18784
Supply – Whether payment made to Appellants was for a taxable supply of services by way of subsidy or grant – Appellants specially formed to provide services otherwise the responsibility of their respective local authorities – Local Government and Planning (Scotland) Act 1982 Sections 14, 15 & 16 – EC Sixth Directive 11A(1), 13A(1(m)) – VATA Schedule 9, Group 10 Item, 3.

EDINBURGH TRIBUNAL CENTRE

1.	EDINBURGH LEISURE	
2.	SOUTH LANARKSHIRE LEISURE
3.	RENFREWSHIRE LEISURE	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Members):   James D Crerar, WS., NP
							  I R Welch, CA., JP

Sitting in Edinburgh on Monday 6th – Thursday 9th September 2004

for the Appellants		Mr Colin Tyre, QC

for the Respondents	Mr Andrew Young, Counsel

© CROWN COPYRIGHT 2004.

DECISION

Introductory
Each of the Appellants Edinburgh Leisure Ltd (ELL), South Lanarkshire Leisure Ltd (SLL) and Renfrewshire Leisure Ltd (RLL) were formed in order to fulfil an obligation incumbent upon their respective Local Authorities (LA) in terms of the Local Government and Planning (Scotland) Act 1982.  The appeals were all heard together.  The underlying issue was the same in each appeal.  The issue for the Tribunal was whether payments made by LA to the Appellants, each Not for Profit Leisure Trusts, are consideration for supplies of services to them by the Appellants.  It was not disputed that if the Appellants are making supplies of services to their respective LA these are taxable supplies.  The importance of the matter lies in relation to the deductibility of input tax by the Appellants and the extent to which that is recoverable.  The Tribunal heard evidence from an official from each of the Appellants and from each of the Appellants’ Local Authority officials and the matter can be set out by recording the common features of each arrangement and thereafter noting any relevant differences.  

Common Features
Each Appellant is a Leisure Trust and a registered charity.  In each case various sport centres owned by the respective Local Authorities which were operated by them are now leased to the Appellants for a nominal rent.  The former employees of the Authorities who work at the leased sports facilities were also transferred to the Leisure Trust.  Each Appellant receives negotiated payments in advance in recognition that the Appellants cannot meet their service agreement with the Local Authorities out of income they can generate themselves from participants.  Some of the activities carried out by the Appellants are profitable in that they produce a surplus, others are not.  Accordingly in the course of the business of each Appellant payment would have to be made in order to maintain the operation.

Each LA has directors on the management board of the respective trusts, but no control over the board.

By setting up Not For Profit Leisure Trusts the LA was able to benefit by a saving which can arise in relation to non-domestic rates.  The sums were substantial and in themselves would have justified setting up the arrangement irrespective of VAT considerations.  Nonetheless the Appellants and Local Authorities seek, if they can, to achieve VAT savings.  The matter has taken some time to come to an issue which could be decided by the Tribunal in the case of ELL but the Tribunal did not consider that circumstance to have any relevance to the question they required to answer.  No tax invoices for any Company were created, but that fact was agreed by Counsel as of no significance for the purposes of these appeals.

The Statutory Provisions
These are:
The Local Government and Planning (Scotland) Act 1982 which provides:
14. (1) Subject to subsection (2) below and to section 19 of this Act, a local authority shall ensure that there is adequate provision of facilities for the inhabitants of their area for recreational, sporting ….activities.

15. (2) A local authority may provide or do, or arrange for the provision of or doing of, or contribute towards the expense of providing or doing anything necessary or expedient for the purpose of ensuring that there are available, whether inside or outside their area, such facilities for recreational, sporting …activities as they consider appropriate.

16. (1) Without prejudice to the generality of their powers under section 15 of this Act, a local authority may, for the purposes of their functions under subsection (2) of that section –
	(b)  maintain a body for the promotion of a recreational, sporting ….activity
	(c) permit any facility provided by the authority under the said section 14 to be run by another person on such conditions (including conditions as to the charges if any)-
	(i) to be imposed on the person in respect of the rights thereby enjoyed by him; or
	(ii) which may be imposed by the person on members of the public for admission to, or use of enjoyment of, that facility,
	as the authority thinks fit.

