Neutral Citation Number: [2004] EWHC 1761 (Ch)
Case No: CH/2003/APP/0735
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 21/07/2004

Before :

THE HONOURABLE MR JUSTICE HART
- - - - - - - - - - - - - - - - - - - - -
Between :

	MESSENGER LEISURE DEVELOPMENTS LIMITED	
Appellant
	
	- and -	
	
	THE COMMISSIONERS OF CUSTOMS AND EXCISE	
Respondent	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Mr Roger Thomas (instructed by Messrs. Cobbetts of Manchester) for the Appellant.
Mr Andrew Macnab (instructed by Solicitor for the Customs and Excise) for the Respondent. 

Hearing dates: 5th & 6th May 2004
- - - - - - - - - - - - - - - - - - - - -
Judgment
Mr Justice Hart: 
1.	This is an appeal against a decision of a VAT & Duties Tribunal (Miss J C Gort (Chairman) and Mr Michael Silbert) dated 27th August 2003 that the Appellant was not entitled to treat the supplies of sporting services it made as exempt from value added tax (‘VAT’) under Value Added Tax Act 1994 Schedule 9 Group 10 in the form which that provision took at the time of each relevant supply  or under Article 13A(1)(m) of the Sixth Directive. Group 10 exempts supplies of sporting services made to individuals by non-profit-making bodies.  The crux of the dispute in this case is whether the Appellant was at any or all material times such a non-profit-making body.  
2.	Article 13(A)(1) of the Sixth Directive provides for certain exemptions from VAT in relation to certain activities in the public interest.  The provisions relevant to this appeal are the following:
“Article 13(A)(1)Without prejudice to other community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:

