19485

EXEMPTION – Article 13A(1)(n) of the Sixth Directive and the Value Added Tax (Cultural Services) Order 1996 – whether unjust enrichment – no – whether 3-year cap applies – no 

LONDON TRIBUNAL CENTRE

	NORTHAMPTON THEATRES TRUST LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					JOHN BROWN CBE FCA CTA

Sitting in public in London on 24 and 25 October 2005

Roger Thomas, counsel, instructed by Grant Thornton, chartered accountants, for the Appellant

Richard Smith, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal by Northampton Theatres Trust Limited against the refusal contained in a letter dated 10 September 2004 to refund VAT that the Appellant claimed was overpaid on the ground that the supplies were exempt in accordance with Article 13A(1)(n) of the Sixth Directive or the Value Added Tax (Cultural Services) Order 1996 (“the Cultural Services Order”) (SI 1996 No.1256).  The appeal raises issues relating to the 3-year cap and unjust enrichment.  Mr Roger Thomas appeared for the Appellant and Mr Richard Smith for Customs.
2.	We heard evidence from Mr Neil Smith, Director of Finance and Company Secretary of Derngate Trust Limited between 1996 and 2000, Mrs Kim Grant, Finance Director of the Appellant from May 2001, Mr David James, Indirect Tax Consultant with Grant Thornton, and Mrs M F Cadman, officer of HM Revenue and Customs.  We find the following facts:
(1)	The Appellant is a charity whose main objects are to provide a cultural experience which will enlighten, entertain, educate and stimulate appreciation of the arts for the public at large, and in particular the residents of Northampton and the East Midlands by providing a wide range of quality arts and entertainment at the Centre at Guildhall Road, Northampton or elsewhere.  It owns the Royal and Derngate theatres.
(2)	Before October 1999 the Derngate theatre was operated by Derngate Trust Limited, a charity, for cultural shows (the type of show expected by those making grants to the Appellant), and Derngate Enterprises, a trading subsidiary which covenanted its profits to its parent, for more popular shows.  Both were within a group registration with Derngate Trust Limited as representative member.  On 3 October 1999 the business was transferred to the Appellant which put on both types of shows, Derngate Trust Limited was wound up, and Derngate Enterprises remains as a dormant subsidiary (the Royal theatre was transferred from another body, Northampton Repertory Players Limited).  The VAT registration continued with the Appellant as the representative member.  References to the Appellant include the predecessor entities within the same VAT group.
(3)	There are three types of arrangement made by the Appellant for putting on shows.  About two-thirds of programmes are bought-in productions in which the Appellant runs the box office as agent for the producer and the proceeds are split.  Other programmes are put on by the Appellant itself.  The Appellant also leases out the theatre to others.
(4)	Derngate Trust Limited (before 3 October 1999), and thereafter the Appellant, ran at a deficit in all relevant years, which was partly made up by grants from the Arts Council and Northampton Borough Council.  The following figures are extracted from its accounts in respect of the years for which claims are live (see paragraph 2(11) below); we were not given the figures for the blank cells.
Year to 31 March	Income	Expenditure	Deficit 	Grants	Net deficit	Potential refund	Potential deficit	
1994	2,578,941	3,547,666	968,725	910,000	58,725	51,251 	8,474	
1995	2,387,017	3,225,923	838,906	815,000	23,906	(14,075)	37,981	
1996	2,651,802	3,525,564	873,762	790,000	83,762	9,808  	73,954	
2001	5,037,500	6,405,533	1368,033	1283,141	84,892			
2002	4,772,614	6,260,304	1487,690	1233,033	254,657			
2003	4,893,228	6,234,030	1340,802	1283,445	57,357			
(5)	Up to October 1999 further funds were provided by profits covenanted by Derngate Enterprises Limited.  For example in the year to 31 March 1996 there was a loss of £17,943 after taking into account recharges of expenditure to the subsidiary of £65,819 not included in the table above, and a covenanted payment of £74,037, resulting in a consolidated profit of £56,094.
(6)	The ticket price is set in conjunction with the promoter for bought-in productions, with a view to maximising the revenue in both their interests, taking into account factors such as the type of production, its knowledge of the artiste and promoter, its expected popularity, the day of the week and its knowledge of its customers derived from its database.  Experience has shown that there is a maximum price that the public will pay for various productions and if this is exceeded revenue will drop, as in consequence will associated income such as bar takings.  The Appellant was aware of prices charged by other theatres but the others in the vicinity were smaller and not in competition for the same promoters’ shows.  The theatre in Milton Keynes, which was believed to be liable to VAT, was potentially in competition but had different programmes, mainly weekly repertory.  Their research showed that following the opening of the Milton Keynes theatre in about 2001 more people were going to the theatre.  Ticket prices are not set with VAT in mind.  An estimate is made of the number of tickets sold, taking concessions into account, VAT is deducted; the promoter’s share (plus VAT) and any royalties are deducted with any other specifically attributable costs.  Overhead costs will then be deducted.