(2) Without prejudice to the generality of their powers under section 15 of this Act, a local authority may contribute –

(a)	by way of grant or loan towards expenses incurred, or to be incurred, as regards recreational, sporting ….facilities or activities by a voluntary organisation or other person, not being a local authority, in providing or maintaining such facilities (or, as the case may be, in providing or promoting such activities) if the authority have powers themselves, under the said section 15 or under the foregoing provisions of this section, to provide such facilities or activities.

The EC Sixth Directive (77/388/EEC) provides that:-

11A(1) – “The taxable amount shall be:
(a)	in respect of supplies of ….services other than those referred to in (b), (c) or (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies”.

13A(1) (m) – “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”.

The exemption from article 13A(1)(m) is given effect to in VATA, schedule 9, group 10, item 3.

Some discussion took place about the enforceability by an interested person or body against the authority of the provisions of said Section 14.  The Tribunal having analysed the statutory provisions as best they can is of opinion that the wide ranging duty imposed would be capable of enforcement if the local authority failed to ensure not only adequate provision of facilities in the sense of structures and equipment, but also failed to ensure that the inhabitants of their area were provided adequately with facilities.  The inhabitants of a local authority area consist not only of the fit and able bodied, they also consist of persons who are subject to disadvantages whether physical, mental, social or economic.  Adequate provision requires to be made for such people.  Accordingly a local authority cannot for example point to private provision of leisure centres as satisfying the requirements of the statute when only provided by the private sector at an economic charge, they must do more and ensure that there are adequate facilities for people who cannot for social or economic reason make use of facilities supplied for profit which as a result are costly.  A local authority may include such facilities as fulfilling part of their overall duty but require to fulfil the further duty of ensuring availability to the inhabitants of their area.  This duty they could perform by running loss making social and leisure departments and funding these by way of direct grant or subsidy.  It was with a view to overcoming some of the disadvantages of a local authority being involved in the minutiae of such service that the leisure trusts were created as well as securing the financial advantage in rating.  It is necessary to look in some detail at the arrangements and this may best be done having regard first to ELL.

The Creation and Operation of ELL
ELL was, or at all events before the Tribunal claimed to be, the first of the leisure trusts to be created and operate.  The LA was minded to create such a body and for a time prior to its incorporation a shadow company was run and accounts made up with a view to establishing the financial implications of the creation of the trust for the Council.  The Council sought to derive a figure which would require to be paid in order to ensure the continuity of and also the expansion of leisure services.  Previously there had been a direct labour organisation which had been tested by competitive tendering and the costs of management by the LA required to be added to that in order to produce a figure for expenditure by ELL.  

In order to formalise the matter various contracts were entered into.  The Council following upon a report by the Director of Recreation resolved on 6 March 1997 to approve the establishment of a not for profit trust at the earliest possible date to deliver various services.  Some of those had been subject at that time to compulsory competitive tendering and some might have become so subject, together with services managed by the Direct Service Organisation’s new Recreation Department but not subject to compulsory competitive tendering and also additional sports facilities owned by the Council such as a sports centre and swimming pool.  The creation of the not for profit trust proceeded apace and from the reports to the Council, approved by them, it is apparent that there was at that time some thought that what was described as “the subsidy” could be treated as a taxable supply.  It should be noted that in the Council documents the annual payment which was eventually agreed to be made was variously described as a subsidy or a grant, a feature which was founded upon by the Respondents.

Ultimately the Memorandum and Articles of Association of Edinburgh Leisure Company was formulated and presented to Companies House on 21 January 1998.  The objects of the company were described as follows:

(One)	To provide, or assist in the provision of, facilities for recreation or other leisure-time occupation in the interests of social welfare for the general public and in particular in connection with the local 'authority area of The City of Edinburgh as defined in the Local: Government etc. (Scotland). Act 1994 (hereinafter referred to as "the Community”.) with the object of. improving the conditions of life for the Community; and
(Two)	To provide, whilst providing or assisting in the provision of such facilities for the Community, special facilities for persons who by reason of their youth,. infirmity or disability, poverty or social and economic circumstances may need special. facilities; and
(Three)	To promote good health among the Community through health education directed to the part which healthy eating and standards of nutrition together with exercise play in the maintenance of good health 

The Company was registered for VAT with effect from 1 February 1998.