…

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

…

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

-	they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied,

-	they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned,

…

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

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

3.	These provisions were implemented in UK law by section 31 of the Value Added Tax Act 1994 by reference to Group 10 of Schedule 9 to VATA, which was amended with effect from 1st January 2000 by the Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999. The first assessment under appeal in this case, concerned with supplies made by the appellant between September 1998 and 31st December 1999 is thus governed by the law as it stood prior to that amendment, which specified
 “The supply by a non-profit-making body to an individual, except, where the body operates a membership scheme, an individual who is not a member, of services closely linked with and essential to sport or physical education in which the individual is taking part.”
4.	The two later assessments under appeal are governed by the law as it stood after that amendment.  That specified
3. The supply by an eligible body to an individual, except, where the body operates a membership scheme, an individual who is not a member, of services closely linked with and essential to sport or physical education in which the individual is taking part.  
Notes  
(1)   Item 3 does not include the supply of any services by an eligible body of residential accommodation, catering or transport.  
(2)   An individual shall only be considered to be a member of an eligible body for the purpose of Item 3 where he is granted membership for a period of three months or more.  
(2A)   Subject to Notes (2C) and (3), in this Group “eligible body” means a non-profit making body which—  
(a)    is precluded from distributing any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body;  
 (b)    applies in accordance with Note (2B) any profits it makes from supplies of a description within Item 2 or 3; and  
(c)    is not subject to commercial influence.  
(2B)   For the purposes of Note (2A)(b) the application of profits made by any body from supplies of a description within Item 2 or 3 is in accordance with this Note only if those profits are applied for one or more of the following purposes, namely—  
 (a)    the continuance or improvement of any facilities made available in or in connection with the making of the supplies of those descriptions made by that body;  
(b)    the purposes of a non-profit making body.  
(2C)   In determining whether the requirements of Note (2A) for being an eligible body are satisfied in the case of any body, there shall be disregarded any distribution of amounts representing unapplied or undistributed profits that falls to be made to the body’s members on its winding-up or dissolution.  
5.	Although some part of the Tribunal’s reasoning in relation to the later assessments was devoted to considering whether the appellant, even if otherwise a non-profit-making body, was “subject to commercial influence” (see Note (2A)(c) above) this was not a point taken by the Commissioners before me and does not need to be considered further.
6.	The primary facts found by the Tribunal are set out in paragraphs 9 to 46 of the Decision.  The bare bones are these.  The appellant at all material times since 1st September 1998 has been a wholly owned subsidiary of Messenger Leisure Ltd (“Leisure”), itself a wholly owned subsidiary of Messenger Group Limited (“MGL”).  MGL is owned by Mr S J (Eddy) Shah and his wife, and is controlled by Mr Shah, who is its sole director.  Prior to 1st September 1998 Leisure had acquired and was operating three golf and country clubs, in Essex, Suffolk and Norfolk respectively.  With effect from 1st September in respect of Essex and Suffolk, and with effect from 1st November 1998 for Norfolk, Leisure procured that the sporting activities at each of these clubs were thenceforth operated by the appellant, whose Memorandum of Association was specifically crafted to ensure (so far as legally possible) that it had the characteristics required by law of a “non-profit making body” for the purposes of the VAT exemption.  Thereafter the subscriptions paid by Leisure’s customers were split between Leisure and the appellant so as to reflect the services offered by each.  For a time however, the subscriptions continued in the first instance to be paid into Leisure’s bank account, resulting in Leisure becoming indebted to the appellant for its share of the subscriptions.  The financial benefit which thus accrued to Leisure was not corrected until about September 2000 when Leisure agreed to pay the appellant interest (at what was intended to be a commercial rate) on the sums collected both for the future and as regards the past.  The appellant paid no rent for the use of the land on which it provided the facilities nor any charge for the administrative services provided to it by Leisure.  As a result it made and retained large profits for the years of account under consideration.  The Tribunal found that its expenditure included the purchase of gymnasium equipment, improvement of the greens, the building of a swimming pool, installation of new tees and bunkers, landscaping, irrigation and reseeding (paragraph 46).
7.	The Tribunal also found that when the Essex club came to be sold (as it had been in November 2000) the consideration had been apportioned between the Messenger Group Pension Fund (which had owned the land and buildings of the hotel operation), Leisure and the appellant according to their respective entitlements, the consideration attributable to goodwill being in the event split equally between Leisure and the appellant.
8.	The principal object of the appellant as set forth in Clause 3 of its Memorandum of Association was:
“(a)	To carry on the business of managing the playing facilities of a golf and country club (‘the Club’) at such locations as the company may in its absolute discretion decide and to provide all manner of golf, sporting and recreational facilities, for the benefit of members of the club for the benefit of visitors to the club and for the benefit and promotion of golf and other sporting and recreational facilities generally in the United Kingdom.”
