18952
	
	VALUE ADDED TAX  — claim for refund of tax incorrectly accounted for to Respondents — VATA 1994 s 80(3) to (3C) — unjust enrichment — whether VAT “passed on” — no — whether repayment “unjust” — no — appeal allowed.

MANCHESTER TRIBUNAL CENTRE

 
 	
	NEWCASTLE THEATRE ROYAL TRUST LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Colin Bishopp (Chairman)

Sitting in public in North Shields on 6 January 2005

Mark Hetherington of PricewaterhouseCoopers, chartered accountants, for the Appellant 

Nigel Poole, counsel, instructed by their solicitor’s office, for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	As its name indicates, the Appellant carries on the business of presenting live theatrical performances at Newcastle Theatre Royal.  Historically it accounted to the Respondents for VAT on the admission charges paid by those attending its performances.  However in Customs and Excise Commissioners v Zoological Society of London (Case C-267/00) [2002] STC 521 the European Court of Justice decided that organisations providing cultural services whose governing bodies were essentially voluntary came within article 13A(2)(a) of the Sixth VAT Directive (77/388/EEC) with the consequence that admission charges levied by them were exempt.  The Respondents accept that the Appellant is an organisation of that kind.  Its supplies of admission to its productions fall therefore within Item 2 of Group 13 in Schedule 9 to the Value Added Tax Act 1994 and, as the Respondents now also accept, are exempt.
2.	The Appellant has sought repayment of the VAT for which it has accounted in the past in the erroneous belief that its supplies were taxable.  It has made several claims, each relating to a different period of time.  The only claim with which I am presently concerned relates to the period from 1 December 1999 to 31 March 2003.  A modest amount has been repaid, for reasons immaterial for present purposes, but the Respondents have refused to repay the remainder, amounting to about £235,000.  That sum represents the amount of output tax for which the Appellant has incorrectly accounted, less the input tax for which it obtained relief on the assumption that it had been incurred in the making of taxable supplies; that input tax must now be disallowed.  The arithmetic of the claim is agreed.
3.	The Appellant’s claim is one made in accordance with section 80(1) of the 1994 Act:
“Where a person has … paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him.”
4.	 The Commissioners, however, rely on subsections 80(3) to (3C), which provide:
“(3)	It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.
(3A) 	Subsection (3B) below applies for the purposes of subsection (3) above where —
(a)	there is an amount paid by way of VAT which (apart from subsection (3) above) would fall to be repaid under this section to any person (‘the taxpayer’), and
(b)	the whole or a part of the cost of the payment of that amount to the Commissioners has, for practical purposes, been borne by a person other than the taxpayer.
(3B)	Where, in a case to which this subsection applies, loss or damage has been or may be incurred by the taxpayer as a result of mistaken assumptions made in his case about the operation of any VAT provisions, that loss or damage shall be disregarded, except to the extent of the quantified amount, in the making of any determination —
(a)	of whether or to what extent the repayment of an amount to the taxpayer would enrich him; or
(b)	of whether or to what extent any enrichment of the taxpayer would be unjust.
(3C)	In subsection (3B) above —
‘the quantified amount’ means the amount (if any) which is shown by the taxpayer to constitute the amount that would appropriately compensate him for loss or damage shown by him to have resulted, for any business carried on by him, from the making of the mistaken assumptions; and 
‘VAT provisions’ means the provisions of —
(a)	any enactment, subordinate legislation or Community legislation (whether or not still in force) which relates to VAT or to any matter connected with VAT; or 
(b)	any notice published by the Commissioners under or for the purposes of any such enactment or subordinate legislation.”
5.	The Appellant does not intend, if it receives the payment, to make any attempt to pass the money on to its patrons by identifying them and offering reimbursement of part of the cost of the tickets they have bought.  Instead, it proposes to retain the money and use it for its general purposes of promoting live theatre.  It accepts that it will, correspondingly, be “enriched”, in the sense that it will have more money at its disposal if the repayment is made than if it is not.  The Respondents maintain that such enrichment would be unjust because the burden of the VAT was borne by the patrons, and not by the Appellant — so that subsection (3A)(b) applies, a proposition which the Appellant disputes.  It does not argue that it can quantify any loss which satisfies subsection (3C), and acknowledges therefore that it cannot bring itself within the exception to subsection (3B).  Thus the only issue I must determine is whether the Appellant would be “unjustly” enriched if the repayment were made.
6.	The Appellant was represented by Mark Hetherington of PricewaterhouseCoopers, the chartered accountants, and the Respondents by Nigel Poole of counsel.  I had an agreed bundle of documents and heard oral evidence from one witness, the Appellant’s chief executive and artistic director, Peter Sarah.  I find the following facts.
