[2010] UKFTT 423 (TC)

TC00690

	Appeal number: LON/2009/0625

VAT – Exemption for supplies made without payment other than membership subscription to members by a non-profit-making organisation – whether the supplies were referable only to the aims of the organisation – item 1(e), Group 9, Schedule 9, VATA – held the supplies were referable only to the aims of the organisation notwithstanding that the motivation of the members in receiving them was different from the aims of the organisation – Expert Witness Institute v Customs and Excise Commissioners [2002] STC 42 followed – appeal dismissed

FIRST-TIER TRIBUNAL
TAX 

	ETHICAL TRADING INITIATIVE	Appellant
	
	-and-
	
	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

		TRIBUNAL: 	JOHN WALTERS QC (TRIBUNAL JUDGE)		
				SONIA GABLE							
Sitting in public at 45 Bedford Square, London WC1 on 21 and 22 June 2010

David Southern, Counsel, instructed by Kingston Smith, for the Appellant 
David Manknell, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Ethical Trading Initiative (“ETI”), a company limited by guarantee, appeals against a decision of the Respondent Commissioners (“HMRC”) that the supplies made by ETI to its ‘corporate members’ are exempt supplies within item 1, Group 9, Schedule 9 to the Value Added Tax Act 1994 (“VATA”). The corporate members of ETI are (per clause 1.1.17 of its Articles of Association) “those Corporations, unincorporated bodies and partnerships as are admitted as Corporate Members of the Company”.
2.	Group 9 of Schedule 9 to the VATA is headed ‘Subscriptions to trade unions, professional and other public interest bodies’.  Item 1 relevantly provides as follows:
“The supply to its members of such services … as are both referable only to its aims and available without payment other than membership subscription by any of the following non-profit-making organisations- 
…
(e) a body which has objects which are in the public domain and are of a political, religious, patriotic, philosophical, philanthropic or civic nature.”
3.	ETI’s Memorandum of Association includes at clause 3 a statement of its objects as follows:
“The objects for which the Company [that is, ETI] is established are to promote and encourage ethical trading in order to improve conditions for workers and their communities in the supply chains of companies supplying products in the UK market.”
4.	Clause 4 of ETI’s Memorandum of Association contains a wide and comprehensive list of powers which are available to ETI, in terms, “in furtherance of the above objects [that is, the objects cited above, which are contained in clause 3 of the Memorandum] but not otherwise”.
5.	ETI’s Articles of Association provide (at clause 2.2) that there are three categories of members of ETI.  They are: ‘corporate members’, ‘NGO members’ and ‘Trades Union Members’.
6.	HMRC’s decision, defended at the hearing of the appeal by Mr. Manknell, was that the supplies made by ETI to its corporate members in consideration of their membership subscriptions are referable only to ETI’s aims and, because ETI is a non-profit-making organisation with objects in the public domain of a philanthropic or civic nature, the supplies are exempt.
7.	Mr. Southern, for ETI, argued that ETI’s supplies to its corporate members in consideration of their subscriptions are provided by way of business and enable the corporate members to demonstrate that their goods are produced under ethically acceptable working conditions, which has commercial value, and also “add value to the ability of its corporate members to trade ethically”.  He adds that ETI provides training in good corporate practice to its corporate members. These circumstances show, in his contention, that ETI’s supplies to its corporate members do not come within the exemption relied on by HMRC which, moreover, is to be construed strictly in the sense of narrowly.
8.	We heard oral evidence from Daniel Rees, a director of ETI, and Giles Bolton, the Head of Ethical Trading at Tesco plc, one of ETI’s corporate members. We also received in evidence a number of documents (including the Memorandum and Articles of Association of ETI, referred to above).  These included a statement from Louise Nicholls, the Head of Responsible Sourcing at Marks and Spencer plc (another corporate member of ETI) and an open letter from Robert Brown, Sustainability Manager at the Boots Company plc (another corporate member of ETI).
9.	From the evidence we find the following facts.
The facts
10.	   ETI was founded in 1998 and has been registered for VAT purposes since 8 January 1999. Between 1999 and 2008 ETI charged VAT on the subscriptions paid by corporate members with the consent of HMRC.  HMRC first took the point that the supplies made by ETI in consideration of the subscriptions were exempt in late 2007.
11.	ETI is a non-profit making organisation.  ETI carries on a business.  On the basis of ETI’s Memorandum of Association we find that its objects are of a political and philanthropic nature.
12.	ETI has 65 corporate members.  They provide more than half of its income in the form of their subscriptions.  ETI’s other main source of income is a grant from the Department for International Development (“DfID”). NGO members pay nominal subscriptions, while trade union members do not pay any subscriptions.