(7)	The Appellant’s agreement with the Arts Council requires that, after taking grants into account, a break-even budget is provided.
(8)	Mr James of Grant Thornton wrote to Mr Smith mentioning the Cultural Services Order; a meeting took place on 28 November 1996; an internal Grant Thornton note of 3 December 1996 stated that the Appellant “may be entitled to exemption for the cultural activities which it supplies.  However, whether it is advantageous…to investigate this point further will depend upon the amount of input tax which would be lost as a result.  Only once Neil [Smith] has completed his analysis of the last VAT Return will we be in a position to consider this further.”  Mr James was aware of the possibility of challenges to Customs interpretation of the Cultural Services Order but nobody was making protective claims at the time.  
(9)	Although there is nothing in the minutes Mr Smith discussed with the Finance Committee of the Appellant the possibility of claiming exemption under the Cultural Services Order.  There was no further discussion as the Appellant did not qualify on Customs’ interpretation of the Order in Notice 701/47 (June 1996) because it had paid administrators.
(10)	An issue of Legal Update by the Theatrical Management Association of May 1997, which it is likely that Mr Smith saw although he did not remember, mentions that one member of the Association had successfully claimed exemption despite paying a fee to its treasurer and administrator.  Mr Smith was aware of other discussion of the issue of the scope of bodies entitled to exemption under the Cultural Services Order in the accountancy press and the trade magazine “The Stage.”
(11)	About the time of the meeting with Mr James the Appellant was planning a major refurbishment and recovery of input tax on the project was important.  It had applied for a grant from the National Lottery.  There were lengthy negotiations during which the likely amount of grant varied from £13.7m to £1m.  Mrs Grant quantified the input tax on the refurbishment as £1.3 in 2001 and it has since risen to £2m.  Customs accept that this is covered by transitional relief for building projects in progress on 1 June 2004 in Business Brief 28/03 (but are holding up repayment of input tax on building work pending the result of this appeal).   
(12)	On 17 July 2002 the first claim was made for refund in respect of Derngate Trust Limited for the period 1 April 1993 to 3 October 1999 (Derngate Enterprises Limited is not included in the claim) on Grant Thornton’s advice following the decision in Zoological Society of London, Case C-267/00 that Customs’ interpretation of the Cultural Services Order was wrong in respect of the meaning of managed on a voluntary basis (the Directive says “an essentially voluntary basis”) with the consequence that the Appellant could qualify for exemption.  The Appellant now concedes that periods after 4 December 1996 (the date of the resolution in Parliament giving effect to the three-year cap) are time barred.  Refurbishment work had not started when the claim was made.  On 4 March 2004 the Appellant made its second refund claim in respect of the period August 1999 to March 2003.  It now concedes that periods earlier than 3 years before 4 March 2004 are time barred.  The live claims are therefore from 1 April 1993 to 4 December 1996, which Customs contends is barred by both the three-year cap and unjust enrichment; and 5 March 2001 to 4 March 2004, which Customs contends is barred by unjust enrichment.
(13)	The Appellant wrote to a random selection of 21,000 its customers on 7 September 2005 saying that if they succeeded in the claim which is the subject of this appeal, customers would not receive any refund but asking if the customer preferred either that Customs keep it or the Appellant used it for their benefit.  They received responses from 5,996 (28%) all of whom said that they had bought tickets over the last 10 years, that they recognised that they were entitled to a proportion of the refund, and that they donated it to the theatre.
3.	Section 80 of the VAT Act 1994 provides:
(1) Where a person— 
(a) has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and 
(b) in doing so, has brought into account as output tax an amount that was not output tax due, 
the Commissioners shall be liable to credit the person with that amount.
…
(3) It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.
4.	As the unjust enrichment and three-year cap issues are unrelated, we shall deal with them separately.
Unjust enrichment
5.	Mr Thomas, for the Appellant contends in outline on this aspect:
(1)	The burden of proof is on Customs.
(2)	The Appellant runs at a deficit with expenditure exceeding income by 30-35%.  By charging say £10 to receive £7 from the customer it cannot be said to be passing on the additional element of VAT on the ticket.  Customs need to show that the VAT has been passed on rather than some other cost.
(3)	Even if (which he denied) VAT had been passed on, it would be not be unjust for the Appellant to retain the refund as shown by the replies to its questionnaire.
(4)	He reserved his right to argue that s 80 of the VAT Act 1994 was discriminatory and could not be relied on by Customs, this point being currently before the ECJ.
