organisation were in business that it could be making supplies capable of exemption under article 13A: see section 4 of the Value Added Tax Act 1994 and article 2 of the Sixth Directive.

88.	The Appellant’s intention to save up its profit to buy a new club from which it would be able to make further and better supplies of sporting facilities to the public was wholly consonant both within an intention not to distribute profits and with an intention (to the extent that one is needed after 1 January 2000) to apply profits to the furtherance and improvement of the services the Appellant supplied.   The reason that previous clubs had been acquired by Leisure and not by the Appellant was that, at the time, the Appellant had not the funds to make the purchase.

89.	It was admitted that the Appellant spent money on maintaining the courses, but there was no evidence in the company’s accounts of capital expenditure on Leisure’s assets.  The accounts for 1999 show £63,303 on “course upkeep” and other items of income and expenditure; no capital expenditure appeared anywhere in the accounts.  The reference to capital expenditure expended by the Appellant on “fixtures, fittings and equipment” was a reference to the gym equipment purchased by the Appellant.  This equipment belonged to the Appellant and not to Leisure.  

90.	It was submitted that the acquisition by the Appellant of a capital asset such as a “flagship club” would not, as the Commissioners’ contended, enrich Leisure either directly or as the owner and controller of the Appellant. Furthermore it would not fall to be treated as a distribution of profits as profits as required by the Court of Justice in Kennemer.  In addition, if accumulation of profits was not a distribution of profits, neither was the replacement of those accumulations by another capital asset on capital account.

91.	There was no justification for the approach of the Tribunal in De Vere where it expressed the opinion that the consolidation of accounts “enhanced the business of the group” (see paragraph 198 of the decision).  This would appear to derive from the proposition (2) in paragraph 132 of the Tribunal’s decision, where, drawing on the opinion of the Advocate General, the Tribunal concluded that “shrewd cross-subsidisation” was outlawed where exemption was sought under article 13A(1)(m).  The tribunal failed to appreciate that that comment was made in the context of the first question asked by the referring Court, namely whether non-profit-making status was to be determined only from the activities which might benefit from the exemption or from all the activities of the organisation.  What the court held was that it was not enough that a commercial organisation should carry on one activity in which it intended not to make a profit for it to be entitled to exemption.  In such a case there was a risk of distortion of competition.  For that reason the exemption had been couched in terms of non-profit-making organisations not non-profit-making activities.  

92.	It was not open to the Commissioners to rely on the fact that Leisure and the Appellant produced consolidated accounts.  If under English law it was necessary for companies to present their accounts in consolidated form, but that was not a requirement of other Member States, it would be contrary to the general principle of European law that the Directive must be interpreted uniformly throughout the Community.  (See London Zoo, opinion of Advocate General Jacobs, paragraph 21-23.)  In the present case Mr Lopian had given evidence that a careful exercise was carried out by the accountants to ensure that expenses were recharged to the appropriate company. This was possible because all items of expenditure were coded as they were incurred and could therefore be properly attributed when it became necessary to do so.  That was all that the Court of Justice would have expected to find if the issue had been raised in Kennemer.  Including the Appellant as part of the consolidated accounts of Leisure did not increase the value of Leisure.  

93.	The Commissioners had raised questions as to the split of the consideration paid by Clubhaus to Leisure and the Appellant for the sale of the goodwill attached to the Essex country club.  They had made no attempt to find any other basis for apportioning goodwill; in evidence it was stated that the matter was considered from the perspective of the purchaser who would be interested in paying for turnover, and the turnover in this case was roughly even. There was therefore no reason to criticise the apportionment actually made.

94.	With regard to commercial influence, the Commissioners failed to address the issue in detail and the Appellant relied on paragraph 57 of the Commissioners’ closing submissions in which they accepted that there was no ground for denying exemption to the Appellant in the event that the Tribunal accepted that it was a non-profit-making  organisation.  

