[2009] UKFTT 161 (TC)

TC00123

Appeal Number: Man/08/0387 

FIRST TIER TRIBUNAL TAX

VAT – EXEMPT SUPPLIES – Cultural Services - Eligible Body – No – Appeal Dismissed

DECISION NOTICE 
(Full Reasons)
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	KEELE UNIVERSITY STUDENTS UNION	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 

Sitting in public at Birmingham on 14 May 2009

Nigel Gibbon, Director of VAT & Customs Appeals, Omnis VAT Consultancy Limited, Agent for VATangles for the Appellant

Vinesh Mandalia counsel instructed by the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Preamble
1.	A decision notice with a summary of the facts and reasons was released to the parties within 14 days of the hearing.
2.	On 1 June 2009 the Tribunal Office received a request from the Appellant for full reasons, which was forwarded to the Tribunal Judge on the 18 June 2009.
3.	The Tribunal has elaborated upon the legal arguments and reasons but in all other respects considers the summary document sufficient to constitute full written findings of fact and reasons.   
The Appeal
4.	The Appellant was appealing against HMRC decision dated 9 August 2007 that the Appellant did not qualify as an eligible body so as to treat as exempt its supplies of a right of admission to entertainments which qualify as a performance of a cultural nature (item 2b group 13 schedule 9 of the VAT Act 1994).
The Dispute
5.	The dispute concerned whether the Appellant met the requirements of an eligible body as defined by note 2 group 13 schedule 9 of the VAT Act 1994 which provides
“For the purposes of item 2 “eligible body” means any body (other than a public body) which –
a)	is precluded from distributing, and does not distribute any profit it makes;
b)	applies any profits made from supplies of a description falling within item 2 to the continuance or improvement of the facilities made available by means of the supplies; and
c)	is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities.
6.	In order to qualify as an eligible body the Appellant has to establish on the balance of probabilities that it met the three requirements of note 2.
7.	Notes 2a and 2c refer to the organisation as a whole. Note 2b is specific to the supplies of a right of admission.
The Evidence
8.	The Tribunal heard evidence from Martyn John McCormack, General Manager of the Students Union, Maurice Tootell, Management Accountant, Talah Omran, Students’ Union President, and Dauda Bappa, Students Union Vice President for the Appellant.  The witness statement of John McCombie, HM Revenue & Customs Officer was admitted in evidence for HMRC. A bundle of documents was received in evidence.
 Findings of Fact and Reasons
First Requirement: Precluded from distributing, and does not distribute any profit it makes
9.	Membership of the Appellant was open to all registered students of Keele University.
10.	The Appellant’s constitution indentified three  objectives:
(1)	To advance education;
(2)	To promote and enhance the general welfare of its members;
(3)	To provide a recognised channel of communication between the Appellant’s members and other bodies.
11.	The constitution did not have a stated aim of making profits.
12.	The Appellant’s statement of values included:
“We are dedicated to re-investing our surpluses in order to provide and develop our services, whilst improving the facilities we have here”.
13.	The constitution did not have an explicit clause prohibiting distribution of any surplus made on its activities. The sole clause relating to its assets and liabilities was that on dissolution of the Appellant as an organisation, the University shall assume control of the Appellant’s assets and liabilities.
14.	The Appellant was a membership organisation which has no external shareholders. The Appellant enjoyed charitable status as a result of its association with the University.
15.	The Appellant was organised as a mutual trading association with commercial cost centres and non commercial activity centres. The income gained from the commercial areas was applied to the costs of the non-commercial activities.
16.	The Appellant’s annual turnover was approximately £2 million which was supplemented by a block grant from the University.
17.	The Appellant made an annual surplus of £6,000 to £15,000 in four of the last six years. The surplus was applied to the Appellant’s services and facilities for its members.
18.	The Appellant’s employees except the General Manager were entitled under their conditions of employment to a small flat rate annual bonus at Christmas if they have been in the Appellant’s employment for a qualifying period of time and the commercial activities made a profit. The bonus was usually about £100. 