6.	Mr Smith, for Customs, contends in outline on this aspect:
(1)	The Appellant took VAT into account when setting ticket prices because it had to show that it would not run at a loss in order to obtain Arts Council funding.  When shows were staged by outside promoters there was a contractual provision for the VAT to be deducted from the takings before division, which indicates that VAT was considered when deciding the pricing policy.  Tickets were not priced at what the public will pay as there were instances of prices being raised to recoup losses.  Some of the comparator theatres were not exempt and their prices included VAT.  The Appellant charged similar prices to them.
(2)	The Appellant’s questionnaire to customers admitted that VAT was passed on to the customers who were sent a form including the following: “I recognise that I am entitled to a proportion of any VAT refunded by Customs and Excise to the theatre because the tickets I bought should have been exempt from VAT.”  In any event the sums stated in the letter were incorrect and too small. 
7.	The ECJ has given guidance about unjust enrichment in Société Comateb, Cases C-192/95 to C-218/95 [1997] STC 1006:
“23. It is accordingly for the national courts to determine, in the light of the facts in each case, whether the burden of the charge has been transferred in whole or in part by the trader to other persons and, if so, whether reimbursement to the trader would amount to unjust enrichment.
   24. In this respect it should be made clear, first, that if the final consumer is able to obtain reimbursement through the trader of the amount of the charge passed on to him, that trader must in turn be able to obtain reimbursement from the national authorities. On the other hand, if the final consumer can obtain repayment directly from the national authorities of the amount of the charge which he has paid but which was not due, the question of reimbursing the trader does not, as such, arise.
   25. Second, it must be noted that in Bianco and Girard, (at 1119, para 17), the court stated that even though in national law indirect taxes are designed to be passed on to the final consumer and even if in commerce they are normally passed on in whole or in part, it cannot be generally assumed that the charge is actually passed on in every case. The actual passing on of such taxes, either in whole or in part, depends on various factors in each commercial transaction which distinguish it from other transactions in other contexts. Consequently, the question whether an indirect tax has or has not been passed on in each case is a question of fact to be determined by the national court which may freely assess the evidence. However, in the case of indirect taxes, it may not be assumed that there is a presumption that they have been passed on and that it is for the taxpayer to prove the contrary.
   26. The same applies where taxpayers have been obliged by the relevant legislation to incorporate the charge in the cost price of the product concerned. The fact that such a legal obligation exists does not mean that there is a presumption that the entire charge has been passed on, even where failure to comply with that obligation carries a penalty.
   27. Accordingly, a member state may resist repayment to the trader of a charge levied in breach of Community law only where it is established that the charge has been borne in its entirety by someone other than the trader and that reimbursement of the latter would constitute unjust enrichment.
   28. It follows that if the burden of the charge has been passed on only in part, it is for the national authorities to repay the trader the amount not passed on.
   29. It should be borne in mind, however, that even where it is established that the burden of the charge has been passed on in whole or in part to the purchaser, repayment to the trader of the amount thus passed on does not necessarily entail his unjust enrichment.”
In Kapniki Mikhailidis AE Cases C-441/98 and 442/98 the court said:
“27. By its second question, the national court asks, in substance, (i) whether Community law allows a Member State to refuse to refund charges levied in breach of Community law when it has been established that the refund would involve unjust enrichment and (ii) how proof of unjust enrichment may be established. 
28. Mikhailidis submits that it should not have to bear the burden of proof. The Commission, which supports Mikhailidis on this point, observes that, according to the case-law of the Court, there is no presumption that taxes have been passed on to third parties and that it is not for the taxable person to prove the contrary. 
29. By contrast, the IKA and the Greek Government contend (i) that a Member State is entitled to refuse to refund a charge levied in breach of Community law if it is established that that would give rise to unjust enrichment and (ii) that inasmuch as Mikhailidis has failed to show that the levying of the disputed charge caused an increase in the price of the products and a reduction in the volume of sales, it must be inferred that refunding the charge entails unjust enrichment. Therefore, the IKA and the Greek Government maintain that the competent authorities are not obliged to refund the disputed charge to the plaintiff in the main proceedings. 
30. As a preliminary point, it is apparent from well-established case-law that the right to a refund of charges levied in a Member State in breach of rules of Community law is the consequence of, and complement to, the rights conferred on individuals by the Community provisions prohibiting charges having an effect equivalent to customs duties. The Member State is therefore obliged in principle to repay charges levied in breach of Community law (Case 199/82 Amministrazione delle Finanze dello Stato v San Giorgio [1983] ECR 3595, paragraph 12; and, most recently, Case C-343/96 Dilexport v Amministrazione delle Finanze dello Stato [1999] ECR I-579, paragraph 23). 
31. As regards the first part of the second question, it is settled case-law that the protection of rights guaranteed in the matter by Community law does not require an order for the recovery of charges improperly levied to be granted in conditions which would involve the unjust enrichment of those entitled (see, in particular, Case 68/79 Just v Danish Ministry for Fiscal Affairs [1980] ECR 501, paragraph 26). 