The Respondents’ case

95.	The Commissioners’ primary case was that the Appellant did not at any material time meet one of the conditions for exemption, namely that it be a non-profit-making body.  It was originally contended by the Commissioners that from 1 January 2000 the Appellant was subject to “commercial influence” within the meaning of the 1999 Order.  The principal questions on the latter issue were:

1.	Whether the grant of a licence to occupy land made by Leisure to the Appellant was for a consideration; and

2.	Whether Leisure was a person associated with the Appellant.

It was conceded by the Appellant’s counsel that Leisure was associated with the Appellant and Mr Shah. With regard to the issue of the licence, the Commissioners conceded that they had no option but to accept that the grounds for making that inference were thin on the basis of the oral evidence, but this did not assist the Appellant as the complete lack of formalities between Leisure and the Appellant underlined the complete artificiality of the arrangements between them.

96.	In respect of the principal issue it was submitted that the terms of the Sixth Directive were to be given a community law meaning.  Whilst domestic law must be construed as far as possible so as to give effect to the Community Directive which it sought to implement, exemptions of liability for tax must be strictly interpreted. By contrast, exceptions to exemptions must not be interpreted restrictively, since they placed transactions they encompassed under the general rule of the Sixth Directive.  See Customs and Excise Commissioners v Sinclair Collis Ltd [2001] STC 989 at 993 per Lord Slynn; Skatteministeriet v Henriksen [1990] STC 768; CC Physiological Society of London (supra); EC v Germany (supra).

97.	Accordingly, Schedule 9, Group 10 was to be construed as far as possible so as to give effect to article 13A(1)(m) of the Sixth Directive.  The exemption from VAT of certain services closely linked to sport or physical education supplied by non-profit-making organisations to persons taking part in sport or physical education was to be interpreted strictly.  The exception to the exemption provided by Notes (2A)ff was to be construed as far as possible so as to give effect to the exclusion from exemption in article 13A(2)(a) of the Sixth Directive and was not to be construed restrictively.  

98.	The cases relied on by the Commissioners in support of their argument that the Appellant was not at any material time a non-profit-making organisation or body within the meaning of article 13A(1)(m) or Group 10 item 3 were:

Kennemer, Zoological Society of London, De Vere Golf & Leisure Ltd and Another, Case C-315/00 Maierhofer v Finanzamt Augsburg-land, judgment of 12/1/03 ECJ paragraph 39 and Case C-185/01 Autolease Holland BV v Bundesamt für Finanzen, judgment of 6/2/03, ECJ paragraphs 35-36.

99.	Whether or not the Appellant was a non-profit-making organisation or body was not to be determined solely by reference to what it did with the profit it aimed to make and made: see Kennemer at paragraphs 26-28.  Only if the Tribunal were to conclude that the Appellant were an organisation that “does not have the aim, unlike a commercial undertaking, of achieving profits for its [member]” does the question of whether those profits are distributed arise.  It was submitted that it was plain from the evidence that the Appellant does distribute the profit it is shown as making in the sense in which that concept is to be interpreted.  The Commissioners relied particularly on the following matters:-

1.	From Mr Shah’s evidence it could be seen that the arrangements put in place in September 1998 and November 1998 were wholly artificial: their object was to retain the VAT element of the subscription income in Leisure and the Appellant company.  It had been accepted by Mr Shah in evidence that ultimately the money invested in the clubs was his and that the structures that had been set up were to give effect to his intention. That intention was to build up surpluses in the Appellant company in order to buy a “flagship” club. Mr Shah had acknowledged that the Appellant company had to make profits to survive. Ultimately, as a result of Mr Shah’s controlling position, it was a matter for Mr Shah to determine what the Appellant did with the surpluses generated and the content of the Appellant’s Memorandum.  

2.	The Appellant was a wholly-owned subsidiary of Leisure. Leisure was a profit-making company operated for profit. Leisure was a wholly-owned subsidiary of MGL, also a profit-making company. The majority of MGL was itself owned and controlled by Mr Shah. Mr Shah was therefore the ultimate controller of Leisure and the Appellant.  Those were commercial undertakings. The Appellant aimed to make a profit/financial advantage for its member, Leisure. It achieved that aim. The profits it made were intended to be distributed to Leisure to enrich Leisure and to confer financial advantage on Leisure. Moneys generated (nominally) within the Appellant were freely available for use and were used by Leisure for its commercial purposes.  These funds were used (amongst other things) to maintain and improve the facilities, all of which were owned by Leisure.