13.	We were shown a copy of a document entitled “Becoming a Corporate Member of ETI”.  It contains material under the headings: ‘1. What is the [ETI]?; 2.Why join the [ETI]?; and 3. How to join the [ETI]?’. 
14.	Under the first heading, ETI represents to companies considering corporate membership that it exists to identify and promote good practice in the implementation of corporate codes of conduct, including the monitoring and independent verification of the observance of code provisions.  ETI states that its specific purpose is to enable members to work together to identify and promote good practice in the credible implementation of corporate codes of conduct, based on international labour standards. ETI states that it provides a platform to its membership to experiment with different ways of improving the labour practices of their suppliers through implementing corporate codes of labour practice. 
15.	The document goes on to describe ETI’s ‘distinguishing features’.  It highlights ETI’s ‘tripartite structure’, describing it as ‘an alliance of companies, NGOs and trade union organisations’.  ETI’s Board of Directors consists of representatives elected from ‘these three constituencies’.  
16.	In a significant passage of the document, ETI represents to companies considering applying for corporate membership that ETI has a ‘single focus on learning: [ETI] exist[s] solely to acquire experience in the implementation of codes of labour practice and to disseminate the lessons learned.  ETI is neither a standard setting nor accreditation agency. [ETI does] not endorse, certify, accredit or label any product, company or any member or non-member organisation.’    
17.	Under the second heading, ‘Why join the ETI?’, the document states that ETI provides opportunities for corporate members to ‘learn from good practice and benchmarks developed with other companies, trade unions and development organisations, accessible in the form of manuals and other publications’ and to attend ‘problem-solving seminars, round table discussions on key code implementation issues’ and to ‘develop relationships with other ETI members in order to cooperate and maximise impact in supplier destinations’.
18.	The document further states under the same heading that ETI offers a number of services to its members, including: the opportunity to participate in ‘experimental projects’ in supplier countries, working together with other companies, local development organisations and trade unions; practical guidance through ‘issue-led reports, country reports and guidance manuals’; ‘peer review’, which is an ‘annual reporting exercise’ providing a ‘comparable assessment of the individual and the whole membership’s performance over the previous year’; access to up-to-date copies of the ETI workbook, ‘which compiles ETI’s learning on good practice in implementing labour standard practice’; a global network of interested individuals and organisations and a forum for discussion, shared learning and policy development.
19.	A company wishing to apply for corporate membership of ETI is expected to make a series of specific commitments to adopting and participating in the development of ETI’s aims.  There is an application form to be filled out including a series of questions about the company’s involvement in overseas supply-chains and germane matters.  ETI’s Board of Directors assess an applicant’s acceptability in terms of its expressed commitment to adopting and participating in the development of ETI’s aims, and reserve the right to require further information from an applicant before reaching a final decision.
20.	 Mr. Rees, the director of ETI who gave evidence, referred us to another ETI document, entitled “Purpose, Principles, Programme”.  This document, which was a self-assessment form relating to ETI’s programme partnership arrangement (“PPA”) with DfID, pursuant to which substantial annual funding was (and continues to be) received by ETI from DfID, covered similar ground to the document entitled “Becoming a Corporate Member of ETI”.  It emphasised what Mr. Rees described as ETI’s ‘philosophy of collaboration’, which is designed to ‘help guide [ETI’s] members in the real work of trading ethically in the supply chain’.  He said that all ETI’s activities are designed to help or promote ethical trading and to improve trading practices, but he insisted (and we accept) that membership of ETI gives corporate members ‘tangible business benefits’.  He stressed that poor labour rights in supply chains remain a ‘high profile public issue and a major risk to brand reputation’, and that membership of ETI helps corporate members to demonstrate to their critics that they are working seriously to improve standards of ethical trading in their business and supply chains.
21.	Mr. Rees also stressed that a fundamental principle underlying ETI’s operations was that ‘the moral case is inseparable from the business case’. This point was also made in a statement by Will Stephens, Tesco plc’s ‘Ethical trading Coordinator – Food’ which was annexed to Mr. Giles Bolton’s witness statement.  Mr. Stephens said:
“There was a time when our consumers would not have been aware of, inquired into or had any particular concern about the conditions in which the goods which they purchased were produced.