The Company was one limited by guarantee and its Directors and members of its board were 13 in number.  These comprised 5 Councillors, a Union Representative, 5 members of the Business Community, a member of the public appointed by selection together with another independent person (which post is currently vacant).  It can be seen therefore that the Local Authority do not control the Board and cannot dictate the activities of the Board by way of Board Decisions.  

A funding agreement required to be entered into annually the first of which was dated 31 March 1998.  On that date the Policy and Resources Committee agreed to pay the sum of £7,023,466.00 for the first 12 months operation as one sum for the first financial year and thereafter quarterly in advance.  In the preamble to the funding agreement the Council reserved their position to select a sum to be paid for the following 2 years and at that time made no representation or commitment about the sum to be paid between April 1999 and April 2001.  They also excluded liability on the Council for any liabilities entered into by the Company during that period.  

The purpose of the fund was specifically set out.  It provided “that in consideration of the Council paying the fund” the Company bound itself to use it exclusively for the purpose of providing a service detailed in a specification of service and business plan and complying with the terms of missives of let to be entered into in relation to premises and golf courses.  The Company was also obliged to provide the Council with audited accounts and, without need for request, true and complete quarterly financial and  monitoring reports detailing its income and expenditure as well as annual reports on all aspects of the company.  Their specific obligations included a requirement to permit the Council’s Directors of Recreation and Finance to investigate the arrangements relating to the purpose of the Company, maximise recovery of Value Added Tax, minimise its commitments by using its best endeavours to obtain funds, capital sponsorship grants and the like from third parties and to make all necessary approaches to appropriate private and public sources of funding.

The Tribunal was provided with copies of the business plans from 1998 to 2004 created on the basis that there required to be taken into account that Edinburgh Leisure had to remain service focussed while being commercially aware and also comply with the requirements of the “major funder” the City of Edinburgh Council in meeting stated standards of service and in contributing to the Councils commitment to “Best Value”.  Each leisure facility had also its own business plan.  The stated aim was to reduce, if not eliminate, the need for the Council to make payment for the provision of the leisure facilities it was statutorily required to provide.  No witness thought that elimination was possible.

In the event the sum paid to ELL has not been revised upwards except in relation to the provision of new facilities and ELL has required to achieve various economies as well as providing new services if for any reason the provision of facilities at any particular place required to cease.  In other words the Council were not to provide and have not provided any additional money beyond the agreed payment for the composite supply of services the Company has undertaken to provide.  On occasion the Company has achieved a surplus which the Council has not sought to have repaid.  These surpluses are modest and have been utilised by ELL to build up a reserve and improve services generally.

Originally it was envisaged that services would be provided to ELL by LA but that position has been departed from and the current situation is that ELL gets no services from the LA except refuse collection and participation in a Central Purchasing Unit which provides ELL with the ability to achieve cheaper supplies.

ELL employs 600 full-time and 300 part-time staff and have participated in coaching facilities and other enterprises which could not be described as other than a social service.  Such advertising potential for ELL as those services might have had would not justify their cost to the company, and would not be undertaken but for the Councils payment package. 

The leases have not, even now reached final form.  In the main they are in a form suitable for LA leasing tenants, but may be none the worse for that.  By contrast the finalised golf course leases are such that the reader may well feel bunkered by over meticulous detail.  They attempt to regulate maintenance in what seems to be an inappropriate way for such a document.  However that may be they do impose detailed obligations upon ELL.

The political aim of the LA is to provide not only facilities for participation but a general enhancement of the health and wellbeing of the inhabitants of the area and an encouragement to young and old persons more fully to participate in sporting and leisure activities.  They described this as “social inclusion”.