3.	Although the Appellant and Leisure were legally distinct, they were economically indissociable and produced consolidated accounts. The accumulation of profits and acquisition of a flagship club would enrich Leisure, either directly or as the owner and controller of the Appellant.  

100.	A members club funds it operations from subscription income from its members, the members do not seek to make a profit for themselves.  By contrast the Appellant was in the business of supplying services to third parties (i.e. persons other than Leisure) for a price, a price that was intended to exceed the cost of supplying those services, with the intention of  thereby generating financial advantages for Leisure.  

101.	It was not open to the Appellant to rely on the terms of its constitution since nothing in the memorandum prevented it from making profits, nothing in paragraph 3(v) of the memorandum defined what “surplus funds” were, it was for the Appellant/Leisure/Mr Shah to define what the surplus funds were that they may put to the uses set out in Clause 3(v); the Appellant generated profits for its member, Leisure, Leisure as the sole member was the only person entitled to the benefit of the profit generated by the Appellant.  Leisure was the only person entitled to direct how that profit was to be used, Leisure was enriched by, and obtained financial advantage from, the Appellant’s activities.  Clause 3(v) permitted the Appellant to distribute profits to Leisure.  It permitted the application of  “surplus funds” to the provision of “facilities”.  The Appellant owned nothing.  All the facilities were owned by Leisure.  Therefore under the present constitution surplus funds could be applied to the benefit of Leisure.  Furthermore any restriction on distribution by Clause 3(v) was purely illusory.  Amendment of the memorandum was wholly within the control of Leisure (and ultimately Mr Shah).

102.	The most obvious means by which the Appellant’s profits were distributed was by the inter-company loan agreement whereby sums (nominally) generated by the Appellant were (nominally) lent to Leisure.  Originally no provision had been made in Leisure’s accounts for the payment of interest to the Appellant in respect of the use of its funds.  That was clearly a distribution of profit and indicative of the fact that the Appellant was not a non-profit-making body.  The Commissioners were not in a position to challenge the proposition that the sum or sums later paid by Leisure to the Appellant were in respect of “interest” on the loan account, but the loan could not be described as an arm’s length transaction.  The whole relationship between Leisure and the Appellant was characterised by informality and artificiality:-

1.	The Club premises were owned by Leisure, the Appellant however was permitted to charge Club members or be paid by Leisure for moneys received from Club members for access to the premises.  The arrangement by which the Appellant acquired the licence to occupy Leisure’s property was informal in the extreme.  Leisure disposed of approximately one half of its business to the Appellant in 1998 for no consideration, this was not indicative of an arm’s length relationship.

2.	The loan of funds between the Appellant and Leisure was likewise informal and not contained in or evidenced by writing.  The charging of interest was arbitrary and purely notional.  Any payment made by Leisure to the Appellant was cancelled out in the consolidated accounts and enured to Leisure’s benefit as the sole shareholder in the Appellant.

3.	Leisure’s and the Appellant’s operations were wholly symbiotic.  The internal accounting records were co-mingled.  

4.	Sums paid to the Appellant were and are paid into Leisure’s bank account.  The Appellant’s expenses and Leisure’s expenses were paid out of that account.  Leisure had free use of the funds in the account.  The banking arrangements merely served to illustrate the artificiality of the distinction between the Appellant and Leisure.  

103.	No rational lender would lend to Leisure alone, without taking into account the Appellant’s activities: hence the consolidated accounts.

104.	The rules and regulations of The Suffolk, and also The Norfolk, showed amongst other things that each Club was a proprietary club, the proprietor of the Club being Leisure and associated companies. Associated companies included the Appellant.  Rule 29.1 provided that:  “It is understood by each [Club] member that the proprietor has provided the Club and the Club premises in the furtherance of the proprietor’s business and the Club is to be run as a business for profit”.  