9.	Prior to 21st December 1999 the objects clause further provided, by Clause 3(v), as follows:
(v) not to distribute any profits of the Company to its Shareholders (so that this restriction shall override any other provisions of this Clause 3) but to utilise any surplus funds to improve the playing facilities provided by the Company for the benefit of the persons using those facilities, for the benefit of employees of the Company, for any charitable or public purposes having as their objects the promotion of golf and other sporting activities in the United Kingdom and otherwise for the attainment of the objects herein set out.”
10.	With effect from 21st December 1999 that provision was deleted and replaced by the following:
“(v)	Not to distribute any profits of the company except to its shareholders on winding up or dissolution of the company or to another non-profit making body (so that this restriction shall override any other provisions of this Clause 3) and to utilise any surplus funds for the continuance or improvement of the facilities for sport or physical education made available or provided by the company for the benefit of individuals using those facilities.”
11.	At the same time the Articles of Association of the appellant were amended to remove any power it might have had under Articles 102 to 108 of Table A to declare and pay dividends, or, under Article 110, to capitalise profits or appropriate the same to members.
12.	Leisure can change the appellant’s constitution at any time.  While there was evidence before the Tribunal that Leisure did not in fact distribute its profits, it was not and could not be suggested that Leisure itself was a non-profit making or “eligible” body for the purposes of the legislation.
13.	The Tribunal found that the appellant had been set up with the intention of obtaining a fiscal advantage, and had no independent business purpose (paragraph 114), but accepted that it had been formed to achieve Mr Shah’s aims of providing well maintained and relatively low cost sporting facilities and not to extract profits from the business (paragraphs 111-112).  They asked themselves (at para 117) the question
“..whether, despite the constitution of the company, and despite Mr Shah’s intentions, the reality of the situation is not such that the profit is in fact being distributed to its member, Leisure, and if we find that is not the case that nonetheless the reality is such that at any time the company could, because of the structure of the group, distribute its profit to Leisure.”
14.	The Tribunal’s conclusion was that the terms on which Leisure had enjoyed the use of the appellant’s money without interest (until it was retrospectively paid after September 2000) showed that there had been a de facto distribution of profits (see paragraphs 119 and 121).  It also found (see paragraph 120) that its expenditure on “the swimming pool, landscaping and irrigation represent a capital improvement in the value of the land in the hands of Leisure.”  These findings appear to be the essential ones underlying the Tribunal’s conclusion that the appellant was not a non-profit making organisation.  In considering the later assessments the Tribunal also appears to have treated as significant the fact that the constitution of the appellant could at any time have been changed by its owners so as to enable profit to be extracted (see para 124), and the fact that the loans to Leisure, even at a commercial rate of interest, provided a benefit to Leisure (see para 125).
15.	The principal source of learning on the meaning of “non-profit-making organisation” in this context is provided by the judgment of the European Court of Justice in Kennemer Golf Club v Staatsecretaris van Financiën Case C-174/00, [2002] QB 1252.  The question raised in that case was whether the systematic aim of achieving profits made it impossible for an organisation to be “non-profit-making” for the purposes of the Directive.  The relevant passages from the judgment of the Court were the following: “The third question
“24. By its third question … the national court is asking, essentially, whether art 13A(1)(m) of the Sixth Directive, read together with the first indent of paragraph (2)(a) of that provision, is to be interpreted as meaning that an organisation may be categorised as ‘non-profit-making’ even if it systematically seeks to achieve surpluses which it then uses for the purposes of the provision of its services.
“25. …. the Netherlands government … contends that the VAT exemption should not be granted when profits are made systematically. In its submission, the exemption is applicable only where surpluses are achieved occasionally or merely incidentally.
“26. On that point, it must be observed first of all that it is clear from art 13A(1)(m) of the Sixth Directive that an organisation is to be classed as being ‘non-profit-making’ for the purposes of that provision by having regard to the aim which the organisation pursues, that is to say that the organisation must not have the aim, unlike a ‘commercial’ undertaking, of achieving profits for its members (see, as regards the exemption provided for in art 13A(1)(n) of the Sixth Directive, the judgment given today in Customs and Excise Commissioners v Zoological Society of London paragraph 17 ). The fact that it is the aim of the organisation which is the test of eligibility for the VAT exemption is clearly borne out by most of the other language versions of art 13A(1)(m), in which it is explicit that the organisation in question must not have a profit-making aim:  see, besides the French version “sans but lucrative”, the German version, “Gewinnstreben”; the Dutch version “winst oogmerg”; the Italian version, “senza scopo lucrativo”, and the Spanish version, “sin fin lucrative”.
“27. It is for the competent national authorities to determine whether, having regard to the objects of the organisation in question as defined in its constitution, and in the light of the specific facts of the case, an organisation satisfies the requirements enabling it to be categorised as a ‘non-profit-making’ organisation.
