Messenger Leisure Developments Ltd v HM Revenue & Customs

Part A of Article 13 of the Sixth Directive exempts from VAT certain activities in the public interest, including (by Article 13 A (1)(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”.

Article 13 A (2)(a) provides as follows (so far as material):

“Member States may make the granting to bodies other than those governed by public law of each exemption provided for in 1 … (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 on 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,

….”

Notwithstanding that the exemption in Article 13 A (1)(m) has at all times been part of the Sixth Directive, Member States were, until 1990, entitled pursuant to Article 28 (3)(a) of, and Annex E4 to, the Sixth Directive to derogate from the exemption and to continue to tax sporting supplies. However, the power to derogate was removed by the Eighteenth EC Directive as from the end of 1989 (by which time only the United Kingdom and Germany were continuing to tax such supplies). In the event, it was not until 1 April 1994 that the United Kingdom implemented the exemption by the inclusion of Group 10 in Schedule 6 to the Value Added Tax 1983 (“the 1983 Act”). The implementing provision was the VAT (Sport, Physical Education and Fund-raising) Order 1994 (SI 1994/687), which backdated the exemption to 1 January 1990.

Group 10 in Schedule 6 to the 1983 Act in due course became Group 10 in Schedule 9 to the 1994 Act.

Section 4(1) of the 1994 Act provides that VAT shall be charged on any taxable supply of goods or services made in the United Kingdom by a taxable person in the course or furtherance of any business carried on by him. Section 4(2) provides that a “taxable supply” for this purpose is a supply of any goods or services in the United Kingdom “other than an exempt supply”.

Section 26 of the 1994 Act provides that a taxable person is entitled to credit at the end of any VAT period for so much of the input tax for that period as is attributable to (among other things) taxable supplies made by him during the period.

Section 31 of the 1994 Act provides that a supply of goods or services is an “exempt supply” if it falls within Schedule 9.

Group 10 in Schedule 9 is headed “Sports, Sports Competitions and Physical Education”. Prior to 1 January 2000 Item 3 in Group 10 was in the following terms:

“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.”

Group 10 was substantially amended with effect from 1 January 2000 by the VAT (Sports, Sports Competitions and Physical Education) Order 1999 (SI 1999/1994). As so amended, Item 3 in Group 10 reads as follows:

“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.”

A number of Notes then follow. Note (2A) defines “eligible body” as meaning (so far as material):

“…. a non-profit making body which –

(a)

is precluded from distributing any profits it makes, or is allowed to distribute any such profits 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 … 3; and

(c)

is not subject to commercial influence.”

Note (4) explains what is meant by “subject to commercial influence” in Note (2A). Although at one stage the Commissioners sought to contend that Developments was “subject to commercial influence” in the sense there explained, they expressly abandoned that contention before the Tribunal.

Note (2B) provides as follows (so far as material):

“For the purposes of Note (2A)(b) the application of profits made by any body from supplies of a description within Item … 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 sole issue in the instant case is whether, in relation to the periods in question, Developments falls to be treated as a ‘non-profit making body’ within the meaning and for the purposes of Item 3 in Group 10 in Schedule 9 to the 1994 Act. It is common ground that that in turn depends on whether, in relation to those periods, it was a “non-profit-making organisation” within the meaning and for the purposes of Article 13 A.

Community law

It is common ground that, in interpreting and applying Article 13 A, the following general principles of Community law are engaged:

The European authorities which are of central relevance in the instant case, however, are the decisions of the European Court of Justice (“the ECJ”) in the conjoined cases of Kennemer Golf and Country Club v. Staatssecretaris van Financien Case C-174/00 [2002] QB 1252 (“Kennemer”) and (to a lesser extent) Customs and Excise Commissioners v. Zoological Society of London Case C-267/00 [2002] QB 1272 (“LondonZoo”).

The facts of Kennemer were, in summary, as follows. The claimant, a members’ golf club in the Netherlands, derived a large part of its income from day membership fees paid by non-members for the use of the course and associated facilities (green fees). In a number of tax years the claimant made an operating surplus which was paid into a reserve fund as a provision for non-recurring expenditure. It claimed exemption from VAT in respect of the green fees on the ground that it was supplying services closely linked to sport within the meaning of Article 13 A (1)(m). The tax authorities concluded that the club was aiming to make a profit, and hence was not a “non-profit-making organisation” within the meaning of the exemption; and that it failed to meet the optional condition in the first indent in Article 13A(2)(a) (see paragraph 32 above) – a condition which had been adopted in the Netherlands – that it should not “systematically aim to make a profit”. The national court referred to the ECJ for (among other things) a ruling on how the provisions in question were to be interpreted.

The ECJ 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 (in the sense of financial advantages) for its members; but that, provided that was so, the fact that the organisation made operating surpluses, even if it sought to make them and did so systematically, did not affect its non-profit-making status so long as the surpluses were not distributed to the organisation’s members as profits.

I turn first to the opinion of the Advocate-General (Jacobs). In paragraph 36 of his opinion, under the heading “The third question”, he formulated the question at issue in the following terms:

“[I]f an organisation is to be classed as non-profit-making for the purposes of article 13 A (1)(m) of the Sixth Directive, to what extent may it nonetheless make a surplus and what is the relevance in that regard of the first indent of article 13 A (2)(a) …?”