Submissions on First Requirement
19.	Mr Gibbon for the Appellant contended that the Appellant’s constitution did not allow for any sum to be distributed to any person, and, therefore, de facto, precluded from distributing profits. Further any profits generated from the entertainment events were allocated to capital reserves and never distributed.
20.	Mr Mandalia for HMRC submitted that the Appellant’s constitution did not prohibit the distribution of profits. It was simply not good enough for the Appellant to assert that it made no distributions.  The facts showed that the Appellant had made profits in four of the last six years and paid bonuses to staff. The bonus which was dependent upon a profit being made amounted to a distribution. 
Decision
21.	The cultural  exemption under Group 13 of schedule 9 gives effect to article 13A.1n of the Sixth Directive which exempts from VAT the supply of  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.  The obligation to exempt under article 13A.1, however, is subject to article 13A.2(a) which provides as follows insofar as is relevant:
“Member States may make the granting to bodies other than those governed by public law of the cultural exemption (my italics) subject  to one or more of the following conditions:
i.	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.
ii.	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.
iii.	They shall charge prices approved by the public authorities …. Or … prices lower than those charged for similar services by commercial services subject to value added tax.
iv.	Exemption of the services concerned shall not be likely to create distortions of competition such as to place at disadvantage commercial organisations liable to value added tax”.
22.	The conditions specified in article 13A.2 are at the discretion of the Member State. The United Kingdom has enacted aspects of the conditions in the term eligible body as defined by note 2 to group 13 schedule 9 of the VAT Act 1994. Notes 2a and 2b incorporate most of condition I (first indent) above except there is no requirement that an eligible body shall not systematically aim to make a profit. 
23.	The Tribunal in determining the first dispute has construed the wording of Note 2 (a) so as to give effect to the Directive. The Court of Justice in Kennemer Golf and Country Club v Staatssecretaris Van Financien  Case C – 174/00 [2002] 3 W.L.R 829) held that 
“an organisation was non-profit making if it did not have the aim, such as that of a commercial undertaking, of achieving profits for its members, and provided that  was so, the fact that the organisation made operating surpluses, even if it sought to make them  or did so systematically, did not affect that categorisation, so long as the surpluses were not distributed to the organisation’s members as profits”.
24.	In assessing whether an organisation was non-profit making, Advocate General Jacobs at paragraph 47 opined:
“When assessing those aims (non-profit making), therefore, it is necessary but not sufficient to look at the organisation’s express objectives as set out in its statutes. It is also necessary however to examine whether the aim of making and distributing profit can be deduced from the way in which it  operates in practice. And in that context it is not enough to look simply for an overt distribution of profits in the form of, say, a direct return on the investment represented by contributions to the organisation’s assets. Such distribution might also, at least in some circumstances take the form of unusually high remuneration for employees, redeemable rights to increasingly valuable assets, the award of supply contracts to members, whether or not at prices higher than the market rate ……. No doubt further methods of covert distribution can be devised”.
25.	Kennemer was concerned with exemption for sporting services supplied by non-profit making organisations (article 13A.1m). The decision was directed at the requirement non-profit making organisations included in the substantive article, and separate from the discretionary conditions in article 13A.2(a). The Court of Justice and Advocate General Jacobs, however, recognised the overlap between the  first indent  of article 13A.2(a), prohibition of the distribution of profits and non-profit making as the Advocate General identified at paragraph 54:
“It is inherent in the concept of a non-profit making organisation as I have defined it that the second condition in the first indent – prohibition of the distribution of profits – will be fulfilled”.
26.	The Tribunal concluded that its analysis of Kennemer was applicable to its decision on whether the Appellant was precluded from distributing profits. The central lesson from Kennemer was that the decision on distribution of profits must be made on the whole facts not just the Appellant’s constitution.  In this Appeal the Appellant’s express objects were about advancing education and improving the welfare of students. The constitution was silent on the question of making and distributing profits. The Appellant’s statement of values, however, expressly indicated that any surplus made would be reinvested to develop services and improve facilities for students. The facts found demonstrated that the Appellant did reinvest surpluses in services and facilities. The one exception was that some employees were entitled to a small flat rate annual bonus of about £100 at Christmas. Payment of the bonus was dependent upon the Appellant’s commercial activities producing a profit. HMRC counsel contended that this amounted to a distribution. The Tribunal finds that the bonus did not amount a distribution as understood in Kennemer.   The Advocate General at paragraph 47 described a distribution as including a form of unusually high remuneration for employees. The Tribunal did not consider a modest Christmas bonus met the description of unusually high distribution.
27.	The Tribunal, therefore, decides on the totality of the facts found that the Appellant’s objects were those of a non-profit making organisation and that it was precluded from distributing, and did not distribute any profit made. The Appellant met the requirements of note 2a, group 13, schedule 9 of the VAT Act 1994.
Second Requirement: Applies any profits made from supplies of a description falling within item 2 to the continuance or improvement of the facilities made available by means of the supplies
 
28.	Appellant adduced evidence that any surplus gained from the admission charges  was allocated to the entertainments sub-section of the capital reserves, which were then applied to improving the entertainments facilities. HMRC did not challenge the Appellant’s evidence.
29.	The Tribunal decides that the Appellant met the requirements of note 2(b) group 13, schedule 9 of the VAT Act 1994.
Third Requirement: Is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities?