Although the calculation of the payment to ELL is capable of being varied in detail this has not in fact happened.  The original calculations have been adopted but an overall reduction may be and has been applied from year to year.  No effort has been made to cost out the individual items and relate that directly to any form of deficit funding or subsidy, although the amounts of shortfall or surplus in each of ELL’s activities are ascertainable and are in fact disclosed to LA.

The factual position would therefore appear to be capable of the analysis that the Local Authority provides an overall sum for leisure provision and ELL are left to make the detail of the provision within the sum paid.

South Lanarkshire Leisure Limited
This Company is a Company limited by guarantee and was formed in November 2001 and took over the leisure facilities then provided by LA.  Business plans, leases and service agreements were drawn up as in the case of Edinburgh Leisure.  However SLL also managed properties which were not transferred and have a separate agreement with LA about that and they also often have a dual use of facilities with local schools taking over usage after the school day and at weekends.  Links and parks maintenance is done by LA.

There are 12 Board Members of whom 2 are elected Council Officers and 2 Senior Council Officials.  There is also an observer from LA on the Board (the Deputy Chief Executive).  The LA has input into the initiatives and provisions and, if they were not prepared to fund at the level of costs proposed by the Company, there would require to be discussion and negotiation about what could be paid.  The Council for example undertook to pay £6.4m to provide the agreed services but would not underwrite any further deficit.

SLL has 650 contracted staff and 500 seasonal employees.  The Council have kept responsibility for links and parks facilities and in relation to the leisure facilities provided by way of golf courses the SLL operate but do not maintain them.  They pay the LA for certain administrative services e.g., payroll audit and debtor control; the specification of these is renewed annually.  The SLL may use the Council facilities or may outsource whichever they choose.  SLL have borrowing powers of up to £1m which could be utilised for extra facilities.  The leases in their instance are not full repairing leases. 

SLL sources of funding are the Council, the public, Health Boards by way of GP referral, the Scottish Football Association, lottery money and new opportunity funds.

Renfrewshire Leisure Limited
The mechanism adopted for this not for profit trust was that of an Industrial and Provident Society.  That route was considered by the other 2 Appellants but rejected in the favour of a company limited by guarantee.  For the present purposes there is no material difference.  However it should be noted that an Industrial and Provident Society does have an extra degree of control over its activities because of its status which is absent from the other 2 leisure trusts.

This Appellant was established on 1 January 2003.  The considerations were similar to the other Companies, a saving of rates and a possible VAT advantage.  There are 11 on their Management Board, 5 representatives of the Council, 2 members of staff, 1 representative of Sports Scotland and other persons invited to represent local interests.  RLL project a surplus at the end of each year but only to the extent that a deficit is avoided.  They expect to achieve some surpluses but these are committed to enhancing the premises or the provision of services.  They have 380 full-time equivalent staff and support staff.  The LA provides RLL with additional services but these are diminishing.  Property maintenance is not provided and the Council’s payment which is arranged from year to year may be modified to reflect the provision of additional services by RLL if as has happened the LA has created a new facility which RLL requires to manage. 

The Decided Cases
The precise circumstances disclosed by the above facts and the evidence have not been directly determined before.  Guidance however can be obtained from the binding authoritative statements of the Law in relation to supply of services; in relation to consideration and the discussion in the authorities about the requirement of a direct link between the consideration and the services.  The concept of supply has been considered by the House of Lords and in particular by Lords Millet and Hope of Craighead in Customs and Excise Commissioners v Redrow Group Plc [1999] STC 161 [1999] IWLR 408.  Lord Hope of Craighead said at p166; (412)

“The word “services” is given such a wide meaning for the purposes of VAT that it is capable of embracing everything which a taxable person does in the course of furtherance of a business carried on by him which is done for a consideration.  The name or description which one might apply to the service is immaterial, because the concept does not call for that kind of analysis.  The service is that which is done in return for the consideration”.