32. It is therefore for the national courts to determine, in the light of the facts of each case, whether the burden of the charge has been transferred in whole or in part by the trader to other persons and, if so, whether reimbursement to the trader would amount to unjust enrichment (see, inter alia, Joined Cases C-192/95 to C-218/95 Comateb and Others v Directeur Général des Douanes et Droits Indirects [1997] ECR I-165, paragraph 23). 
33. However, a Member State may resist repayment to the trader of a charge levied in breach of Community law only where it is established that the charge has been borne in its entirety by someone other than the trader and that reimbursement of the latter would constitute unjust enrichment. It follows that if the burden of the charge has been passed on only in part, it is for the national authorities to repay the trader the amount not passed on (Comateb, paragraphs 27 and 28). 
34. Furthermore, even where it is established that the burden of the charge has been passed on in whole or in part to third parties, repayment to the trader of the amount thus passed on does not necessarily entail his unjust enrichment (Comateb, paragraph 29). 
35. The Court has already observed on several occasions that it would be compatible with the principles of Community law for courts before which claims for repayment were brought to take into consideration the damage which the trader concerned might have suffered because measures such as the disputed charge had the effect of restricting the volume of exports (Just, paragraph 26; and Comateb, paragraph 30). 
36. As regards the second part of the second question, it should be borne in mind that any rules of evidence which have the effect of making it virtually impossible or excessively difficult to secure repayment of charges levied in breach of Community law are incompatible with Community law. That is so particularly in the case of presumptions or rules of evidence intended to place upon the taxpayer the burden of establishing that the charges unduly paid have not been passed on to other persons or of special limitations concerning the form of the evidence to be adduced, such as the exclusion of any kind of evidence other than documentary evidence (San Giorgio, cited above, paragraph 14). 
37. In that regard, Community law precludes a Member State from making repayment of customs duties and taxes contrary to Community law subject to a condition, such as the requirement that such duties or taxes have not been passed on to third parties, which the plaintiff must show he has satisfied (Dilexport, paragraph 54).”
8.	Mr Thomas drew our attention immediately after the hearing to a summary of Warren J’s decision in Baines & Ernst Limited v Customs and Excise Commissioners (25 October 2005, while we were sitting) in which he found that the Tribunal’s decision that the VAT had been passed on could not stand, and considered the nature of the evidence required.
9.	Unjust enrichment can arise where tax has been passed on to the recipient of the supply and the refund of tax is made to the supplier.  For example, where a widget manufacturer fixes the price of widgets on commercial grounds and then adds VAT that the business customer is happy to pay in addition to the price because it will be credited in full as input tax to the customer.  If it is found that tax was wrongly charged, repaying it to the manufacturer which keeps it would unjustly enrich the manufacturer.  An example of the opposite was given by Advocate General Jacobs in Weber’s Wine World, Case C-147/01 at [48]:
“For example, the trader may choose to curtail any increase in his retail prices and maintain his volume of sales by limiting his profit margin to absorb all or part of the tax. Or else, having decided not to take that course but to increase his prices by the exact amount of the tax, he may find that his profits drop because he is making fewer sales. And he may even choose to absorb part of the tax himself yet still find a drop in sales. In all such cases which are plausible in a situation of keen competition between traders he will have suffered an economic loss as a result of the imposition of an unlawful tax, so that it cannot be said either that he has passed on (all) the burden of that tax to third parties or that he would be unjustly enriched if (an appropriate proportion of) the tax were reimbursed to him.” 
10.	It is much more difficult to apply the principle to supplies by a charity whose aims are to benefit those who pay to attend performances, and particularly so when it aims (but does not succeed) to break-even after taking grants into account.  The ticket prices are not economic in the way that a normal business will fix prices to cover costs and make a profit.  The Appellant fixes ticket prices to maximise revenue but knowing that it will make a deficit.  When the Appellant thought that its supplies were standard rated clearly VAT had to be paid out of the receipts because the law so provides but that does not determine who bears it and there is no presumption that tax is passed on (Comateb at [25]).  We question whether the concept of unjust enrichment is meaningful for a charity where the payers and the charity have the same interests and consequently there is no equivalent of the shareholders of the widget manufacturer who can potentially be enriched.  