105.	On the disposal of The Essex the land was disposed of by Leisure but the goodwill was disposed of jointly by Leisure and the Appellant for a single price.  The split of the business between Leisure and the Appellant was arbitrary.  If the Appellant were genuinely making the profit shown in its own financial statements, the goodwill should have been allocated to it.  A distinction was drawn by Mr Lopian between “accounting profit”, which is what the Appellant made according to its account and “economic profit”, which is what Leisure and the Appellant made together.  Having created “accounting profit”, goodwill should have been allocated on that basis.  Furthermore it was only as a result of a purely artificial transaction in 1998 that the Appellant acquired any right to participate in the goodwill of the business.  The manner in which the goodwill was split was no more artificial than the manner in which the Appellant acquired part of Leisure’s business.  

106.	With regard to whether or not the Appellant was subject to “commercial influence” it was submitted that the proposition that the Appellant was not a non-profit-making organisation or body was so obvious that it was not necessary for the Tribunal to consider this aspect in any detail.  

107.	It was accepted by the Commissioners that if the Appellant could assert some directly effective Community law right to have its supplies treated as exempt supplies, the Tribunal would be obliged to apply and enforce the relevant Community law and would be required to “disapply” the domestic measures to the extent that they were incompatible with community law. This did not, however, affect the validity or vires of the disputed domestic measures.

108.	It was submitted that EC Commission v Spain was not directly relevant.  The amendments to Group 10 complied with Community law. The “commercial influence” provisions were fully consistent with article 13A(2)(a), second indent.  The time limits complained of operated by way of restricting the class of those who may be legitimately excluded from the exemption, rather than extending the exclusion beyond its legitimate scope.

109.	On the facts, the Appellant was unable to assert any Community law right to which the Tribunal must give effect, on any view the Appellant was not “managed or administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the result of the activities concerned.”  The burden was on the Appellant to establish the existence and extent of some Community law right to which effect must be given.  It was submitted that the Appellant was unable to discharge that burden.

110.	The complete lack of formalities between Leisure and the Appellant underlined the complete artificiality of the arrangements between the Appellant and Leisure and wholly undermined the proposition that the Appellant was a non-profit-making organisation.  

Reasons for decision

111.	We have found this a particularly difficult case, not least because we found Mr Shah a convincing witness and we are satisfied that he has a genuine intention (as he puts it in his witness statement) to “create something quite different from the elite private members club which cost a fortune to join, or the overused municipal golf courses, and to provide golf and other sporting facilities which families could use and enjoy”.  He continued “I was also determined to invest properly in the sporting facilities as it is often the case in clubs, both members owned and proprietary, which are not solely members clubs that they are over used, not looked after sufficiently, and deteriorate to the detriment of the players.  My overall objective remains exactly the same today as it was then; I was not interested in extracting profit from the business.  I wanted to provide improved facilities.”  We accept that it was not his primary intention to extract profits from the Appellant, nor to build up a company from which he could later extract a profit.

112.	We are satisfied that the Appellant company was formed to achieve Mr Shah’s aims, and it was not the immediate intention to take advantage of the legislation to benefit Leisure and MGL, or, ultimately, Mr Shah himself, although it must be recognised that Leisure and MGL would benefit if the Appellant were found to be VAT exempt.

113.	We do not think that it is right to disregard the fact that, despite the structure of the Appellant and Clause 3(v) of its memorandum, it is, as Mr Shah himself acknowledged in evidence, ultimately he who has control of the group.  

114.	We find that the Appellant company was set up with the intention of obtaining a fiscal advantage following the introduction into UK law of the exemption provided by Article 13 and had no independent business purpose.  This of itself is not a reason why it may not benefit from the exemption.

115.	Insofar as the Respondents relied on the very fact that the Appellant made a profit, and was not prevented by anything in its Memorandum from so doing, we do not consider this is relevant.  As the court in the case of Kennemer said at paragraph 6:  

“… it is clear from Art 13A(1)(m) of the Sixth Directive that an organisation is to be classed as being `non-profit-making’ for the purposes of that provision by having regard to the aim which the organisation pursues, that is to say that the organisation must not have the aim, unlike a `commercial’ undertaking, of achieving profits for its members … .”