The Advocate-General then considered in general terms the relationship between Article 13 A (1)(m) and the optional condition in the first indent of Article 13 A (2)(a), concluding that there may be room for a degree of overlap and/or replication between that condition and the substantive exemption to which it is applicable.

In the next section of his opinion (paragraphs 44 to 51) the Advocate-General addressed the concept of a “non-profit-making organisation” in Article 13 A (1)(m), as follows:

“44 The Commission points out that the concept of a non-profit-making entity already exists in the laws of several member states. For the purposes of the Sixth Directive, however, an autonomous and uniform Community definition is required (see, for example, Commission of the European Communities v United Kingdom of Great Britain and Northern Ireland (Case C-359/97) [2000] ECR I-6355, 6406, para 63 of the judgment and the case law cited there), which will not necessarily correspond to those concepts in every detail.

45

First, I agree with what appears to be the consensus of the Finnish and United Kingdom Governments and the Commission, that the idea 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--rather than to whether in any given period the organisation's income exceeds its expenditure. 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.

46

Secondly, in accordance with most of the language versions, the focus must be on the aims of the organisation concerned rather than on its results--the mere fact that an entity does not make a profit over any given period is not enough to confer non-profit-making status. Moreover, from the fact that "non-profit-making" is used to qualify "organisation", it would seem that the aims in question are those which are inherent in the organisation rather than those which it may be pursuing at a particular point in time.

47

When assessing those aims, therefore, it is necessary but not sufficient to look at the organisation's express objects 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, or the organisation of sporting "competitions" in which all the members win prizes. No doubt further methods of covert distribution can be devised.

48

On the other hand, as the Finnish and United Kingdom Governments have also submitted, it would not be reasonable to define an organisation as profit-making simply because it sought to achieve a surplus of regular income over regular expenditure in order to budget for irregular but foreseeable expenditure. A golf club might need, for example, to re-roof its clubhouse after a number of years or to extend its course. To deny it non-profit-making status simply because it accumulated a surplus for that purpose would be to discourage it from managing its affairs economically, with prudence and foresight, and to ignore the fact that no material benefit would accrue to any person as a result of the surplus. Organisations would moreover be liable to acquire and lose their right to exemption depending on where they stood in their budgeting programme, although their fundamental nature and aims would remain unchanged. That cannot in my view have been the intention of the legislature when it enacted the category of "non-profit-making organisations".

49

Clearly, in each case the assessment must be a matter for the national court, which is in a position to investigate the circumstances of the organisation. In the present case, it does not seem possible for this court to give more than general guidance, since it is not clear from the case file exactly how the excess income paid by the claimant into its reserve funds was actually used or intended to be used.

50

The relevant part of the [national court’s] question may nonetheless be answered to the effect that a non-profit-making organisation within the meaning of article 13 A (1)(m) of the Sixth Directive is one which does not have as its object the enrichment of natural or legal persons and which is not in fact run in such a way as to achieve or seek to achieve such enrichment. However, the fact that a body systematically aims to make a surplus which it uses for the services it supplies in the form of a facility to practise a sport does not preclude its classification as such a non-profit-making organisation.

51

In answering that specific question, it is, as I have indicated above, not appropriate to have regard to the terms of the first indent of article 13 A (2)(a). However, it appears that the Netherlands legislature has sought also to apply the conditions set out in that indent to the exemption under article 13 A (1)(m). In so far as it has done so, those conditions must be examined in order to provide a more complete answer to the national court.”

The Advocate-General then turned (in paragraphs 52 to 61 of his opinion), to the provisions of the first indent of Article 13 A (2)(a), saying this:

“52 This provision sets out three conditions: (i) there may be no systematic aim of making a profit; (ii) any profits nevertheless arising may not be distributed; (iii) such profits must be used for the continuance or improvement of the services supplied. It seems to me clear from the language used that those conditions are cumulative and not alternative.

53

They must moreover be construed in such a way as to be coherent both among themselves and with the terms of the exemptions to which they may be applied. Therefore, taken together, they should be capable of allowing some non-profit-making organisations within the meaning of article 13 A (1)(m) to benefit from the exemption whilst excluding others. Put another way, it should be possible for some but not all of those organisations to fulfil the conditions: see paragraphs 37 to 43 above. (The same applies, mutatis mutandis, with regard to the bodies referred to in the other sub-paragraphs of article 13 A (1) to which the conditions may be applied. Whilst there may be some degree of overlap between the definition of the body in question and the conditions which may be imposed, the application of the combined conditions may be expected in some way to limit the scope of that definition.).

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. Moreover, the word "profit " must be construed here as "surplus of income over expenditure" rather than "enrichment of natural or legal persons" (that is to say profit which by its very nature is distributed) or the condition would be circular and would have no meaning. (This appears to be specifically supported by the use of the word "overskud" in Danish.)

55

It must consequently bear the same construction in the third condition – use for the furtherance of the services supplied – which will often, but not necessarily, be fulfilled: a non-profit-making organisation may make a surplus which it uses otherwise than for the continuance or improvement of its services whilst nonetheless ensuring that third parties are not enriched.

