Messenger Leisure Developments Ltd v HM Revenue & Customs

For the VAT exemption for sporting services, a body’s status as non-profit-making depends on the aim it pursues, assessed in the full factual context of the supplies. The absence of an express power to distribute profits, and the retention of surpluses for sporting facilities, do not necessarily establish that status. Financial advantages for members may include advantages arising from accumulated reserves and commercial integration with a parent group. Subjective intentions are relevant but not conclusive. The exemption must be interpreted strictly, without extending it beyond its intended scope.

The taxpayer supplied sporting facilities at three proprietary golf and country clubs within a commercial group. It claimed exemption from VAT under Item 3 of Group 10 in Schedule 9 to the Value Added Tax Act 1994, implementing Article 13 A (1)(m) of the Sixth EC Directive. The VAT tribunal dismissed the appeal against the assessments, and Hart J dismissed the taxpayer’s appeal from that decision, holding that it was not a non-profit-making organisation.

The taxpayer appealed to the Court of Appeal. The central issue was whether a company constitutionally restricted from distributing profits nevertheless qualified for the exemption where its activities were commercially integrated with its parent and its accumulated surpluses could benefit the group.

1. Appeal dismissed. The supplies were not exempt because the taxpayer was not a non-profit-making organisation within Article 13 A (1)(m) of the Sixth EC Directive and therefore was not a non-profit-making body under Item 3 of Group 10 in Schedule 9 to the Value Added Tax Act 1994.
2. The decision in Kennemer established that an organisation may remain non-profit-making despite systematically achieving surpluses used to provide its services, provided its aim is not to achieve profits for its members and the surpluses are not distributed to them. It did not establish that the absence of distributions, or of a power to distribute them, is sufficient in every case.
3. The expression “financial advantages for the organisation’s members” was not confined to distributions of surplus funds. The organisation’s aim had to be assessed by examining the transactions and their full factual context. The taxpayer formed an integral part of the commercial operation of its group, used facilities supplied by other group companies without rent, accumulated substantial reserves and received part of the goodwill consideration on the sale of a club. Those matters showed that its supplies furthered the commercial aims of the group and its controller.
4. The controller’s subjective intentions were relevant but not conclusive. Flockton concerned different statutory wording and did not assist in construing Article 13 A (1)(m).
5. Arden LJ added that the restrictions on distributing profits could be removed by special resolution and that the parent could procure a winding-up. Their fragility was relevant to assessing the organisation’s real aim, although companies limited by shares were not categorically excluded from qualifying.

Lord Phillips MR agreed with Jonathan Parker LJ’s reasons and Arden LJ’s additional reasons.

• Court of Appeal (Civil Division): appeal dismissed and the decision of Hart J upheld.
• High Court, Chancery Division: Hart J dismissed the taxpayer’s appeal from the VAT tribunal decision, reported at [2004] EWHC 1761.
• Value Added Tax & Duties Tribunal: the taxpayer’s appeal against VAT assessments for the relevant periods was dismissed.