With the spread of knowledge of other countries, arising from travel and modern communications, this is no longer the case.  We conduct market research on a continuous basis to establish customers’ attitudes and preferences.  This research clearly establishes that consumers are concerned to know how the goods which they purchase have been produced, will be unwilling to buy goods which have not been produced in conditions which they would regard as acceptable, and will in turn be attracted to goods which have been produced in acceptable conditions.
A related consideration is this.  If it were shown that we were selling goods produced in unacceptable conditions, we could be subject to adverse publicity which would be commercially damaging. There have been many instances of this amongst our competitors.  If therefore we wish to maintain and enhance our commercial position, we have to do something to meet these concerns and avoid these risks.
There are a number of ways in which the problem could be addressed.  As a matter of commercial judgment, we have decided that membership of ETI offers a commercially effective solution in our case. This is because ETI provides a forum in which we can share good practice and speed up learning, develop key relationships with other ETI members (including corporate trade union and NGO members), learn how to do ethical trade better through accessing training and conferences, and improve our purchasing policies and contractual arrangements with suppliers in general.  Likewise, when asked what we are doing to meet these ethical concerns – as we frequently are – we can start by pointing to our membership and support of ETI.”
22.	Mr. Robert Brown, the Sustainability Manager at Boots Company plc made a statement in virtually the same terms which was also in evidence. 
23.	Mr. Bolton told us that Tesco plc has a full time director for ethical trading, though he is not on the main board.  Tesco plc has a department working entirely on ethical trading within the UK and two locally based managers with ethical trading responsibilities, in South Africa and Bangladesh.
24.	Mr. Rees acknowledged some sensitivity over the issue of the extent to which corporate members could advertise their membership of ETI for commercial purposes.  Corporate members are permitted to make use of ETI’s logo so long as ETI is satisfied that the corporate member concerned is not making any extravagant claim in relationship to its ethical practices.  ETI much prefers corporate members to emphasise that membership of ETI demonstrates their commitment to the constant improvement of ethical standards in trading.  ETI does publish a list of its corporate members on its website.
ETI’s submissions
25.	Mr. Southern submitted that charitable or philanthropic activities may constitute a business for VAT purposes and that ETI is carrying on such a business. He cited, among other cases, Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1.  
26.	He also submitted that there was a legal relationship between ETI and its corporate members pursuant to which ETI supplied services for the purposes of VAT in return for the subscriptions received from the corporate members.  He cited, among other cases, Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509.   
27.	He also submitted that as a matter of general principle the exemptions in the VAT code must be interpreted strictly.  He cited Stichting Uitvoering Financiële Acties v Staatssecretaris van Financiën (Case 348/87) [1989] ECR 1737.
28.	He placed emphasis in his submissions on the terms of section 94(2)(a) VATA.  Section 94(1) and (2)(a) are as follows:
“(1) In this Act “business” includes any trade, profession or vocation.
(2) Without prejudice to the generality of anything else in this Act, the following are deemed to be the carrying on of a business-
(a) the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members;”
29.	He submitted that section 94(2)(a) VATA and item 1 of Group 9 of VATA Schedule 9 (the exemption for subscriptions to trade unions, professional and other public interest bodies) reflect each other and a statutory scheme is discernible whereby the provision by an organisation to its members of facilities or advantages for a consideration consisting of a subscription is, first, brought into the scope of VAT as an exception to the general principle that VAT applies to supplies made in the course or furtherance of a business (section 4(1) VATA) and then, effectively removed from the scope of VAT by the exemption at item 1 of Group 9.
30.	He submitted that ETI carried on a ‘real’ (as opposed to ‘deemed’) business in its transactions with its corporate members.  This was demonstrated by the fact that the corporate members obtained a commercial benefit from their membership of ETI.  The significance of the fact that ETI carried on a ‘real’ business was that this demonstrated that section 94(2)(a) did not apply to it (i.e.  there was no need – and indeed it was inappropriate – to deem the activities of ETI to be the carrying on of a business, because they were such on the ordinary meaning of ‘business’). In any case, ETI was not an organisation within the meaning of section 94(2)(a) because there was no contractual link between the members in the form, for example, of the rules of a social club or professional body. 