11.	Even if the concept of unjust enrichment can be applied here, the first question is whether on the facts the ticket prices are higher than they would have been if VAT had not been charged.  We find that they are not and accordingly that VAT is not passed on.  Ticket prices are set to maximise revenue without taking VAT into account.  The ticket price would be exactly the same in the absence of VAT, as is demonstrated by the fact that when the Appellant became exempt, ticket prices were not reduced.  The difference between the price of a £15 ticket with VAT and the price if the Appellant is exempt (including taking into account irrecoverable VAT paid) is stated in the circular to their customers to be about 27p; we understood Mr Smith to dispute this, but we have no other figure.  VAT was paid as an overhead and was borne either by the Appellant or out of grants.  If we are wrong on this we must still consider whether it would be unjust (Comateb at [29]) if the Appellant retains the refund and then applies it, as required by its objects, for the benefit of the class of persons who (on this assumption) bore the VAT.  We do not find that it would be unjust.  The result achieve as closely as is possible that the customers who paid indirectly benefit from the refund.
12.	Although in the similar appeal of Newcastle Theatre Royal Trust Limited v Customs and Excise Commissioners (2005) VAT Decision 18,952 the Tribunal considered what might have the customer’s response if they had been told that the theatre would retain the refund, we do not consider it is relevant that, when customers were asked if they would prefer Customs or the Appellant to retain the refund, they unanimously choose the Appellant, and said that they would donate the refund to the theatre.  We would have been surprised if they did not.  Mr Smith contended that the Appellant had in effect shot itself in the foot by asking customers to state that they recognised they were entitled to a refund as this indicated that the Appellant would be unjustly enriched if it kept it.  Mr Thomas said that the question was asked on the hypothesis that they were so entitled.  Whether something is unjust does not depend on the motives of the payer, who might want the Appellant to keep the refund out of charitable motives, as suggested by the word donate it to the theatre, rather than because they considered that they would not be unjustly enriched. 
13.	Accordingly we find that the Appellant would not be unjustly enriched if it keeps the refund.
Three-Year cap
14.	The following chronology is relevant:
(1)	1 January 1990: transitional taxation of cultural services within article 13A(1)(n) of the Sixth Directive removed by the Eighteenth Directive.
(2)	8 May 1996: the Cultural Services Order made; laid before the House of Commons on 9 May 1996, and came into force on 1 June 1996.
(3)	June 1996: VAT Notice 701/47 explaining that the Cultural Services Order did not apply if any payment is made for services of a managerial or administrative nature; also providing that a public body did not have to be exempt if it did not wish to be, but that this would be subject to review.  The notice provides for repayments from 1 January 1990 subject to the defence of unjust enrichment.
(4)	18 July 1996: 3-year cap announced in Parliament applying to claims made from 18 July 1996.
(5)	13 November 1996: Tribunal decision in Glastonbury Abbey v Customs and Excise Commissioners [1996] V & DR 307 released, deciding that in the circumstances having paid employees did not prevent article 13A(1)(1)(n) from applying (but that the provision was not directly applicable).
(6)	14 November 1996: Mr James’ letter to Mr Smith mentioning the Cultural Services Order; meeting on 28 November 1996; internal Grant Thornton note of 3 December 1996 that the Appellant “may be entitled to exemption for the cultural activities which it supplies.  At the time the Appellant was planning the major refurbishment and recovery of input tax on the project was important.  
(7)	4 December 1996: Provisional Collection of Taxes Act 1968 Resolution giving effect to the 3-year cap.  Business Brief BB/22/02 issued on 5 August 2002 deals with the transitional arrangements for making reclaims of overpaid VAT before that date.
(8)	19 March 1997: 3-year cap enacted in s 47 Finance Act 1997.
(9)	31 March 1997: original end date (later extended to 30 June 1997, see paragraph 14(15) below by which time the taxpayer must have discovered the error in order to obtain the benefit of transitional arrangements introduced following Marks and Spencer, Case C-62/00 [2002] STC 1036.
(10)	May 1997: Legal Update by the Theatrical Management Association mentions that one member had successfully claimed exemption despite paying a fee to its treasurer and administrator.
(11)	30 June 1997: extended end date (see paragraph 14(15) below) by which time the taxpayer must have discovered the error in order to obtain the benefit of the transitional arrangements following Marks and Spencer.
(12)	21 March 2002: Zoological Society of London, Case C-267/00) decided by the European Court of Justice with the result that the Appellant could qualify for exemption.
(13)	11 July 2002: Marks and Spencer case decided by the European Court of Justice that the absence of transitional provisions on enactment of the 3-year cap was in breach of Community law.
(14)	17 July 2002: The Appellant makes the first claim for refund in respect of Derngate Trust for the period 1 April 1993 to 3 October 1999.   Refurbishment work had not then started.  The live period is 1 April 1993 to 4 December 1996, of which the period from 1 June 1996 is after the Cultural Service Order came into force.
(15)	5 August 2002: Business Brief 22/02 issued setting out transitional arrangements following Marks and Spencer.  This invited repayment claims by 31 March 2003 including cases where taxpayers “…made no claim [before 31 March 1997] but can demonstrate that they discovered the error before 31 March 1997.”  