56

I should point out here that I do not agree with the suggestion in the [national court's] question that the second and third conditions might be read as referring to any profits nevertheless "systematically" arising. The word "systematically" in this context implies the existence of a system and thus, where human activities are concerned, of an organised plan or design. It is not possible in my view for profits to arise systematically in the absence of a systematic aim to make them. However, that does not mean that the words "merely incidentally" must necessarily be read into the provision either. The reference is simply to a surplus, of whatever nature or origin, to be used in a specified manner.

57

What remains to be determined is whether the first of the three conditions in the indent – that there may be no systematic aim to make a profit – limits or merely replicates the concept of non-profit-making aim set out in article 13 A (1)(m) and, if it limits that concept, in what way it does so.

58

The fact that the two provisions are worded differently in all the language versions might well suggest that their meaning was intended to be different. That view would be supported by the fact that the alternative would offer less scope for the member states to use the indent to impose any further condition on non-profit-making bodies; they would be empowered merely to insist that such bodies used any surplus for the furtherance of the services they supplied.

59

On the other hand, the reasoning I have set out in paragraph 48 above applies as much in the context of the first indent of article 13 A (2)(a) as in the context of article 13 A (1)(m). It would seem arbitrary in the extreme to allow an organisation to benefit from a VAT exemption while budgeting regularly for its regular expenditure, but not if it accumulated a temporary surplus to budget for irregular but foreseeable expenditure.

60

In line with that reasoning, I take the view that the first part of the optional condition in the first indent of article 13 A (2)(a) of the Sixth Directive, to the effect that the bodies in question may not "systematically aim to make a profit", refers to the making of profit intended to be distributed and thus essentially replicates the "non-profit-making" criterion in article 13 A (1)(m), whereas the second and third parts of that condition refer respectively to prohibited and compulsory uses of any surplus of income over expenditure.

61

That interpretation does not deprive the condition of any substance. The overlap with the "non-profit-making" criterion in article 13 A (1)(m) – and article 13 A (1)(l), which exempts certain supplies made by non-profit-making organisations with aims of a political, trade union, religious, patriotic, philosophical, philanthropic or civic nature – does not necessarily apply in the case of the bodies referred to in the other sub-paragraphs concerned, such as hospitals or similar recognised establishments, or charitable, educational or cultural bodies recognised by the member states. Medical or educational establishments in particular might well include among their aims the making and distribution of profit whilst still complying with all the other criteria in the relevant sub-paragraphs. Furthermore, a requirement that surpluses must be assigned to the continuance or improvement of the services supplied will significantly circumscribe the uses to which such monies may be put. For example, a golf club might be required to devote all its income to its own services rather than, say, to making donations to an external fund for promoting excellence in golf journalism.”

In the final paragraph of his opinion (paragraph 66) the Advocate-General concluded that:

“…. a non-profit-making organisation within the meaning of article 13 A (1)(m) is one which does not have as its object the enrichment of natural or legal persons and which is not in fact run in such a way as to achieve or seek to achieve such enrichment”.

He continued:

“However, the fact that a body systematically aims to make a surplus which it uses for the services it supplies in the form of a facility to practice a sport does not preclude its classification as a non-profit-making organisation. The first part of the optional condition in the first indent of article 13 A (2)(a) of the Sixth Directive, to the effect that the bodies in question may not “systematically aim to make a profit”, falls to be construed in the same way.”

In paragraphs 16 to 23 of its judgment the ECJ addressed the question whether the categorisation of an organisation as ‘non-profit-making’ for the purposes of Article 13(A)(1)(m) should be based exclusively on the services there referred to, or on the totality of the organisation’s activities. The ECJ concluded (in paragraph 23) that the categorisation should be based on the totality of the organisation’s activities. In paragraph 19 the ECJ described the purpose of the exemption (and of a number of other associated exemptions) as being:

“…. to provide more favourable treatment, in the matter of VAT, for certain organisations whose activities are directed towards non-commercial purposes.”

The ECJ addressed the question at issue (“the third question”) in paragraphs 24 to 35 of its judgment, as follows:

“24 By its third question, which it is appropriate to examine before the second question owing to its close link to the first question, the national court is asking, essentially, whether article 13 A (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

Whilst the Finnish and United Kingdom Governments, and also the Commission, submit that the most important consideration is whether the organisation in question aims to make a profit and not the fact that it actually makes a profit, even if it does so habitually, the Netherlands Government, on the other hand, 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 article 13 A (1)(m) 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 article 13 A (1)(n) of the Sixth Directive, the judgment given today in Zoological Society of London v Customs and Excise Comrs (Case C-267/00), post, p 860, para 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 article 13 A (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 lucratif", the German version, "Gewinnstreben"; the Dutch version, "winst oogmerk"; the Italian version, "senza scopo lucrativo", and the Spanish version, "sin fin lucrativo".

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 surpluses, even if it seeks to make them or makes them systematically, will not affect the original categorisation of the organisation as long as those surpluses are not distributed to its members as profits. Clearly, article 13 A (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.

29

The referring court is also unsure whether this interpretation can be maintained in cases where the achievement of surpluses is systematically sought by an organisation. It refers in this regard to the first indent of article 13 A (2)(a) of the Sixth Directive which would seem to suggest that the VAT exemption is to be disallowed where an organisation systematically seeks to make profits.