31.	It followed that the exemption does not apply to those transactions either, because the statutory scheme does not have that effect.
32.	On the wording of item 1(e) of Group 9 of Schedule 9 to VATA, he had the following points: first, the objects of ETI were not ‘in the public domain’ and, secondly, they were not ‘referable only to its [i.e. ETI’s] aims’.
33.	In support of the submission that the objects of ETI were not ‘in the public domain’, Mr. Southern referred us to the document “Purpose, Principles, Programme”, which, under the heading “Governance” states that ETI ‘is a civil, that is private, and not a public initiative’.  He also cited HMRC’s Public Notice 701/05/02 at paragraph 12.1 where the expression ‘bodies with aims that are in the public domain’ is explained.  That explanation is that they are bodies with ‘objects which are directed outside the particular organisation and beyond the members themselves to the general community’.  Mr. Southern’s point was that if members secure a tangible private benefit from membership, ‘this puts the organisation outside the public domain’.
34.	He argued that the objects of ETI were not ‘referable only’ to its aims because they are referable also to the commercial benefit which the corporate members wish to secure for themselves.  He cited a number of authorities and Tribunal Decisions including Expert Witness Institute v Customs and Excise Commissioners [2002] STC 42. 
HMRC’s submissions
35.	Mr. Manknell, for HMRC, accepts that the supplies made by ETI to its corporate members are made by way of business and that there is a legal relationship between ETI and its corporate members pursuant to which those supplies are made.  He identifies three points in dispute as follows: (1) whether ETI’s objects are ‘in the public domain’; (2) whether the services supplied by ETI are ‘referable only to ETI’s aims’; and (3) whether ETI is an organisation within the meaning of section 94(2)(a) VATA.
36.	  As to whether ETI’s objects are ‘in the public domain’, Mr. Manknell referred us to English-Speaking Union of the Commonwealth v Commissioners of Customs and Excise [1981] 1 CMLR 581, a decision of the VAT Tribunal (Decision 1023) (Chairman: Lord Grantchester).  He also referred us to other more recent decisions consistent with the English-Speaking Union decision.  In that decision, the statutory expression ‘where a body has objects which are in the public domain’ (in section 45(3) Finance Act 1972) was considered.  The expression was construed consistently with the provision in the Sixth VAT Directive, pursuant to which section 45(3) was enacted, as objects which are regarded as matters of concern and interest to the public generally (in the sense of giving rise to activities in the public interest) as opposed to matters of concern and interest to individuals or groups of individuals in their private capacities. 
37.	The stated purpose of ETI’s programme partnership arrangement (“PPA”) with DfID is to “improve the incomes, working conditions and respect for the rights of millions of poor workers who are employed by companies that supply ETI members”.  Mr. Manknell reminded us that ETI was funded by DfID (a department of HM Government) to a very significant extent because of its work in promoting what is, effectively, Government policy.
38.	He submitted that plainly ETI’s objects were ‘in the public domain’.
39.	As to whether the services supplied by ETI are ‘referable only to ETI’s aims’, Mr. Manknell submitted that it was irrelevant whether corporate members of ETI received a commercial benefit from their membership.  He contended that the only question to be answered was whether, from ETI’s perspective, its supplies to its corporate members were made in furtherance of its philanthropic aims.  He submitted that they clearly were. 
40.	He referred us to the Expert Witness Institute case, in which the Court of Appeal decided, against HMRC’s contentions, that the supply of services by the Institute to its members was exempt within item 1(e) of Group 9, Schedule 9, VATA.  This was on the basis that the supplies were referable only to the Institute’s aims which were to improve the administration of justice.  The fact that members being professional expert witnesses joined the Institute for different, private, motives did not affect that conclusion.
41.	Mr. Manknell submitted that ETI’s objects were to improve the working conditions of poor working people around the globe rather than act as an ‘ethical’ public relations company for their corporate members. He also referred us to the Decision of the VAT and Duties Tribunal (Chairman: Dr. Avery Jones) in The Worshipful Company of Painter-Stainers v Commissioners for HMRC (release date: 6 May 2008) which followed the Expert Witness Institute case in holding that the reasons which members had for joining the Painter-Stainers livery company were irrelevant to the application of the VAT exemption.
42.	As to whether ETI is an organisation within the meaning of section 94(2)(a) VATA, Mr. Manknell submitted that the only relevant requirement for ETI to be such an organisation was that it should have members, which it plainly does. 