In the same case Lord Millet emphasised that there may be a supply by A to B where the goods or services are consumed by a third party where B provides consideration for the supply by A.  In rejecting the Commissioners argument that the destination of a supply must be ascertainable where it is made he said at p172, (WLR 418-9) “what must await events is not the identity of the party to whom services are rendered for different services are rendered to each; but which of the parties is liable to pay for the services rendered to them and so bear the burden of the tax in respect of which it claimed a deduction may arise”.

In Royal Bank of Scotland Group Plc v Commissioners of Customs and Excise [2002] STC 575 2002 STC 664 a case dealing with the issue of banknotes from Royal Bank ATMs operated by customers of other banks, the Lord Justice Clerk adopting the reasoning in Redrow said at p667 E-F “the reciprocity fee is payable to the bank in consideration of its providing to the counterparty bank a supply consisting of a service to a customer of that bank in the form of a facility to withdraw cash in whatever form it is dispensed” and that was so because there was a supply of a service to the counterparty bank even if that involves a provision of a service to third party customer and even if the service to that customer was an issue of banknotes.  Similarly in W H A Limited v Customs and Excise Commissioners [2004] STC 1081 following Customs and Excise Commissioners v Plantiflor Ltd [2002] IWLR 2 287; [2002] STC 1132 in the speeches of Lord Flynn and Lord Millet the House of Lords confirms that no problem is created by more than one supply being made at the same time arising out of the same activity.

In relation to the matter of a direct link what has to be determined is whether the supply was for the consideration; Staatssecetaris van Financien v Cooperatieve Aardappelenbewaarplaats [1981] I ECR 445; Apple & Pear Development Council v Customs and Excise Commissioners [1988] STC 221.  The matter is also discussed in Customs and Excise Commissioners v Church Schools Foundation [2001] STC 1661 by Sir Andrew Morrit V-C at [41-43] and Arden LJ at [95-96].

Certain Tribunal decisions were also referred to.  These, which will be discussed below, were Hillington Legal Resources Centre Ltd 1991 VATTR 39; Trustees of the Bowthorpe Community Trust [1994] No 12978; Wolverhampton CAB [1999] No 16411; North Lanarkshire CCTV Ltd EDN/01/209 No 18031; Pre-School Learning Alliance [2002] No 17737 where a test was propounded [para 29] of whether what was obtained was “a benefit that the Councils needed rather than merely wanted … and were part of the activity in which the authorities themselves were engaged, and not discrete undertakings”.  These cases all give illustrations of how the facts can be applied to the principles above determined in the Superior Courts.

Contentions for the Appellants
The general propositions that (1) There may be a supply by A to B where the goods or services are consumed by a third party where B provides consideration for the supply by A means that the same activity can be 2 supplies as in W H A and Royal Bank of Scotland.  This is put beyond doubt by Plantiflor.  When a customer pays to use one of the leisure facilities there is a supply by the company to the customer (which is exempt) but the making available of the facility to the customer is part of a wider supply by the company to the Council of operating a leisure centre, for which the Council is paying.  There is a direct link-the supply is for consideration-and it matters not whether the customer who receives the supply is the person paying the consideration.

In these appeals there is no doubt that money has been paid by the Councils to the Appellants and the Council receives the benefit of the fulfilment of its statutory duty.  The Council have contracted with the companies (“companies” in this decision includes Renfrewshire Leisure Limited the Industrial & Provident Society) to operate and manage the physical facilities and to service a need and wishes of the local population.  In order to fulfil the statutory duty it is necessary to have concessionary rates and schemes and so what is provided is a benefit which the Councils needed because of the statutory duty rather than merely wanted. 

The nature of the contractual relationships between the Appellants and the respective Councils set out in the funding agreements make it clear that there are binding obligations which are being paid for by the Council.  These may be enforceable and provide the protection required by the Councils before dispensing large amounts of public funds.  There is a direct link between the payments and the work carried out by the companies under the respective agreements.