30

As far as that provision is concerned, it must be observed at the outset that it lays down an optional condition that the member states are at liberty to impose as an additional condition for the grant of certain exemptions set out in article 13 A (1) of the Sixth Directive, amongst which figures the exemption covered by that same provision, under (m), which concerns the present case. The Netherlands legislature seems to require compliance with that optional condition before the benefit of that exemption can be granted.

31

As far as the interpretation of that optional condition is concerned, the Netherlands Government maintains that the exemption must be refused where an organisation systematically seeks to achieve surpluses. The Finnish and United Kingdom Governments, as well as the Commission, on the other hand, submit that systematic pursuit of profits is not of decisive importance where it is clear from both the circumstances of the case and the kind of activity actually carried on by an organisation that it is acting in accordance with the objects set out in its constitution and that those do not include any profit-making aim.

32

It must be observed, with regard to this point, that the first condition set out in the first indent of article 13 A (2)(a) of the Sixth Directive, namely that the organisation in question must not systematically aim to make a profit, clearly refers, in the French version of that provision, to "profit " ("la recherche systématique du profit"), whilst the two other conditions set out there, namely that no "profits" should be distributed and that any "profits " be assigned to the continuance or improvement of the services that supplied, refer, in the French text, to "bénéfices".

33

Although that distinction is not to be found in any of the other language versions of the Sixth Directive, it is borne out by the objective of the provisions contained in article 13 A. As the Advocate General points out in paragraphs 57 to 61 of his opinion, it is not "profits" ("bénéfices"), in the sense of surpluses arising at the end of an accounting year, which preclude categorisation of an organisation as "non-profit-making", but profit ("profit ") in the sense of financial advantages for the organisation's members. Consequently, as the Commission also points out, the condition set out in the first indent of article 13 A (2)(a) essentially replicates the criterion of non-profit-making organisation as contained in article 13 A (1)(m).

34

The Netherlands Government argues that such an interpretation does not take account of the fact that the first indent of article 13 A (2)(a) must, as an additional condition, necessarily have a content extending beyond that of the basic provision. In response to that argument, it suffices to observe that that condition refers not only to article 13 A (1)(m) of the Sixth Directive but also to a large number of other compulsory exemptions which have a different content.

35

Consequently, the answer to be given to the third question must be that article 13 A (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. The first part of the optional condition set out in the first indent of article 13 A (2)(a) of the Sixth Directive is to be interpreted in the same way.”

London Zoo was concerned with a different exemption, namely the exemption of “certain cultural services and goods closely linked thereto supplied by …. cultural bodies recognised by the Member State concerned” contained in Article 13 A (1)(n). Nevertheless, in considering London Zoo’s claim for exemption the Advocate-General (Jacobs) in his opinion, and the ECJ in its judgment, made certain observations which are relevant to the exemption claimed in the instant case.

In paragraph 19 of his opinion the Advocate-General said this as to the approach to interpretation of the exemptions:

“19 I agree that exemptions from VAT should be strictly interpreted but should not be whittled away by interpretation. The Commission is right in that regard to contrast the notions of "strict" and "restrictive” interpretation. As a corollary, limitations on exemptions should not be interpreted narrowly, but nor should they be construed so as to go beyond their terms. Both the exemptions and any limitations on them must be interpreted in such a way that the exemption applies to that to which it was intended to apply and no more. Thus, I would agree with the Society that it is appropriate to consider the purpose of the relevant provisions in their context.”

In paragraph 25 of his opinion the Advocate-General referred to Kennemer, as follows:

“25.

It seems clear to me from the wording that the condition in question reflects another concern which was manifestly felt in the drafting of article 13 A – that of ensuring that certain activities should not benefit from exemption if they are run for commercial profit. Two exemptions are explicitly confined to "non-profit-making organisations" (see my opinion in Kennemer …. p 831h et seq) and the same group of seven, including article 13 A (1)(n) in issue here, may be subjected under the first indent of article 13 A (2)(a) to the condition that "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".”

In paragraphs 16 and 17 of its judgment, the ECJ said this:

“16 It should be noted at the outset that the second indent of article 13 A (2)(a) is an optional condition which member states are at liberty to impose additionally for the grant of certain exemptions mentioned in article 13 A (1).

17

As for the interpretation of that additional condition, namely, that a body availing itself of one of the exemptions in article 13 A (1) of the Sixth Directive must be managed and administered on an essentially voluntary basis, it follows from the legal context in which that condition occurs that the Community legislature wanted to make a distinction between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members: see in relation to the exemption under article 13 A (1)(m) of the Sixth Directive, Kennemer …. p 847, para 34”

Domestic law

The only domestic authority cited in this court was the decision of Stuart-Smith J in Ian Flockton Developments Ltd v. Commissioners of Customs and Excise [1987] STC 394 (“Flockton”), which was cited by Mr Roger Thomas (for Developments).

The Decision contains brief references to certain other domestic authorities, but for present purposes it is not necessary to refer to them. No domestic authorities are referred to in the judge’s judgment. I should, however, refer briefly to Flockton.