Discussion and Conclusion
43.	In our judgment, in this appeal the crux of the matter is whether or not the supplies of services by ETI to its corporate members are ‘referable only to [ETI’s] aims’ within the meaning of item 1 of Group 9, Schedule 9, VATA.
44.	To decide this issue we must determine what ETI’s ‘aims’ are.  In doing so, we will decide the subsidiary question of whether or not ETI is a body within item 1(e) – that is, a body which has objects which are in the public domain.  We have already found, on the basis of ETI’s Memorandum of Association, that its objects are of a political or philanthropic nature.
45.	 We find that ETI’s ‘aims’ are concisely formulated in a passage in the document “Becoming a Corporate Member of ETI” to which we have already referred at paragraph 16 above.  It is stated in that passage that ETI has a ‘single focus on learning: [ETI] exist[s] solely to acquire experience in the implementation of codes of labour practice and to disseminate the lessons learned.  ETI is neither a standard setting nor accreditation agency. [ETI does] not endorse, certify, accredit or label any product, company or any member or non-member organisation.’
46.	It is not part of ETI’s aims that its corporate members should derive commercial advantages from their membership, though that may be a consequence of membership, as the statement of Mr. Stephens of Tesco plc suggests.  Giving full weight to Mr. Rees’s statement that ‘the moral case is inseparable from the business case’, we find that in no sense are ETI’s aims to act as a kind of ‘ethical’ public relations company for its corporate members. Indeed to act in such a way would, we find, be wholly inconsistent with ETI’s aims.
47.	Although, as Mr. Southern emphasised in his submissions, ETI’s corporate members wish to secure commercial advantages to themselves by their membership of ETI – and ETI recognises that this is the position – this fact cannot have any effect on our finding of what ETI’s ‘aims’ are.  This is made clear from the following passage from Chadwick LJ’s judgment in the Expert Witness Institute case (see: paragraph [31]).  Referring to the quest to identify the aims of the Institute, he said:
“The relevant question is ‘what is the nature of the objective’, not ‘why is it being pursued’.  Secondly, the relevant objective is that of the organisation; not that of any individual member or members.  The exemption is available only to a non-profit-making organisation …  There is no reason to impose a further requirement of altruism on the members.”
48.	After the hearing the Tribunal received a letter from Mr. Rees, the director of ETI who gave evidence at the hearing, making reference to the part of Mr. Manknell’s skeleton argument in which he dealt with the Expert Witness Institute case.  We see no reason at all to criticise Mr. Manknell’s argument.  He referred in the passage with which Mr. Rees’s letter was concerned to Lloyd J’s assessment (at the Chancery Division stage) of the advantages to the members of the Institute in the context of the members’ motivation for joining the Institute being different from the Institute’s ‘aims’.  It is clear that the conclusion which Lloyd J reached, expressed as follows:
“it seems to me … that the aims of the institute can fairly be described as being for the promotion and support of the proper administration of justice, and for that matter, as it says, the early resolution of disputes which itself is something which is in the public interest and is clearly closely related to the administration of justice, notwithstanding that the institute has particular activities and provides particular benefits for its members which will enable them to be better and, possibly, also more successful as expert witnesses in that aspect of their professional activities.”