The relationship between the companies and the Councils are at arms length.  There is an absence of control by the Council of the companies decision-making.  The companies are at liberty, as they have done, to dispense with Council services wherever possible.  There is no question of deficit funding because the companies are not given whatever money turns out to be needed in a particular year; a sum is agreed which is the consideration for the service.

It is relevant that the customer thinks that he is receiving something.  Each of the respective Council’s witnesses considered they were receiving something in return for the payment although their formulations differ.

With regard to the alternative argument that what is here present is a subsidy, the description of the payments whether ‘grant’ or ‘subsidy’ is irrelevant to the characterisation of the relationship for VAT purposes.  The important matter is whether there is a supply for a consideration.  The Tribunal Decisions of North Lanarkshire CCTV, Netherlands Tourist Board and Pre-School Learning Alliance demonstrate that no significance should be attached to words such as grant or subsidy.  It is not deficit funding in that the Council will not pick up the bill if there is any cost overrun.  Hillingdon Legal Resources Centre is an illustration of the absence of a direct link which accordingly caused the appeal to fail.

Keeping Newcastle Warm was concerned with a different issue which was the taxable amount.  The question there was, did a subsidy constitute part of a taxable amount received by the person making the supply?  That is not the issue here.

The Councils have all chosen to implement their statutory duty by paying the Appellants to provide adequate recreational and sporting facilities for the inhabitants of their local authority areas.  In so doing the Appellants provide operational and management services to the Councils.  The forms of relationship which have been adopted involve the receipt by the Councils from the Appellants of taxable supplies for VAT purposes.

Contentions for the Respondents
The Appellants make supplies of largely exempt services to the users of their facilities.  The payments by the Local Authorities to the Leisure Trusts are by way of grant or subsidy in order to maintain the entrance charges for the sports facilities at an acceptable level.  The payment of a grant or subsidy is outwith the scope of VAT and does not involve any supply of service by the recipient of the subsidy to the subsidiser.  However it was conceded that each case must be determined by reference to its precise arrangements.

A supply of services requires the existence of a direct link between the service provided and the consideration received.  The supply of the service must be “for” the consideration.  An indirect benefit accruing to the party making a payment will not be sufficient to create a supply of services.  The present case differs from North Lanarkshire CCTV Ltd v CCE insofar as that case involved payments by the local authority and other commercial organisations in return for CCTV monitoring services to their own properties.  The payments were calculated by reference to the camera coverage available.  In the present case, there is no comparable service being provided to the local authorities own property and the payments are calculated by reference to the shortfall in receipts.

The business plans produced by the leisure trusts clearly identify the payments being made by the local authorities as subsidies, grants or deficit funding.  The payments are calculated by reference to the shortfall between the operating costs and the revenue anticipated.  The level of payment does not reflect the value of the actual work being carried out by the leisure trusts.  In theory, if the leisure trust is operated in a highly efficient manner thereby maximising revenue receipts, the payment from the local authority would reduce to zero despite the increased work by the leisure trust.  A subsidy from public funds to cover general operating costs does not give rise to a taxable transaction since the subsidy from public funds is made in furtherance of the public interest rather than to procure goods or services for the payee.  A grant from a local authority to enable services to be supplied by the recipient of the grant to members of the public does not involve a direct link between the payment and the services provided by the recipient.  The existence of conditions for monitoring/supervision by the local authority of the services provided by the recipient of the grant does not thereby give rise to a supply of services to the local authority since such rights are to ensure that public funds are spent correctly.  Nor does the existence of an agreement whereby the local authority purports to “purchase services” from the recipient of the grant necessarily prevent the payment being outwith the scope of VAT.