In Flockton the taxpayer was a company manufacturing plastic mouldings and storage tanks. Its customers were project engineers in chemical factories. It conceived the idea that purchasing and running a racehorse would attract customers. The Commissioners contended that for VAT purposes expenses incurred by the taxpayer in the purchase and upkeep of the racehorse were not incurred for the purposes of its business, and that the taxpayer was accordingly not entitled to credit for input tax in respect of such expenses since section 14(3) of the 1983 Act (the precursor of section 26(1) of the 1994 Act) limited “input tax” to tax on the supply to the taxpayer of goods or services “to be used for the purposes of any business carried on or to be carried on by him”. A VAT Tribunal dismissed the taxpayer’s appeal, but the High Court allowed it.

In the course of his judgment, Stuart-Smith J referred to the test to be applied under section 14(3) of the 1983 Act, as follows (at p.400b-d):

“The test is were the goods or services which were supplied to the taxpayer used or to be used for the purpose of any business carried on by him? The test is a subjective one: that is to say, the fact-finding tribunal must look into the taxpayer’s mind as it was at the relevant time to discover his object. Where the taxpayer is a company, the relevant mind or minds are those of the person or persons who control the company or are entitled to and do act for the company.”

Mr Thomas submits that Flockton is authority for the proposition that in the instant case the question whether Developments is a ‘non-profit making body’ is to be answered by reference to Mr Shah’s (subjective) intentions, as to which the Tribunal made specific findings. (A submission to which I shall return.)

The Tribunal set out its reasons for dismissing Developments’ appeal in paragraphs 111 to 122 of the Decision (I have already quoted paragraph 114: see paragraph 15 above). The paragraphs in question read as follows:

“111.

We have found this a particularly difficult case, not least because we found Mr Shah a convincing witness and we are satisfied that he has a genuine intention (as he puts it in his witness statement) to “create something quite different from the elite private members club which cost a fortune to join, or the overused municipal golf courses, and to provide golf and other sporting facilities which families can use and enjoy”. He continued “I was also determined to invest properly in the sporting facilities as it is often the case in clubs, both members owned and proprietary, which are not solely members clubs that they are over used, not looked after sufficiently, and deteriorate to the detriment of the players. My overall objective remains exactly the same today as it was then; I was not interested in extracting profit from the business. I wanted to provide improved facilities.” We accept that it was not his primary intention to extract profits from [Developments], nor to build up a company from which he could later extract a profit.

112.

We are satisfied that [Developments] was formed to achieve Mr Shah’s aims, and it was not the immediate intention to take advantage of the legislation to benefit Leisure and MGL, or, ultimately, Mr Shah himself, although it must be recognised that Leisure and MGL would benefit if [Developments] were found to be VAT exempt.

113.

We do not think that it is right to disregard the fact that, despite the structure of [Developments] and Clause 3(v) of its memorandum, it is, as Mr Shah himself acknowledged in evidence, ultimately he who has control of the group.

114.

We find that [Developments] was set up with the intention of obtaining a fiscal advantage following the introduction into UK law of the exemption provided by Article 13 and had no independent business purpose. This of itself is not a reason why it may not benefit from the exemption.

115.

Insofar as the [Commissioners] relied on the very fact that [Developments] made a profit, and was not prevented by anything in its Memorandum from so doing, we do not consider this is relevant. As the court in the case of Kennemer said at paragraph 6:

“…it is clear from Art 13 A (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…”

116.

Whilst we accept that by its constitution [Developments] does not have the purpose of making a profit for distribution to its members, we adopt the line of reasoning of the tribunal in the case of Chobham Golf Club (VAT decision 14867). In that case, following the reasoning in the Court of Appeal in the case of Customs and Excise Commissioners v Bell Concord Educational Trust Ltd [1989] STC 264, the chairman stated that whether a body is non-profit-making (which he considered should truly be “non-profit seeking”) was a question of the purpose, intention or motive of the body concerned. At paragraph 23 he stated:

“Now, a company or un-incorporated body can have a purpose, to which its construction will indeed be a guide, but can it have an intention or a motive? Those are attributes of natural persons, and can only be arrived at by looking at the persons who control the body, using this objective approach outlined in the well-known Ian Flockton case. And what is one to do if the intention or motive of those persons, as evidenced inter alia by their actions, appear to be at variance with the constitution?”

117.

Mr Shah was not challenged in cross-examination when he said he was not interested in extracting profit from [Developments]. It was never put to him that his intention was anything other than that which he said it was. We accept his evidence that it was not his intention to extract a profit from the Club. However, we do not consider that that is the end of the matter. We also have to look at 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.

118.

In respect of the first assessment, we are only concerned with the question of whether or not [Developments] comes within Article 13 A 1(m). We are not concerned with the provisions of Article 13 A2(a) because the United Kingdom had not at that time implemented those provisions, which were within the discretion of the individual Member States to incorporate into their own domestic law or not.

119.