116.	Whilst we accept that by its constitution the Appellant does not have the purpose of making a profit for distribution to its members, we adopt the line of reasoning of the tribunal in the case of  Chobham Golf Club (VAT decision 14867).  In that case, following the reasoning in the Court of Appeal in the case of Customs and Excise Commissioners v Bell Concorde Educational Trust Ltd [1989] STC 264, the chairman stated that whether a body is non-profit-making (which he considered should truly be “non-profit seeking”) was a question of the purpose, intention or motive of the body concerned.  At paragraph 23 he stated:

“Now, a company or un-incorporated body can have a purpose, to which its constitution will indeed be a guide, but can it have an intention or a motive?  Those are attributes of  natural persons, and can only be arrived at by looking at the persons who control the body, using this objective approach outlined in the well-known Ian Flockton case.  And what is one to do if the intention or motive of those persons, as evidenced inter alia by their actions, appear to be at variance with the constitution?”

117.	Mr Shah was not challenged in cross-examination when he said he was not interested in extracting profit from the Appellant. It was never put to him that his intention was anything other than that which he said it was. We accept his evidence that it was not his intention to extract a profit from the Club. However, we do not consider that that is the end of the matter.  We also have to look at whether, despite the constitution of the company, and despite Mr Shah’s intentions, the reality of the situation is not such that the profit is in fact being distributed to its member, Leisure, and if we find that is not the case that nonetheless the reality is such that at any time the company could, because of the structure of the group, distribute its profit to Leisure.

118.	In respect of the first assessment, we are only concerned with the question of whether or not the Appellant comes within Article 13A.1(m).  We are not concerned with the provisions of Article 13A.2(a) because the United Kingdom had not at that time implemented those provisions, which were within the discretion of the individual Member States to incorporate into their own domestic law or not.  

119.	It was in the currency of the first assessment that the Appellant had made a loan to Leisure.  At the time, this loan was made without any interest being charged to Leisure, although subsequently interest was applied retrospectively.  The Appellant is a wholly owned subsidiary of Leisure. The loan was made out of the profits generated by the Appellant. Although we accept that the loan was made without thought to the VAT consequences of making the loan, the very fact that the Appellant subsequently charged Leisure interest, and applied such interest retrospectively, points to the fact that the Appellant accepted the Commissioners’ view that there was a distribution of profits by the Appellant to its member at that time.  The fact that the Appellant was able subsequently to apply a retrospective charge to interest in respect of that loan highlights the commercial unreality of the relationship between the Appellant and Leisure.  It is inconceivable that Leisure could have obtained a similar loan from any other source without the terms and conditions being established at the time of the loan itself.  Mr Thomas submitted that the fact that the loan did not decrease the Appellant’s assets, and was later put on a proper commercial footing, demonstrates that there was no distribution of profit.  We do not accept that is the case with regard to the period when no interest was charged.  The Appellant did not during this time derive the interest it would have had even if it had only left the money in the bank, nor have the money available for its own purposes. 

120.	It was argued on behalf of the Appellant that by spending money on the golf courses the Appellant was properly applying its funds on the provision of sporting facilities, and not distributing funds for the benefit of Leisure.  We do not think it right to ignore the fact that Leisure owned the land and therefore any improvement to the course(s) increased the capital value of the land.  It is open to Leisure to sell the land at any stage at a price which will have been enhanced by the Appellant’s expenditure.  We do not consider that the fact that the items of expenditure referred to in paragraph 40 above do not appear as items of capital expenditure in the Appellant’s accounts alters the reality of the situation, and find specifically that expenditure on the swimming pool, landscaping and irrigation represent a capital improvement in the value of the land in the hands of Leisure.

