Messenger Leisure Developments Ltd v Customs & Excise

Qualification as a non-profit-making organisation for VAT purposes depends on the organisation’s substantive aims and commercial character, not merely on a constitutional prohibition against distributing profits or the absence of actual distributions. An organisation may systematically generate surpluses and remain non-profit-making if it does not aim to distribute them to members, but that is necessary rather than sufficient. A wholly owned subsidiary with no independent business purpose, whose activities are inseparably linked with those of a profit-making parent and whose constitution can be altered by that parent, may be treated as commercial and therefore outside the exemption.

The appellant operated sporting facilities through a group structure. It was a wholly owned subsidiary of Messenger Leisure Ltd, which was itself a wholly owned subsidiary of Messenger Group Limited. A VAT and Duties Tribunal held that the appellant was not a non-profit-making body and was therefore not entitled to exemption for its sporting services under Value Added Tax Act 1994 Schedule 9 Group 10 or Article 13A(1)(m) of the Sixth Directive.

The appellant appealed, arguing that its constitution prevented profit distributions, that its controller had no intention of extracting profits, and that no profits had in fact been distributed. The central issue was whether those matters were sufficient to establish non-profit-making status.

1. The appeal was dismissed.
2. The Tribunal’s reasoning concerning the inadvertent failure to pay interest on sums collected for the appellant was flawed. That failure did not, by itself, amount to a covert distribution of profit. Revenue expenditure on course upkeep, although indirectly beneficial to the landowner, did not by itself prevent an otherwise non-profit-making body from qualifying for exemption.
3. The judgment of the European Court of Justice in Kennemer Golf Club v Staatsecretaris van Financiën [2002] QB 1252 established that an organisation may remain non-profit-making despite systematically generating surpluses, provided that it does not aim to distribute them to members and does not in fact do so. Those criteria are necessary, but not sufficient, for qualification.
4. The question whether an organisation is non-profit-making must be assessed by reference to its substantive purposes and the specific facts. The appellant had no business purpose independent of Leisure’s purpose. Its activities formed part of the group’s commercial undertaking, and Leisure could alter its constitution at any time. Those matters sufficiently established that the appellant was not a non-profit-making organisation under Article 13A(1)(m) of the Sixth Directive or a non-profit-making body under Schedule 9 Group 10.
5. The provisions in Note (2A) to Group 10 identified criteria for an eligible body but did not themselves define a non-profit-making body.

The appeal was from a decision of the VAT & Duties Tribunal dated 27 August 2003. The Tribunal had held that the appellant was not entitled to VAT exemption for its sporting services. The High Court dismissed the appeal.