It was in the currency of the first assessment that [Developments] had made a loan to Leisure. At the time, this loan was made without any interest being charged to Leisure, although subsequently interest was applied retrospectively. [Developments] is a wholly owned subsidiary of Leisure. The loan was made out of the profits generated by [Developments]. Although we accept that the loan was made without thought to the VAT consequences of making the loan, the very fact that [Developments] subsequently charged Leisure interest, and applied such interest retrospectively, points to the fact that [Developments] accepted the Commissioners’ view that there was a distribution of profits by [Developments] to its member at that time. The fact that [Developments] was able subsequently to apply a retrospective charge to interest in respect of that loan highlights the commercial unreality of the relationship between [Developments] and Leisure. It is inconceivable that Leisure could have obtained a similar loan from any other source without the terms and conditions being established at the time of the loan itself. Mr Thomas submitted that the fact that the loan did not decrease [Developments’] assets, and was later put on a proper commercial footing, demonstrates that there was no distribution of profit. We do not accept that is the case with regard to the period when no interest was charged. [Developments] did not during this time derive the interest it would have had even if it had only left the money in the bank, nor have the money available for its own purposes.

120.

It was argued on behalf of [Developments] that by spending money on the golf courses [Developments] was properly applying its funds on the provision of sporting facilities, and not distributing funds for the benefit of Leisure. We do not think it right to ignore the fact that Leisure owned the land and therefore any improvement to the course(s) increased the capital value of the land. It is open to Leisure to sell the land at any stage at a price which will have been enhanced by [Developments’] expenditure. We do not consider that the fact that the items of expenditure referred to in paragraph 40 above do not appear as items of capital expenditure in [Developments’] accounts alters the reality of the situation, and find specifically that expenditure on the swimming pool, landscaping and irrigation represent a capital improvement in the value of the land in the hands of Leisure.

121.

In respect of the first assessment we find that there was a de facto distribution of profits to Leisure, and therefore [Developments] is a profit-making organisation, and therefore the appeal must fail with regard to that assessment. We were not told the exact date on which [Developments] commenced charging Leisure interest on the loan. We were told by Mr MacNab that an officer of Customs and Excise visited [Developments] in September 2000. It was apparently some time after this visit that interest was charged. As the loan continued without there being a charge to interest into the currency of the second assessment, we must therefore find that [Developments] fails on the same grounds as it fails in respect of the first assessment in respect of the later period, at least for those periods when interest was not being charged.

122.

With regard to the second assessment, we do not need to take account of the provisions of Article 13 A 2(a) and (b) which were incorporated into the United Kingdom law with effect from 1 January 2000, insofar as we have found that [Developments] was not a non-profit-making organisation, it quite properly having been accepted by Mr Thomas that [Developments] must fail in any event if he cannot establish that he is a non-profit-making body within Article 13 A (1).”

After summarising the facts and the arguments, and after referring to Kennemer, the judge continued (in paragraphs 24 to 27 of his judgment):

“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 13 A (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 [Developments] 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 13 A (1)(m) of the Sixth Directive or a non-profit making body for the purposes of Group 10 of Schedule 9. [Developments’] 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.”

The judge accordingly dismissed Developments’ appeal.

Developments contends that the judge erred in law in concluding (in paragraph 25 of his judgment) that an organisation which does not have the aim of distributing profits to its members, and which does not in fact do so, may nevertheless not be a ‘non-profit making body’; and that Kennemer is not authority for the contrary proposition.

It further contends that in any event the judge erred in law in paragraph 27 of his judgment:

Accordingly, Developments contends that the judge’s reliance on the above two factors as the basis for his conclusion that Developments is not ‘a non-profit making body’ for present purposes was misconceived; and that the only possible conclusion on the Tribunal’s findings is that Developments is entitled to the exemption which it claims.

By way of general background, Mr Thomas emphasises (by reference to Gregg)that exempt status is not necessarily advantageous to the taxpayer. He points out that where a supply is exempt, there is no right to credit for input tax referable to such supply. Hence, he submits, there can be nothing objectionable in a taxpayer so arranging his affairs as to fall within the terms of an available exemption. He accordingly submits that the Tribunal’s finding (in paragraph 114 of the Decision, quoted in paragraphs 15 and 65 above) that Developments was set up with the intention of obtaining a fiscal advantage should not be regarded as in any way pejorative; and that the Tribunal’s reference to “no independent business purpose” means no more than that Developments was brought into existence because it was not possible for Leisure itself to qualify for the exemption. In short, he submits, in forming Developments Mr Shah took the opportunity afforded by the legislation to provide decent sporting facilities to the general public at a reasonable price.

Turning to Kennemer, Mr Thomas submits that, read in context, the ECJ’s reference (in paragraph 33 of its judgment, quoted in paragraph 55 above) to “profit” as meaning “financial advantages for the organisation’s members” is limited to financial advantages in the form of distributions, whether overt or covert, and does not extend to funds accumulated and retained within the organisation. He submits that in paragraph 54 of his opinion in Kennemer (quoted in paragraph 51above) the Advocate-General had in mind the distribution of surpluses, rather than general financial advantage in any broader sense, and that this is reflected in the ECJ’s judgment. Accordingly, he submits that the Tribunal and the judge erred in law in looking for additional conditions for exemption beyond those laid down in Kennemer; and that, absent any distributions by Developments, there is nothing in the evidence to contradict a finding that Developments is, in relation to the periods in question, a ‘non-profit-making organisation’.