121.	In respect of the first assessment we find that there was a de facto distribution of profits to Leisure, and therefore the Appellant is a profit-making organisation, and therefore the appeal must fail with regard to that assessment.  We were not told the exact date on which the Appellant commenced charging Leisure interest on the loan. We were told by Mr MacNab that an officer of Customs and Excise visited the Appellant in September 2000. It was apparently some time after this visit that interest was charged.  As the loan continued without there being a charge to interest into the currency of the second assessment, we must therefore find that the Appellant fails on the same grounds as it fails in respect of the first assessment in respect of the later period, at least for those periods when interest was not being charged.   

122.	With regard to the second assessment, we do not need to take account of the provisions of Article 13A.2(a) and (b) which were incorporated into the United Kingdom law with effect from 1 January 2000, insofar as we have found that the Appellant was not a non-profit-making organisation, it quite properly having been accepted by Mr Thomas that the Appellant must fail in any event if he cannot establish that he is a non-profit-making body within Article 13A.1.

123.	If and insofar as we are wrong in our conclusions with regard to the second assessment and it is necessary to consider the provisions of Article 13A.2(a) and (b) we do not consider it is sufficient to say that because the Appellant satisfies all the requirements of a non-profit-making body as derived from the cases of Kennemer and the London Zoo, that is sufficient to determine the matter.  Mr Thomas argued that because Mr Shah managed and administered the Appellant on an essentially voluntary basis, the Appellant did not fall foul of Article 13A.2(a), and it was stated in clear terms by Mr Thomas that Mr Shah did not have any interest whether direct or indirect in the result of the Appellant’s activities.  We do not accept that this is the case.  Firstly, it is Mr Shah who will determine at what point the surpluses generated by the Appellant will be applied to the purchase of a new club.  Whilst that club would be owned by the Appellant, if at any time Mr Shah no longer wished to pursue his laudable aim of providing sporting facilities at a reasonable cost, and he decided to sell that club, it is he and his wife who would ultimately take the profit.  Similarly if it is decided not to apply those funds in that way, but to continue making loans to Leisure, it is still Mr Shah’s decision.  

124.	In seeking to distinguish the case of De Vere, Mr Thomas submitted that the Tribunal in that case erred in applying the concept of enrichment to the group in question where the Appellant made its cash resources available to other members of the group, because the only reference to enrichment that he had been able to find in Kennemer was where the Advocate General at paragraph 54 defined enrichment of natural or legal persons (see paragraph 85 above).  Whilst we accept that he was right in his analysis of what the Advocate General had said, and that enrichment was defined by reference to distribution of profit, it is nonetheless the case that in the present circumstances it always remains available to Mr Shah to change the constitution of the Appellant and to apply its profits for his own benefit.

125.	Secondly, eisure is benefiting from the loans made by the Appellant, and we do not accept that, because the rate charged is a commercial one, there is no indirect benefit to Leisure from these loans.  The amount of the loans is large, and the loans are not the subject of any restrictions such as might be found in a normal commercial situation.  The loans are not liable to be called in other than on Mr Shah’s say so.  We therefore find that the Appellant fails to bring himself within the provisions of Article 13A.2(a) with regard to the second period.

126.	We were invited by Mr Thomas to consider whether or not the United Kingdom had properly implemented the terms of Article 13.  We do not find it necessary to decide that matter, since we accept the Respondent’s argument that the matter can be decided on the basis of the terms of Article 13 without looking at the United Kingdom legislation, a position which was also adopted by Mr Thomas. 

127.	Mr Thomas suggested that if the Respondents were correct, then the only type of  organisation which could benefit from Article 13A.1(m) would be a charity, since even members’ clubs were able to vote to dissolve the club and sell its assets to a developer for a profit.  This may be so, but is not a question which we have to answer.  In all the circumstances this appeal is dismissed.

128.	Liberty to apply with regard to costs.

129.	Pursuant to the Value Added Tax Tribunals Appeals Order 1986 we certify that this decision involves points of law relating wholly or mainly to the construction and application of the statutory provisions set out in paragraphs 3-8 above so far as they relate to the questions raised in this appeal.

MISS J C GORT
CHAIRMAN

RELEASED:

LON/02/59