“28. Where it is found that that is indeed the case, the fact that an organisation subsequently achieves profits, even if it seeks to make them or makes them systematically, will not affect the original categorisation of the organisation as long as those profits are not distributed to its members as profits. Clearly, art 13A(1)(m) of the Sixth Directive does not prohibit the organisations covered by that provision from finishing their accounting year with a positive balance. Otherwise, as the United Kingdom points out, such organisations would be unable to create reserves to pay for the maintenance of, and future improvements to, their facilities. …
35. Consequently, the answer to be given to the third question must be that art 13A(1)(m) of the Sixth Directive is to be interpreted as meaning that an organisation may be categorised as ‘non-profit-making’ even if it systematically seeks to achieve surpluses which it then uses for the purposes of the provision of its services. …”
16.	For the appellant it is submitted that these passages in the judgment entitle it to be described as a non-profit-making organisation for the purposes of Article 13A(1)(m) of the Directive, first, if its constitution at all material times prevented it from distributing profits, secondly, if it at no material time had the aim of distributing profits, and, thirdly, if it did not in fact distribute its profits.  It was submitted that the Tribunal’s own findings showed that the first two of these criteria were satisfied, and that the Tribunal’s finding that there had been a de facto distribution of profit was flawed.
17.	As to the first part of these criteria, the Tribunal did accept (see paragraph 116 of the Decision) that “by its constitution, the Appellant does not have the purpose of making a profit for distribution to its members”, but in the same paragraph went on to emphasise that the intention or motive of a company such as the appellant could only be arrived at by looking at the intention or motive of the natural person (namely Mr Shah) who controlled the appellant.  As I have already indicated, it accepted that Mr Shah did not have an intention to extract profits from the appellant’s business.  They appear, therefore, to have accepted that his intentions were entirely consonant with the objects of the appellant as set forth in its constitution.  Accordingly, it was submitted, the only conclusion open to the Tribunal was that the appellant did not have the “aim” of distributing profits to its members, and was therefore a non-profit making organisation for the purposes of Article 13A(1)(m) of the Sixth Directive and a non-profit making body for the purposes of item 3 of Group 10.
18.	In paragraph 28 of its Decision the ECJ had indicated that an actual distribution of profits to members “as profits” might disqualify an organisation which would otherwise have satisfied the criteria.  For this purpose, the Tribunal treated the circumstances of the “debt” (see paragraph 6 above) as having amounted to a de facto distribution, and the appellant as having admitted as much by its subsequent attempt to correct the position.  This, it was submitted, was a conclusion which was wrong in law and not justified by the evidence:  it was wrong in law because, even if Leisure had enjoyed a financial advantage, that advantage  could not properly be described as a distribution “as profit” (or, as the French text has it “en titre de profit”) to Leisure as its member.  There had in fact been no intention to make any such distribution, and any such intention would have been a breach of its constitution.  Moreover, the financial advantage enjoyed by Leisure was not enjoyed by it in its character as the appellant’s owner, but as its agent for the collection of subscriptions.
19.	The further instances of de facto distribution relied upon by the Tribunal were the appellant’s expenditure on the swimming pool, landscaping and irrigation.  Mr Thomas, on behalf of the appellant, took three points against this approach.  First, he pointed out that the passage in question appeared to be based on evidence before the Tribunal of expenditure by the Messenger group of companies as opposed to expenditure specifically by the appellant.  The accounts of the companies demonstrated that all capital expenditure on the capital assets of Leisure was spent by Leisure itself or had been found by MLG or the Group Pension Fund.  Secondly, the revenue expenditure of the appellant in maintaining golf courses was expenditure properly incurred by it for the provision of the services provided by it.  Thirdly, there was no evidence before the Tribunal that any expenditure by the appellant on course upkeep increased the capital value of the golf courses owned by Leisure.
20.	On behalf of the Commissioners, Mr Macnab invited me to stand back from the detail of the appellant’s submissions and to look at the “big picture”.  An organisation which had no independent economic existence and whose activities formed an integral part of those of its profit-making parent could not be described as a “non-profit making organisation/body”.  It was not and could not, on the evidence, be suggested that the aim of the appellant was not to make profits.  The inevitable consequence of the way in which the appellant was constituted, and the role it played in the group’s activities, was that those profits would in one way or another enure for the benefit of Leisure as its member.   It was irrelevant whether or not the profits were in fact distributed.  The mere fact that Leisure owned the appellant made it impossible to insulate it from the profits made by the appellant.  The way in which the profits were in fact deployed were, like the terms of the appellant’s constitution themselves, wholly a matter for Leisure (and ultimately Mr Shah himself).
21.	Mr Macnab supported this general submission by reference to certain passages in the Advocate General’s (Jacobs) opinion in Kennemer, in particular his observations (in paragraph 23) that the exemption should not apply to commercial sports undertakings because of the risk, as a result of “shrewd cross-subsidising”, of distortion of competition; (in paragraph 45) that the concept of profit-making in this context “relates to the enrichment of natural or legal persons – in particular those having a financial interest in the organisation in question….  The concept of a non-profit-making organisation contrasts essentially with that of a commercial undertaking run for the profit of those who control and/or have a financial interest in it”; (in paragraph 47) that when assessing an organisation’s aims it is necessary but not sufficient to look at its constitution.  Its actual practice in relation to distributions must be looked at, and covert as well as overt distributions need to be considered.