(16)	8 October 2002:  Business Brief 27/02 changing the references to 31 March in both years in paragraph 14(15) above to 30 June giving effect to the Grundig Italiana Case C-255/00 [2003] All ER (EC) 176 in which the European Court of Justice held that the minimum transitional period must be 6 months.
(17)	10 December 2003: Business Brief 28/03 explaining changes following Zoological Society of London applying from 1 June 2004, including a concession for major building projects in progress at 1 June 2004 allowing recovery of input tax on such projects between 1 June 2004 and 31 May 2007, which Customs agree applies to the Appellant.
(18)	29 December 2003: the Appellant starts exempting its supplies.
(19)	4 March 2004: the Appellant makes its second refund claim in respect of the period August 1999 to March 2003, of which the period from 5 March 2001 to 4 March 2004 is not affected by the three-year cap.  
15.	Mr Thomas, for the Appellant, contends in outline that:
(1)	The Appellant had a Community right to repayment under article 13A(1)(n) of the Sixth Directive until 31 May 1996 because of the UK’s failure to introduce the exemption until it was included in the Cultural Services Order, and thereafter because of Customs’ failure correctly to interpret that provision, as transposed by the Cultural Services Order, in relation to the Zoological Society of London point.
(2)	The Appellant was aware of the opportunity to make a claim and so could have made a claim during a transitional period of there had been one.  It would have made a claim if Grant Thornton had so advised.
(3)	Because of the principle of effectiveness (that a State must not make it excessively difficult for the person to exercise his Community rights) the burden of proof is on Customs to show knowledge on the part of the Appellant and that the Appellant would not have made a claim, which Customs have not done
(4)	Customs misled the Appellant into not claiming exemption by its interpretation of the Cultural Service Order and so the Appellant should have a reasonable time after it was aware it had been misled as a result of the decision in Zoological Society of London to make a claim.
16.	Mr Smith contends in outline:
(1)	The Appellant had no Community right to repayment since article 13A(1)(n) was not sufficiently precise to be directly applicable, but merely a domestic law right under s 80.
(2)	(Further submissions were made in the light of the decision of the High Court in Fleming (Trading as Bodycraft) v HMRC [2005] STC 707 and Condé Nast Publications Limited v Customs and Excise [2005] STC 1327 which do not arise in the light of the Court of Appeal decision in the former.)
17.	There was thus a substantial disagreement between Mr Thomas and Mr Smith about the legal position before the Cultural Services Order was made, it being common ground that it should have been made in 1990 when the transitional taxability of cultural services was removed by the Eighteenth Directive.  Mr Thomas contends that by virtue of article 13A(1)(n) of the Sixth Directive the Appellant had a Community right to repayment of tax overpaid from the start of trading in 1993, and Mr Smith contends that the terms of the Directive were insufficiently precise to give it any Community rights.  The Directive provides:
“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:…
(n) certain cultural services and goods closely linked thereto supplied by bodies governed by public law or by other cultural bodies recognised by the Member State concerned….
2 (a) Member States may make the granting to bodies other than those governed by public law of each exemption provided for in 1(b), (g), (h), (i), (l), (m) and (n) 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, 
—they shall charge prices approved by the public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to value added tax, 
—exemption of the services concerned shall not be likely to create distortions of competition such as to place at a disadvantage commercial enterprises liable to value added tax.”
18.	Mr Thomas relies on Ambulanter Pfegedienst Kügler GmbH Case C-141/00) that paragraph (g) (“the supply of services and of goods closely linked to welfare and social security work...by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned”) is directly applicable.  The Court said:
“52. First, although Article 13(A)(1) of the Sixth Directive provides that the Member States are to apply the exemptions prescribed by that provision 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, a Member State may not rely, as against a taxpayer who is able to show that his tax position actually falls within one of the categories of exemption laid down in the Sixth Directive, upon its failure to adopt the very provisions which are intended to facilitate the application of that exemption (see, in relation to Article 13(B) of the Sixth Directive, Becker [Case 8/81], paragraph 33). 
53. Second, Article 13(A)(1)(g) of the Sixth Directive indicates in a sufficiently precise and unconditional manner the activities to which the exemption applies. 
54. Finally, with the regard to the concept of organisations recognised as charitable by the Member State concerned, it is correct, as the German Government has stated, that Article 13(A)(1)(g) of the Sixth Directive grants the Member States a discretion for the purpose of according certain organisations such recognition. 
55. As long as the Member States observe the limits of the discretion which is accorded to them by Article 13(A)(1)(g) of the Sixth Directive, persons cannot rely on that provision in order to acquire the status of charitable organisation as against the Member State concerned. 
56. Where a person seeks the status of charitable organisation, it is for the national courts to examine whether the competent authorities have observed those limits while applying Community principles, in particular the principle of equal treatment. 