30.	 The Appellant has four sabbatical officers (shortly to be increased to five), the President and three (four) Vice-Presidents, who managed the Appellant’s affairs and took decisions of “last resort”.
31.	The sabbatical officers took decisions of last resort principally at the Finance and General Purposes Committee and Staffing Committee. The sabbatical officers were the sole voting members on these two committees, and the only persons empowered to make decisions.
32.	The sabbatical officers were elected annually by the student body.
33.	The General Manager and the paid staff did not take decisions of last resort. They were obliged to implement the decisions made by the sabbatical officers.
34.	The sabbatical officers were each entitled to a bursary for fulfilling their duties. The bursary for 2008 was £15,345 per annum which was related to the salary scale for the Appellant’s employees (equivalent to the salary of a senior bar staff) and subject to income tax and national insurance. They were also entitled to reimbursement of expenses incurred on official duties which included a mobile phone, clothing, travel expenses and accommodation/subsistence. The terms and conditions of their appointment were set out in the Sabbatical Officer agreement covering duties, holiday entitlement and   arrangements for sickness and absence.
35.	The quantum of the bursary was not dependent upon the financial performance of the Appellant.
36.	The Tribunal finds that
(1)	The four sabbatical officers made decisions of last resort (conceded by the Appellant).
(2)	The four sabbatical officers have no direct or indirect financial interest in the Appellant’s activities in that the bursary was not results based or at such a high rate as to be a disguised means of distributing profit.
(3)	The sabbatical officers were entitled to bursaries which in effect were annual salaries. The bursaries although below the market rate for jobs of equivalent responsibilities were significantly more than a nominal rate. 
(4)	The decisions of last resort were made by the body of four sabbatical officers, all of whom were in receipt of this bursary.
Submissions on the Third Requirement
37.	Mr Gibbon for the Appellant contended that the purpose of the third requirement was to make a distinction between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members. Mr Gibbon submitted that the fact that the Appellant was a non-profit making organisation should weigh heavily in the Appellant’s favour when deciding the true status of the bursaries paid to the sabbatical officers.
38.	Mr Gibbon argued that the reason why the Court of  Appeal found against the Appellant in Bournemouth Symphony Orchestra v Commissioners for HM Revenue & Customs [2006] EWCA Civ 1281) was that the managing director received reasonable and proper remuneration for his duties. In this Appeal the bursaries received by the sabbatical officers could not be described as full and proper salaries for their responsibilities in running a business with an annual turnover of in excess of £2 million. The officers had elected to serve the Appellant for one year rather than  commencing their careers commensurate with their graduate qualifications when they could expect a starting annual salary of £24,000 plus. In these circumstances the Appellant was managed and administered on a voluntary basis even though the four sabbatical officers each received a bursary of £15,345 per annum.
39.	Mr Mandalia for HMRC submitted that the Appellant did not meet the third requirement. The facts of the case were straightforward. The sabbatical officers made the decisions of last resort for the Appellant. They were paid an annual salary which was more than a nominal amount.  Thus the Appellant was not managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities.
Decision on Third Requirement
40.	The third requirement was derived from the second indent of article 13A.2 which provides that an eligible body 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.
41.	Lord Justice Chadwick in Bournemouth Symphony Orchestra decided at paragraph 6 that
“The correct approach as it seems to me is to interpret the condition allowed by the second indent on the basis that it is intended to be independent of, and not merely ancillary to that allowed by the first indent.
Thus in this Appeal the Tribunal is obliged to consider the third requirement on its own merits even though the Tribunal has found in favour of the Appellant in respect of the first two requirements of an eligible body within the meaning of item 2b group 13, schedule 9 of the VAT Act 1994.
42.	The Court of Justice in Customs and Excise Commissioners v Zoological Society of London (c-267/2000) (2002) STC 321 determined that the focus of the enquiry on whether a body was managed and administered on an essentially voluntary basis  was the members who were  responsible for directing the body at the highest level.  In short the members who took the decisions of last resort. 
43.	 The Court of Appeal in Bournemouth Symphony Orchestra considered the construction of the second indent of article 13A.2 in some detail.  There was a difference of view between Lord Justice Chadwick on the one hand, and Lord Justices May and Lloyd on the other. The majority in the Court of Appeal favoured a three staged approach whereas Lord Justice Chadwick preferred two stages. The Tribunal was bound by the majority view, which was encapsulated in the following three questions identified by Lord Justice Lloyd at paragraph 77:
(1)	Who are the persons by whom the body is managed and administered?
(2)	Are they persons who have no direct or indirect interest in the results of the activities of the body?
(3)	Do they manage and administer the body on an essentially voluntary basis?