7.	The Appellant runs a leading provincial theatre, though it is in competition for its audience with other regional theatres.  Some of those competitors, like the Appellant, are run on non-profit making lines, supported by grants from the local authority – the Appellant receives substantial, though variable, funds annually from Newcastle City Council.  Most of its income, however, is derived from the sale of admission tickets.  Some of its competitors are entirely commercial ventures; others, Mr Sarah believed, had different financial structures.  In some cases the competition was direct, in that two establishments would put on the same show (though I understood they would do so sequentially rather than simultaneously) but for the most part it was indirect in that the theatres were offering different productions but endeavouring to attract a share of the same finite audience.  I understood that the majority of the Appellant’s productions were of classical theatre, ballet and opera but that it also provided less highbrow entertainment, such as pantomime.
8.	The Appellant does not itself create the productions which it puts on, but instead takes shows produced by others, in the main touring companies.  It is, so I understand, typical of many similar theatres although there are others, including some among the Appellant’s competitors, which produce their own shows.  The consequence of putting on shows produced by others, as Mr Sarah explained, was that the Appellant has first to negotiate a fee with the touring company in return for which the show is provided.  The magnitude of the fee varies to reflect factors such as the nature of the production, the number and calibre of the participants and the length of time for which the production is to be put on by the Appellant.  Sometimes the fee is of a fixed sum and sometimes it consists of a share of the box-office receipts, or it may be a combination of the two.  The price of the tickets, sold to members of the audience, is, however, set by the Appellant.  The price set – and as in the case of most theatres, there is a range of prices for different seats within the auditorium – is always set by the Appellant at a level which takes into account the cost of the production – that is the amount which the Appellant must pay to the touring company – and its other expenses on the one hand and its expectation of ticket income on the other.  The amount which might be expected from ticket income will itself be affected by the cost of a ticket since if it is set too high, the number of customers will be smaller.  Mr Sarah explained that another factor which influenced him was the ticket pricing policy of the Appellant’s competitors.  I accept that evidence.  Those factors were set against the background of the Appellant’s overhead expenditure and its grant income in arriving at a final price.
9.	Mr Sarah told me that in fixing the price, he did not have VAT in mind.  I accept that the price of a ticket was not determined by calculating a figure at which the ticket might otherwise be sold and then adding VAT to arrive at the face value, and I accept too that Mr Sarah was not conscious, when fixing the prices, of VAT as a discrete component.  However, I do not think it can properly be said that VAT played no part at all in their determination.  At the time, the Appellant had to account for an excess of output tax over input tax of several thousands of pounds each year.  I do not accept that Mr Sarah simply disregarded that fact.  Indeed, he acknowledged that the price of the ticket, of necessity, did include an allowance for VAT.
10.	Nevertheless, it was clear that, of the ticket price, only a small amount represented VAT and that the VAT liability with which I am concerned was modest in the context of the Appellant’s overall turnover.  Mr Hetherington was able to demonstrate that in the relevant period, the average cost of a ticket was £14, of which 27p could be ascribed to VAT; and that the excess of output tax over input tax, so far as material in this appeal, amounted to less than 2 per cent of the Appellant’s turnover.  Mr Poole did not challenge those figures.  In my view, they support the conclusion that, while the Appellant could not disregard VAT when determining the price to be charged for admission tickets, it was merely one of several factors which contributed to the final decision, and was by no means the dominant factor.
11.	Of course, the fact that a windfall (as the repayment will be if the Appellant receives it) is modest does not make it any the less a windfall, and the question remains whether it would be unjust if the Appellant were to receive it.  That it may have set its prices with VAT only incidentally in mind does not seem to me to be determinative.
12.	I was referred to the decisions in Weber’s Wine World v Abgabenbenberufungskommission Wien (Case C-147/01) (delivered on 2 October 2003) and to Customs and Excise Commissioners v National Westminster Bank plc [2003] STC 1072 in which the European Court of Justice and the High Court respectively drew together the threads of European and United Kingdom jurisprudence on unjust enrichment.  The approach I must adopt can, I think, be summarised in this way: the Commissioners, on whom the burden lies, must show that the VAT has been passed on to the customer, but that burden is not discharged by pointing to the mere fact that, as a matter of law, the price charged necessarily included VAT; that even if the VAT has been passed on, its repayment to the trader may not necessarily amount to unjust enrichment; and that no firm rule can be laid down – the question is to be decided on the facts of the individual case.  The tribunal is required to reach a fair decision on those facts.  It is also clear from Weber’s Wine World that (as the Court put it at paragraph 95 of the judgment) the rules precluding recovery “must be interpreted restrictively, taking account in particular of the fact that passing on a charge to the consumer does not necessarily neutralise the economic effects of the tax on the taxable person.”