There is nothing within the documents which justifies a different analysis.  First the business plans and internal documents from the various leisure trusts generally recognise that the payments involved are subsidies.  There are numerous examples of such language.  In addition, the mechanism for calculating the payment and making over the payment (in advance) is consistent with such use of language.  The leisure trusts’ advisers have merely sought to strengthen their position by adopting language within the formal agreements which indicates that the local authorities are acquiring services in return for the payments.  The services which are said to be provided by the Appellants to the local authorities are variously described as “managing sport and leisure facilities”, “managing and operating the Properties”, or “management of sports and leisure facilities within Council Area”.  However, they are not truly providing management services to the local authorities in relation to these sports centres.  The sports centres are held by the Appellants under long leases with the Appellants who also own most of the equipment.  The Appellants employ the staff.  Effectively, the business assets are all under the legal control of the Appellants and they are not managing these assets for the local authority.  Any management element relates to their own business of operating sports facilities for the public.  The specifications of service also make clear that the sport and leisure services which the Appellants must provide are services to the local community.  The service specifications sets out criteria to enable the Appellants to improve the delivery of their service to the general public whilst also ensuring that the subsidy is spent appropriately.

The true position in each of these three cases is that the Appellants’ supply services to members of the public in return for consideration.  There is no taxable supply by the Appellants to the local authorities who provide subsidies for the provision of the sports facilities.

Decision
The Tribunal accepted and uphold the Appellants contentions.  It seems clear, on the facts, that the Councils are under the statutory duty to make provision of leisure facilities.  Not only that but they have other motivations and also the general duty to provide for the wellbeing of the inhabitants of their area.  Insofar as the general health of the inhabitants is something separate which the Councils may want rather than need we consider that that can be and must be subordinated to their general duty of providing adequate facilities for recreational sporting cultural and social activities.  The policy of “social inclusion” adopted, in the view of the Tribunal is of no consequence for present purposes.  What is of importance is that in order to provide and ensure that there are available facilities for the inhabitants of their area they must include adequate provision for all the inhabitants of their areas.  Not all of those persons are in a position to utilise private sport centres or leisure facilities and they could not reasonably be expected to pay the commercial cost of things like swimming pools or fitness centres which are expensive to own, maintain and operate.

While it may be true that the or one of the motivating factors for the establishment of the leisure trusts was a rates advantage to the Councils that may have proved simply to be the catalyst for a more efficient and advantageous provision of appropriate leisure facilities.  A separate accountable body is likely to be, and has proved to be, more efficient and financially more effective than a local authority department. 

That being so, it is plain that benefits accrue and have accrued to the local authority by the arrangement.

It is in the view of the Tribunal obvious that such benefits for the Councils if secured from an independent legal entity require to be paid for and it is inescapable that the reality of the situation with each Appellant is that they are providing services to the Council for a consideration.  That consideration is calculated on the basis that the companies shall not suffer loss.  It is calculated in advance.  It is unrelated to any specific calculation of shortfall or subsidy and it is not to be amended in the event that the payment proves inadequate.  The companies have made a conspicuous success of their operations and have achieved surpluses.  If there is consideration the method of calculating the amount of consideration does not have any significance.

Whether in the course of the voluminous documentation provided to the Tribunal the payments which the Councils made were described as grants or subsidies is in the view of the Tribunal irrelevant.  They are in fact payments and they are payments in consideration for which the local authority receive a supply of services.

The Commissioners argument that the supply is to the athletic participant and that the companies are operating their own facilities which they lease or own for their own purposes while superficially legalistically maintainable takes no account of the reality which is that but for the Councils payment the facilities could not be operated in the way the Council desire.  However the objects of the Leisure Trusts were described, economic fact means that what would be provided without the Councils payment would be totally inadequate to fulfil the Councils statutory duty.  The Councils are not making a grant to the companies to enable them to operate for their own purposes.  They are making a payment to the companies so that they may operate in accordance with the wishes of the Councils properly to fulfil their statutory duty.  In that context the Council is the customer.

On the whole matter the Tribunal have no hesitation in unanimously concluding that the companies provide services to the Councils for a consideration and they accordingly find and determine that the rulings made by the Respondent in connection with the 3 Appellants are erroneous.  They allow the appeals.

Expenses
The Appellants moved for expenses in the event of success.  They have succeeded and are entitled to their expenses which failing agreement will require to be taxed by the Auditor of the Court of Session in terms of the Tribunal Rules.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  30 SEPTEMBER 2004

EDN/03/22
EDN/03/29
EDN/03/30