22.	As to the detail of the appellant’s case, Mr Macnab submitted that the restriction in the appellant’s constitution was illusory given the ability of Leisure (and Mr Shah) to change the constitution at any moment.  Similarly, given the fact that all the arrangements between Leisure and the appellant were, from first to last, wholly a matter within Mr Shah’s control and that the aim of the group was to generate surpluses, the proposition that the appellant did not have a profit-making aim which took it outside the exemption was simply unsustainable.
23.	As to whether the debt had constituted a covert distribution of profits, Mr Macnab submitted that the Tribunal’s decision that it had was a finding of fact which was justified by the evidence and which cannot be challenged on appeal.  In relation to the Tribunal’s findings at paragraph 120 of the Decision, Mr Macnab did not seek to defend the “detail” of the finding but submitted that the evidence before the Tribunal of expenditure by the appellant on “course upkeep” justified its conclusion that Leisure necessarily benefited from the expenditure (since even if such expenditure did not “improve” Leisure’s land it prevented it from diminishing in value).
24.	In my judgment, many of the criticisms made by Mr Thomas of the Tribunal’s reasoning are well-founded.  Indeed, Mr Macnab did not seek to defend the totality of that reasoning.  In particular, in relation to the “debt”, I am unable to see the basis on which an inadvertent failure to pay interest should be viewed as a covert distribution of profit, and thus as a reason in itself why an otherwise non-profit-making body should be treated as falling outside the exemption.  Likewise, the fact that revenue expenditure on course upkeep indirectly benefits the owner of the course should not, by itself, prevent the otherwise non-profit-making body which makes the expenditure to further its own purposes from enjoying the exemption.  The fact that the Tribunal focussed on those items is not surprising given the terms in which the Court expressed itself in Kennemer and the course which the argument took before it.  However, in my judgment, it is important to bear in mind the precise question which the Court answered in Kennemer.  That was essentially whether Article 13A(1)(m) should be interpreted as meaning “that an organisation may be categorised as ‘non-profit-making’ even if it systematically seeks to achieve surpluses which it then uses for the purposes of the provision of its services”.  The answer which the Court gave to that question was affirmative, subject to the qualification or proviso that the organisation’s aim should not be the distribution of profits to members.  It does not, however, follow that an organisation which does systematically aim to achieve surpluses (“bénéfices” in the French text) but does not have the intention covertly or overtly to distribute such surpluses to its members “as profit” is therefore a non-profit-making organisation which is entitled to the exemption.  Indeed, the structure of the judgment, and in particular the critical passages at paragraphs 27 and 28, rather serves to emphasise that the question whether a particular organisation  can be characterised as “non-profit making” is a question to which an answer can provisionally be given independently of any consideration of its surplus-generating characteristics.
25.	The decision in Kennemer, properly read, is authority only for the proposition that an organisation, which does not have the purpose of distributing those profits to its members and does not in fact do so, may be a non-profit making organisation notwithstanding that it systematically makes profits.  It does not follow that a body which answers these criteria will be a non-profit making organisation.  Satisfaction of the criteria is a necessary condition of qualification as a non-profit making organisation, but Kennemer does not tell us that it is necessarily a sufficient one.  Indeed it suggests that it is not.
26.	The national legislation in the form in which it now appears adopts the same approach.  The three sub-paragraphs of Note (2A) are not themselves a definition of “a non-profit making body”:  they are criteria which such a body must satisfy in order to be an “eligible body”.  The legislation does not provide a definition of non-profit making body.
27.	In my judgment, the Tribunal’s finding (amply warranted by the evidence before it) that the appellant had no business purpose independent of that of Leisure (itself unarguably not a non-profit making body), coupled with Leisure’s ability at any moment to change the appellant’s constitution, was a sufficient basis on which to hold that the appellant itself was not a non-profit making organisation for the purposes of Article 13A(1)(m) of the Sixth Directive or a non-profit making body for the purposes of Group 10 of Schedule 9.  The appellant’s purposes were as commercial as those of Leisure:  the fact that neither was in the business of distributing its profits, and that the appellant was constitutionally debarred from doing so, does not suffice to deprive the activities which both jointly conducted of their essentially commercial nature.  I accept that, in the absence of a statutory definition, it is difficult to draw with precision the line to be crossed for an enterprise to qualify as a non-profit making organisation.  I consider, however, that, if I were to refer to the ECJ the question whether the wholly owned subsidiary of a profit-making company whose activities are inextricably linked with those of its parent and which has no business purpose independent of its parent may be characterised as a non-profit making organisation if its constitution forbids distribution of profits and its parent has no current intention of procuring such a distribution, the answer which would be received is predictable with a sufficient degree of confidence to make such a reference unnecessary.
28.	I would accordingly dismiss the appeal.