Mr Thomas further submits that the Kennemer test is an essentially subjective one. He accepts that the terms of clause 3 of Developments’ Memorandum is a relevant factor, but he submits (relying on Flockton: see paragraphs 62to 64above) that ultimately the question of Developments’ intention is to be answered by inquiring as to the subjective intentions of its controller, Mr Shah. As to that, he relies on the specific findings made by the Tribunal, to which I have already referred.

Mr Thomas also takes issue with the judge’s description of Developments as a company whose activities were “inextricably linked” with those of Leisure (see paragraph 27 of his judgment, quoted in paragraph 66 above). He goes so far as to submit that the facts found by the Tribunal lead to the opposite conclusion. He points in particular to the Tribunal’s finding that it was Mr Shah’s intention that, far from distributing its profits, Developments should accumulate any surplus funds so that it could in due course buy its own “flagship club”. Having done that, Mr Thomas submits, Developments would not continue to be dependent on Leisure to provide it with the facilities with which it made its sporting supplies.

As to Leisure’s ability to procure a change in Developments’ constitution, Mr Thomas points out that the constitution of an English company can always be changed. He submits that it follows that that fact in itself cannot have the effect of disqualifying such a company from being a ‘non-profit making organisation’.

He submits that the Tribunal and the judge have engaged on just that process of “whittling away” the scope of the exemption of which the Advocate-General expressly deplored (see paragraph 19 of his opinion in London Zoo: quoted in paragraph 57 above).

Finally, Mr Thomas submits that the effect of the Decision – and of the judge’s judgment – is to treat Developments and Leisure as a single taxable person for VAT purposes, notwithstanding that they make separate supplies. He submits (and with this proposition at least Mr Nicholas Paines QC, for the Commissioners, does not take issue) that such an approach is not legitimate under Community law.

Mr Paines submits that the facts found by the Tribunal lead inevitably to the conclusion that Developments is not “a non-profit-making organisation” for the purposes of Article 13 A (1)(m) of the Sixth Directive; and hence that it is not “a non-profit making body” for the purposes of Group 10 in Schedule 9 to the 1994 Act.

He submits that in his (perfectly proper) attempt to bring the supply made by Developments within the exemption, Mr Shah has not gone far enough to separate Developments’ aims and activities from those of Leisure. Rather than, for example, setting up a charitable trust, Mr Shah has elected to use Developments as a commercial arm of the Messenger group, which he owns and controls. He reminds us that (in contrast to the golf club in Kennemer) the Clubs in the instant case are not members’ clubs but proprietary clubs, owned by a commercial organisation and run for profit; and that in making its supplies Developments uses facilities owned by other members of the group (principally Leisure) and made available to it free of charge. He points out that Mr Shah could (again perfectly properly) wind up Developments, or procure an alteration of its Memorandum, and extract any surplus funds which it had accumulated; and that, not surprisingly, there is no finding by the Tribunal that Mr Shah will never take out any surplus.

Mr Paines relies on London Zoo for the submission that the exemption must be construed strictly (albeit, as he accepts, not restrictively: see paragraph 19 of the Advocate-General’s opinion, quoted in paragraph 57 above).

Turning to Kennemer, Mr Paines submits that there is no warrant for Mr Thomas’ submission that in defining “profit” by reference to “financial advantages for the organisation’s members” (in paragraph 33 of its judgment: quoted in paragraph 55 above) the ECJ had in mind only distributions to members. He submits that the expression “financial advantages” is an entirely general one, and that on the facts of the instant case, as found by the Tribunal, Developments’ activities bring clear financial advantages to the Messenger group. He further submits that, reading paragraph 25 of the judge’s judgment in the context of the judgment as a whole, the judge was not suggesting that Kennemer does not lay down a complete test as to whether an organisation is ‘non-profit-making’; rather the judge was, rightly, treating the accumulation of surplus funds within Developments as a financial advantage for its members (i.e. Leisure).

He further submits that the test whether the “aim” of an organisation is “non-profit making” is an objective test, which requires a consideration of all the elements of the transactions in question and the circumstances in which they take place (including, in the instant case, the relationship between Mr Shah and his companies) in order to determine, objectively, their essential features, inherent nature and economic reality. He submits that the question whether a supply is exempt has to be asked at the time the supply is made; and that on an objective appraisal of the facts in the instant case the only conclusion is that Developments’ supplies were not exempt. He submits that Flockton is of no assistance in the instant case, since the court was there concerned with different statutory wording (viz. whether the racehorse was being ‘used …. for the purpose of’ the taxpayer’s business).

At the outset, I must make it clear that it has not been suggested by the Commissioners at any stage that in bringing Developments into use in the way that he has, Mr Shah has done anything remotely improper. As Mr Thomas says, it is a commercial decision for a taxpayer whether to arrange his affairs in such a way as to bring a particular supply within the terms of a statutory exemption. The issue in the instant case is whether, in relation to the supplies made by Developments, Mr Shah has succeeded in doing so.

I turn, therefore, to that issue; and I begin with Kennemer. The issue of law which arose in Kennemer (albeit in the context of a members’ club rather than, as in the instant case, a proprietary club)was as to the extent to which an organisation which is originally categorised as ‘non-profit-making’ for the purposes of Article 13 A may make a surplus without losing its status as such; and that issue in turn raised a subsidiary issue as to the relationship between Article 13 A (1)(m) and the first of the optional conditions in Article 13 A (2)(a).