57. It will accordingly be for the national authorities, in accordance with Community law and subject to review by the national courts, to determine, in the light in particular of practice followed by the competent administrative body in analogous situations, which organisations should be recognised as charitable within the meaning of Article 13(A)(1)(g) of the Sixth Directive. 
58. In the main proceedings, the national court will thus be able to take into account the existence of specific provisions, be they national or regional, legislative or administrative, or tax or social security provisions, the fact that associations carrying on the same activities as the claimant in the main proceedings are already entitled to a similar exemption, given the public interest inherent in those activities, and the fact that the costs of the services supplied by the claimant in the main proceedings may be largely met by statutory health funds or by social security bodies with which private operators such as the claimant in the main proceedings have contractual relations. 
59. This conclusion cannot be affected by the possibility under Article 13(A)(2) of the Sixth Directive of making the grant of the exemptions provided for in Article 13(A)(1) subject to one or more conditions.
It is inherent in that decision that charitable is a Community concept, as has since been made clear by Kingscrest Associates Limited v Customs and Excise Commissioners, Case C-498/03 [2005] STC 1547 at [27]: “the word ‘charitable’ in the English version of art 13A(1)(g) and (h) of the Sixth Directive has its own independent meaning in Community law which must be interpreted taking account of all the language versions of that directive.”
19.	Mr Thomas also relies on EC Commission v Spain [1998] STC 1237 concerning paragraph (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”).  Spain had legislated for an exemption not depending on whether the supplier was a non-profit-making organisation but depending solely on the maximum price paid, relying on the word certain providing a discretion on what it included.  The Court said:
“14. The Spanish government then argues, concerning the exemption of supplies of services referred to in art 13A(1)(m), that, unlike other exemptions envisaged by that provision, letter (m) provides for the exemption of ‘certain’ supplies of services. In its submission, that permits member states to limit the scope of art 13A(1)(m), not only by expressly excluding certain services provided by sports establishments from the exemption, but also by applying ‘other criteria’, such as the amount of the consideration for the services in question.
   15. On that point, it is clear from art 13A(1)(m) of the Sixth Directive that the exemption in question concerns supplies of services closely linked to sport or physical education provided by non-profit-making bodies.
   16. It is undisputed that, under the Spanish legislation, the exemption envisaged under art 13A(1)(m) of the Sixth Directive is granted only to private sports bodies or establishments of a social nature which charge membership fees not exceeding certain amounts.
   17. To apply the criterion of the amount of membership fees may lead to results contrary to art 13A(1)(m). As the Advocate General has pointed out at para 5 of his opinion, to apply such a criterion may result, first, in a non-profit-making body being excluded from the benefit of the exemption provided for by the provision and, secondly, in a profit-making body being able to benefit from it.
   18. Moreover, there is nothing in that provision to the effect that a member state, when granting an exemption for a certain supply of services closely linked to sport or physical education provided by non-profit-making bodies, may make that exemption subject to any conditions other than those laid down in art 13A(2).”
20.	Article 13A contains descriptions of a type of supply which is restricted to a type of supplier (except in paragraph (d)).  The description of the supplier falls into three categories.  Category (1) is where the type of supplier is described in general terms, as in the following paragraphs: (a) the public postal services, (b) bodies governed by public law, and hospitals etc, (e) dentists and dental technicians, (f) independent groups of persons whose activities are exempt or not subject to VAT, (j) teachers, (k) religious or philosophical institutions, (l) and (m) non-profit-making organisations, and (q) public radio and television bodies. Category (2) is where recognition of the body is required, as in the following paragraphs: (b) other duly recognised establishments of a similar nature, (g) and (h) (in addition to bodies governed by public law) other organisations recognised as charitable by the member State concerned, (n) other cultural bodies recognised by the Member State concerned, and (p) duly authorised bodies.  Category (3) is where definition of the body is required as in paragraphs (c) medical and paramedical professions as defined by the Member State concerned, and (i) (in addition to bodies governed by public law having education as their main aim) other organisations defined by the Member State concerned as having similar objects (although the French uses reconnus here, the same word as is used for the items in category (2), which suggests that this category may effectively be the same as category (2)).  The main difference seems to be that it should be clear whether a supplier falls into category (1) (the exception might be non-profit-making organisations, but this is a recognised legal category in many States, see Advocate General Jacobs in Kennemer Golf & Country Club, Case C-170/00 at [44]), whereas in categories (2) and (3) some recognition or definition requiring the exercise of a discretion by the State is necessary to determine whether a particular person qualifies.