was entirely supported in the reasoning and conclusion of the Court of Appeal. 
49.	We find that ETI’s aims are correctly stated in clause 3 of its Memorandum of Association (see: paragraph [3] above).  That being so, and having regard in particular to ETI’s PPA association with DfID, we consider that ETI’s objects are clearly ‘in the public domain’ for the purposes of item 1(e), Group 9, Schedule 9, VATA.  If justification is needed for this conclusion, it is to be found in the reasoning of Lord Grantchester in the English-Speaking Union case referred to at paragraph [36] above.
50.	We go on to consider Mr. Southern’s argument on the construction we should put on the provisions of item 1, Group 9, Schedule 9, VATA by reference to the terms of section 94(2)(a) VATA.
51.	We see no reason to interpret item 1 – specifically, item 1(e) – Group 9, Schedule 9 VATA by reference to section 94(2)(a).  The exemption provided for by item 1(e), in conformity with article 132(1)(l) of the VAT Directive of 28 November 2006, 2006/112/EC, is a free-standing exemption for particular activities in the public interest.  There is no reason to impose a restriction on the exemption to the effect that it is only to apply where the activities are undertaken in circumstances in which they are deemed to be the carrying on of a business, as opposed to circumstances which clearly denote a business, without any such deeming provision being necessary or appropriate.  Indeed it would be wrong to interpret the exemption by reference to section 94(2)(a).
52.	We regard section 94(2)(a) VATA to be in the nature of a declaratory provision, adding to the basic definition of “business”, which ‘includes any trade, profession or vocation’ by way of clarification the provision by a club, association or organisation to its members for a consideration of the facilities or advantages available to the members.  This we see as a necessary drafting mechanism to ensure that all economic activity independently carried out is brought within the term “business” as is required by, for example, article 9(1) of the VAT Directive 2006/112/EC.
53.	We point out, also, that there is no symmetry between item 1 and section 94(2)(a), as the exemption applies only to non-profit-making organisations, whereas the deeming provision is not so restricted. Likewise, the exemption applies only to services referable only to the aims of the organisation which are available without payment other than a membership subscription, whereas the deeming provision is not restricted by reference to either of these factors.
54.	Therefore we reject Mr. Southern’s proposition that the exemption is to be construed (at any rate on the facts of this appeal) so that it only applies to activities which would trigger the deeming provision in section 94(2)(a).  
55.	This makes it unnecessary to consider the question of whether ETI is an organisation within section 94(2)(a) VATA.  However it is plain to us that it is.  It is an organisation which provides facilities or advantages to its members for a subscription or other consideration, and that is all that is required by section 94(2)(a) VATA.
56.	For the reasons given above we hold that item 1(e) of Group 9, Schedule 9, VATA applies to the supplies of services made by ETI to its corporate members and dismiss this appeal.  
Costs
	57. The appeal was submitted on 10 March 2009 and, at the request of the parties we direct that rule 29 of the VAT Tribunals Rules 1986, which related to costs, shall apply by virtue of the transitional provisions.  HMRC having made no application for costs on the basis that they were successful in the appeal, we make no order as to costs.  
	
      Right to apply for permission to appeal
58.  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN WALTERS QC

TRIBUNAL JUDGE
RELEASE DATE: 3 September 2010