13.	I am not persuaded that, in this case, the Appellant has “passed on” the tax in the sense contemplated by the jurisprudence to which I have referred.  I am satisfied that, albeit Mr Sarah had to include VAT among the factors leading to his determination of the prices to be charged, and his doing so might, at least in some cases, have resulted in the price being higher than if he had left VAT out of account, the most important factor of all was the view he took of the amount the likely audience for the show would be willing to pay.  There may have been cases in which, the show being likely to attract large audiences, the ticket prices could be set at a fairly high level; there may have been others when the ticket price needed to be set at a low level in order to attract an adequate audience.  What was clear to me from Mr Sarah’s evidence, which I accept on this point, was that these considerations far outweighed the inclusion of VAT as a determining factor.  In other words, the VAT was passed on in only the most incidental of senses, and in reality because, as the law was understood at the time, the Appellant had no means by which it could not include an element of VAT within its ticket prices.  For this reason alone, I am satisfied the appeal must be allowed.
14.	Even if I am wrong in that conclusion, I also take the view that the repayment to the Appellant would not be unjust.  I was referred to the very recent tribunal decision in Baines & Ernst Limited (2004, Decision 18769).  I am aware that the unsuccessful appellant in that case has lodged an appeal with the High Court but I nevertheless think a comparison between the two cases is helpful.  The tribunal found as a fact that the prices charged to the trader’s clients at all times included the VAT for which the trader believed it was required to account.  For part of the period it was overtly adding VAT to its fees, for the remainder adding VAT to what it would otherwise charge though without mentioning the fact to its clients.  It was later decided by the tribunal in another case that the supplies were exempt and Baines & Ernst claimed a refund of the tax for which it had accounted.  It did not intend to pass on any part of the refund, should it receive it, to its clients.  That is, as I have recorded, this Appellant’s position: it does not intend to pass on any part of the refund.  However, it seems to me that it would have been possible for Baines & Ernst, if it so wished, to pass on refunds to its clients or many of them, and that the amounts due to each individual client might be quite substantial.  Here, the Appellant would find it difficult, if not impossible, to identify purchasers of tickets with any degree of reliability; and even if it could, the amount to be repaid would in most cases be trivial.
15.	That one trader can, and the other cannot, identify its customers is not, of itself, a ground for deciding that the former should not, while the latter should, receive a refund when, as a matter of fact, neither will make a refund, but it is, I think, pertinent to ask what would be the response of their respective customers if told that VAT which they had themselves paid was to be repaid to the trader, and retained.  In Baines & Ernst, the shareholders intended to keep the money themselves.  I strongly suspect that their clients would consider that manifestly unjust.  Here, by contrast, the Appellant proposes to devote the money to its general purposes of promoting live theatre in Newcastle.  It seems to me more likely than not that its patrons, even if they could establish an entitlement to an individual refund, would not seek one but would instead be content to see the money diverted to those purposes.  In other words, it does not appear to me that the informed bystander, even one with a personal, if small, interest in the matter, would consider it in any way unjust that the Appellant should receive and retain the refund it seeks.  On this ground, too, the appeal  must be allowed.
16.	For completeness, I should mention the Appellant’s contention that other theatre trusts, for all practical purposes in a position identical to its own, had received refunds and that the Commissioners’ refusal to make a refund to it was unfair.  Mr Poole, without conceding that any such refunds had been made, agreed that I could not determine the appeal in the Appellant’s favour merely on that ground.  So much is, in fact, apparent from the National Westminster case to which I have referred, and I have left any possible unfair treatment of the Appellant by comparison with others out of account.
17.	For the reasons I have given, the appeal is allowed.  I direct that the Respondents pay the Appellant’s costs, to be assessed by a tribunal chairman if the parties are unable to agree an amount.

COLIN BISHOPP
CHAIRMAN
Release Date: 23 February 2005
MAN/03/0758