21.	EC Commission v Spain, concerning paragraph (m), belongs to category (1) where no question of recognition arises and so we do not think that its reasoning can be applied here, except that no effect should be given to the word “certain” in paragraph (n).  But Kügler, concerning paragraph (g), and this appeal, concerning paragraph (n), are both in category (2).  Kügler decides that whether an organisation is charitable is sufficiently precise to be relied upon against the state (at [52, 53]), but the state has a discretion within certain limits to decide on the content of what is charitable (at [54]).  Outside those limits a person cannot rely on being charitable against the state (at [55]).  It is for the national courts to examine whether the competent authorities have observed those limits while applying Community principles, in particular the principle of equal treatment (at [56]).  The national authorities will determine whether a person qualifies in the light of practice followed by the competent administrative body in analogous situations (at [57]), taking into account the existence of specific legislative or administrative provisions, or tax or social security provisions, the fact that associations carrying on the same activities are already entitled to a similar exemption, given the public interest inherent in those activities, and the fact that the costs of the services supplied by the claimant in the main proceedings may be largely met by statutory health funds or by social security bodies (at [58]).  Similarly, in Kingscrest although the body concerned is not charitable in English law, being profit-making, it is for the State, subject to review by the courts, to determine whether it is to be recognised as charitable for paragraph (g).  In making these statements the Court appears to have administrative law on French lines in mind under which competent authorities are given a discretion to determine whether a body is recognised as charitable, which is subject to review by the administrative courts, whereas in the UK we expect the law to lay down whether something is charitable, which is subject to determination by the ordinary courts.  However, that is a problem that the Tribunal may already have to face in Kingscrest.
22.	The approach in Kügler should therefore apply to paragraph (n), with the result that the expression “cultural bodies recognised by the Member State concerned” does not mean bodies defined as cultural by law (which so far as we know none was before the Cultural Services Order), just as paragraph (g) “organisations recognised as charitable by the Member State concerned” does not mean organisations defined as charitable by English law.  By analogy, cultural is an expression with an independent meaning in Community law, and if a body is recognised (or not recognised) by the State as cultural, the only question is whether the state is going outside the limits of its discretion in recognising (or not recognising) this body compared to other similar bodies.  
23.	The Cultural Services Order defines cultural services as a right of admission to a museum, gallery, art exhibition or zoo, or a theatrical, musical or choreographic performance of a cultural nature.  It applies the exemption to an eligible body merely meaning as any body that complies with four indents 1, 2 and 4 in article 13A(2), and so does not otherwise cut down the bodies that are recognised by the UK.  Before the Cultural Services Order no bodies were designated by the UK.  On the other hand, VAT Notice 701/47 provides for refunds back to 1 January 1990, subject to unjust enrichment, so Customs have administratively applied the Cultural Services Order retrospectively.  Applying the Kügler principles, one can take this into account as a specific administrative provision, and also the fact that associations carrying on the same activities were already entitled to a similar exemption, given the public interest inherent in those activities.  We can also take into account the fact that the Appellant’s expenditure is to the extent of 20% to 25% in the years in the table in paragraph 2(4) above, rather than largely, met by public funds.  Mr Thomas makes the point that on any definition the Appellant will qualify, which we accept, particularly in view of the Art’s Council and Local Authority funding.
24.	Accordingly we consider that in the period covered by the first claim up to 31 May 1996 before the Cultural Services Order came into force the Appellant had a Community right to repayment.  The same necessarily applies to the period after that date within both claims.
25.	We have held up finalising this decision, by agreement of the parties, until the Court of Appeal decision in Fleming (trading as Bodycraft) v HMRC [2006] EWCA Civ 70, which was delivered on 15 February 2006 rather later than had been expected at the time of the hearing.  The majority disapplied Regulation 29(1A) of the VAT Regulations 1995 in so far as it took away accrued Community rights on the ground that no transitional period had been included in legislation and none could be implied by the Courts.  On that basis no issue concerning the 3-year cap arises here for periods that had accrued before Parliament gave effect to the 3-year cap.
26.	Because the parties have not had an opportunity of making submissions based on the decision of the Court of Appeal in Fleming we give them liberty to restore the appeal for further argument by notice to the Tribunal within 28 days of the date of release of this draft.  If they do not do so our decision is that: 
(1)	The Appellant would not be unjustly enriched if it keeps the refund.
(2)	The Appellant is entitled to a refund for the period 1 April 1993 to 4 December 1996 and the period 5 March 2001 to 4 March 2004 as a Community right that is not affected by the 3-year cap.
Accordingly we allow the appeal.
27.	We are not sure whether any question of interest arises but we give the Appellant liberty to make a claim for interest within 28 days of issue of this decision.
28.	We award the Appellant the costs of, incidental to, and consequent upon, the appeal to be determined by a Taxing Master by way of detailed assessment on the standard basis.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 3 March 2006

LON/05/0104

££Northampton Theatres Trust Ltd v Her Majesty's Revenue and Customs [2006] UKVAT V19485 (03 March 2006)