The issue in Kennemer was accordingly different from the issue which arises in the instant case, in that it concerned an organisation (a members’ club) which would otherwise (that is to say, leaving out of account the making of surpluses) be categorised as ‘non-profit-making’. Nonetheless, in addressing that issue (principally in paragraphs 24 to 35 of its judgment, quoted in paragraph 55 above),and in concluding that “the fact that an organisation subsequently achieves surpluses, even if it seeks to make them or makes them systematically, will not affect the original categorisation of the organisation as long as those surpluses are not distributed to its members as profits” (paragraph 28), both the Advocate-General and the ECJ made certain general observations which are of direct application in the instant case.

Thus, the ECJ observed (paragraph 19) that the exemption in Article 13 A (1)(m), together with certain other exemptions in the same group, is “to provide more favourable treatment, in the matter of VAT, for certain organisations whose activities are directed towards non-commercial purposes”. Further, it held (in agreement with the Advocate-General) that whether or not an organisation is to be classed as ‘non-profit-making’ for the purposes of Article 13 A (1)(m) is to be determined by reference to the “aim which the organisation pursues” (paragraph 26); that to be classed ‘non-profit-making’ for those purposes an organisation “must not have the aim, unlike [sic] a ‘commercial undertaking’, of achieving ‘profits’ for its members” (paragraph 26); and that the word ‘profit’, in the context of the expression ‘non-profit-making’, is used in the sense of “financial advantages for the organisation’s members”, as distinct from the existence of surpluses arising at the end of an accounting year (paragraph 33).

The ECJ accordingly concluded (paragraph 35) 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” (emphasis supplied). As the judge correctly observes in paragraph 25 of his judgment (quoted in paragraph 66 above), that is the proposition for which Kennemer is authority.

More importantly for present purposes, however, Kennemer is not authority for the very different proposition that an organisation which has no power to make, and which does not make, distributions to its members is necessarily a ‘non-profit-making organisation’ for the purposes of Article 13 A (1)(m), notwithstanding that it may achieve surpluses which it retains and uses for its own purposes. There are two reasons why, in my judgment, this is so.

First, in agreement with Mr Paines I can see no basis for treating the expression “financial advantages for the organisation’s members” in paragraph 33 of the ECJ’s judgment in Kennemer as restricted to a particular category of advantage, viz. a distribution of surplus funds to members. Indeed, when read in the context of the judgment as a whole it seems to me that it is plainly not so limited. Second, whether or not an organisation is ‘non-profit-making’ for the purposes of Article 13 A (1)(m) must, as the ECJ tells us, depend on the “aim which [it] pursues”. As to that, I also agree with Mr Paines that in determining what is the “aim” which the organisation is pursuing when it makes the supply in question it is necessary to look at the transactions in question in their full factual context. Thus, the fact that an organisation systematically achieves surpluses which it retains for its own purposes may, depending on the context, demonstrate an “aim” which is far removed from ‘non-profit-making’.

Such, in my judgment, is the position in the instant case. In my judgment it is clear on the undisputed facts that Developments represents an integral part of the commercial operation of the Messenger group, and hence of Mr Shah, in acquiring and running golf and country clubs (i.e. proprietary clubs), and, from time to time, in selling them. This is evident not merely from the formal structure of the group, but also from the fact that (as the Tribunal records in paragraph 40 of the Decision (quoted in paragraph 28 above)) the substantial surpluses accumulated by Developments arose from its free use of the facilities made available to it by other members of the group (principally Leisure). A further indication of the commercial interdependence of companies in the group is the fact that on the sale of the Essex Club part of the price attributable to goodwill was paid to Developments (see paragraph 29 above).

In context, therefore, the building up of reserves in Developments is a clear financial advantage to the group, and hence to Mr Shah. So much, indeed, is evident from Mr Shah’s expressed hope that in due course Developments may acquire its own ‘flagship club’. So even assuming that the initial failure of Developments to charge interest on moneys held by Leisure for its account did not amount to a distribution (and it is unnecessary to decide whether it did or not) the commercial nature of Developments’ “aim” in making the supplies in question is, in my judgment, clear on the facts.

As to whether the test of “aim” is a subjective or an objective one, I have no difficulty in accepting Mr Thomas’ submission that Mr Shah’s subjective intentions in relation to Developments were relevant matters for the Tribunal to take into account as part of the general context; but, for reasons already given, they are far from conclusive as to Developments’ “aim” in making the supplies in question. Indeed, when all the surrounding circumstances are taken into account, the inevitable conclusion (as it seems to me) is that Developments’ aim in making the supplies in question was to further the commercial aims of the group as a whole, and hence of Mr Shah. Nor do I derive any assistance in this connection from the decision in Flockton, where the court was concerned with a different legislative provision.

I therefore conclude that the judge was right for the reasons he gave, and that in relation to the supplies in question Developments is not to be categorised as a ‘non-profit-making organisation’ for the purposes of Article 13 A (1)(m). It follows that in my judgment the supplies in question were not exempt supplies for VAT purposes.

I would dismiss this appeal.