44.	Lord Justice Lloyd considered that questions 2 and 3 above should be addressed separately and that the requirements were cumulative:
“It seems to me that there are two questions, and that the essentially voluntary question must be addressed separately from that of financial interest. Otherwise it would at least in theory  be possible for a body to qualify despite the fact that in the case postulated by the judge, all or a majority of the members of the Board are paid ( at a flat rate which is more than nominal) for their participation in the deliberations of the Board….”  (paragraph 113).
 “In my judgment, the requirements are cumulative: the management and administration must be conducted by persons who have no financial interest in the results of the activities, and it must be conducted on an essentially voluntary basis”  (paragraph 116).
45.	In this Appeal the four sabbatical officers took the decisions of last resort for the Appellant. They were the directors and policy makers constituting the ruling body in its entirety for the Appellant within the meaning given in the London Zoo case. 
46.	The four sabbatical received an annual salary which was subject to income tax and national insurance, and additional benefits in connection with the performance of their duties. Unlike the facts in London Zoo and Bournemouth Symphony Orchestra, the entire ruling body for the Appellants comprised paid officials.
47.	The salary paid to the sabbatical officers was a flat rate payment which did not vary according to the surpluses made by the Appellant. In this respect the salary  did not give the sabbatical officers a financial interest in the Appellant’s activities as understood in note 2c group 13 schedule 9 of the VAT Act 1994 (see Lloyd LJ at paragraph 109).
48.	The dispute between the parties centred on the third question: did the sabbatical officers manage and administer the Appellant on an essentially voluntary basis. At paragraph 104 Lord Justice Lloyd quoted with approval from the High Court decision in Bournemouth Symphony Orchestra on the construction of essentially voluntary:
“The conduct of such an inquiry would reveal whether the management is essentially voluntary. Voluntary must mean not remunerated or rewarded for the function. I have stressed the word essentially because it is important. What is important is the essence of the structure and practice. It is not an absolute test. It does not have to be absolutely or purely voluntary. That is doubtless why the ECJ in the London Zoo case accepted that occasional participation by paid employees did not compromise what was otherwise the voluntary nature of the management. Nor did token payments to the managers. Those are examples of what will not cause the line to be crossed. They demonstrate that an otherwise apparently voluntary management structure remains essentially voluntary despite the fact that it might be said to have become not purely voluntary. They are not in my view an exhaustive classification.  Whether the line is crossed is a question of judgment in each case” (per Mann J).
49.	In this Appeal the sabbatical officers received salaries which were significantly more than nominal amounts for performing their functions. The Appellant’s ruling body comprised wholly of paid sabbatical officers.  In the Tribunal’s view these arrangements for managing the Appellant did not fit the description of essentially voluntary. There was no voluntary element at all in the arrangements.  
50.	 The Appellant’s argument for exemption was derived from a proposition that the determining factor in Bournemouth Symphony Orchestra was the proper and reasonable remuneration of the managing director. In which case the question to be asked by the Tribunal was whether the sabbatical officers received a fit and proper salary for their responsibilities. The Tribunal considers the Appellant’s argument flawed  in three respects:
(1)	The facts of Bournemouth were very different from those in this Appeal, in that the Board members were unpaid except the managing director, and a representative of the musicians. The  factual matrix for the Bournemouth case was that on the face of it  there was an apparent voluntary management structure in place.
(2)	The Bournemouth case was concerned with the involvement of a paid employee rather than the core members of the management structure.
(3)	The correct question to ask was did the sabbatical officers manage and administer the Appellant on an essentially voluntary basis not whether they received a fit and proper salary.
51.	The Appellant’s other principal point was that the Tribunal should have regard to the purpose of the legislation which was to distinguish non-profit organisations from commercial ones. The submission was uncontroversial but it did not give a licence to place a strained construction of the legislative requirements defining an eligible body.
52.	Thus the Tribunal finds that the Appellant was not managed and administered on an essentially voluntary basis.  The Tribunal decides that the Appellant did not meet note 2(c) of group 13 schedule 9 of the VAT Act 1994.
Decision
53.	The Tribunal decides that the Appellant was not an eligible body in that it was not managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities. The Appellant was, therefore, not eligible to treat its supplies of a right of admission to a cultural event as exempt. Appeal dismissed. No order for costs.

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 17 July 2009

MAN/
Notes
54.	The Tribunal directed that the costs regime which operated prior to 1 April 2009 applied to this Appeal. The Tribunal noted HMRC counsel’s objections to its direction.
55.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.