Bournemouth Symphony Orchestra v HM Revenue & Customs

The Court of Appeal considered whether bodies (the Bournemouth Symphony Orchestra and Longborough Festival Opera) were "eligible bodies" for the purposes of item 2 in Group 13 of Schedule 9 to the Value Added Tax Act 1994 and therefore entitled to the cultural-services VAT exemption implemented from Article 13A of the Sixth Directive. The court analysed the second indent of Article 13A.2(a) (as given effect in note (2) to Group 13) which requires that the body be "managed and administered on an essentially voluntary basis by persons who have no direct or indirect financial interest in its activities".

Key holdings: (1) In the BSO appeal the managing director was a paid employee whose employment obligated him to sit on and take a significant part in Board decision-making; there was a sufficient nexus between his remuneration and his participation in high-level management to render the Board not "essentially voluntary" and so the BSO failed the note (2)(c) condition — appeal dismissed. The musician director’s paid status did not, on the facts, undermine the voluntary character of the Board. (2) In the LFO matter the court refused HMRC permission to appeal: Lightman J had found that Mr Graham’s letters of comfort and the possibility of future commercial contracts did not mean he had a present financial interest for the purposes of note (2) and that LFO’s constitutional provisions prevented distribution of profits; the Court of Appeal saw no compelling reason to permit a second appeal on the facts.

This appeal combined two matters dealing with entitlement to the cultural-services VAT exemption under Schedule 9 Group 13 (item 2) VATA 1994, which implements Article 13A of the Sixth Directive. Both matters required construction of the second indent of Article 13A.2(a) and note (2)(c) to Group 13: whether management and administration is "on an essentially voluntary basis" and whether those who manage have "no direct or indirect financial interest" in the body’s results.

Procedural posture and relief sought:

• BSO: appeal to the Court of Appeal from Mann J’s dismissal of BSO’s appeal from the VAT and Duties Tribunal. The BSO sought reversal of the finding that it was ineligible for the exemption.
• LFO: HMRC sought permission to bring a second appeal from Lightman J’s decision allowing LFO’s appeal from the VAT and Duties Tribunal. The application for permission to appeal was heard together with the BSO appeal.

Facts (concise): BSO: organised as a company limited by guarantee; the managing director (a paid employee) was a member of the Board and took a significant part in high-level decision-making; there was also a musician director who was paid as a musician but received no separate payment for Board duties. LFO: incorporated as a charity limited by guarantee; trustees made high-level decisions and received no salary; Mr Graham (majority controller of a related company LDL) had given informal "letters of comfort" and there was a possibility of future commercial contracts between LFO and LDL or Mr Graham.

Issues framed:

• How should note (2) to Group 13 be interpreted and applied in light of Article 13A.2(a) of the Sixth Directive and ECJ authority (in particular the London Zoo case, C-267/00)?
• Who are the relevant managers for the purposes of the second indent and what is meant by "essentially voluntary" and by "financial interest"?
• On the facts, did the BSO or LFO satisfy the conditions in note (2)?

Court’s reasoning (concise): The court recited and applied the ECJ’s guidance in Zoological Society of London (the London Zoo case) that the national court must identify the persons who direct the body at the highest level (constitutional directors and de facto decision-makers) and then assess both the composition/reward of those persons and the contribution they actually make. The court accepted Mann J’s approach that receipt of a straightforward flat-rate salary not linked to results will not necessarily constitute a "financial interest"; but a separate enquiry remains whether management is "essentially voluntary". Applying the tests to the facts, the BSO’s managing director’s role and terms meant his Board participation was part of his paid job and substantial in character, so the Board was not essentially voluntary and the BSO was ineligible. In the LFO case Lightman J’s factual and legal conclusions (no present financial interest on Mr Graham’s part; constitutional and fiduciary constraints preventing profit distribution) meant there was no proper basis for a second appeal, so permission was refused.

The court noted that the London Zoo decision does not resolve every borderline question and that further ECJ guidance might be required in other factual contexts, but that no referral or further appeal was necessary to decide these appeals.

Appeal by Bournemouth Symphony Orchestra dismissed: the managing director’s salaried role required him to participate substantially in high-level Board decision-making and therefore the management and administration was not "essentially voluntary" under note (2) to Group 13 and Article 13A.2(a) of the Sixth Directive. Application for permission to appeal by HMRC in the Longborough Festival Opera proceedings refused: Lightman J’s findings that Mr Graham had no present financial interest in LFO, and that LFO’s constitutional provisions precluded distribution of profits, meant there was no adequate basis for a second appeal on the facts.

Both matters arose from appeals from decisions of the VAT & Duties Tribunal. BSO: VAT & Duties Tribunal decision ([2004] UKVAT V18799) dismissed BSO's claim; BSO appealed to the High Court (Mann J) [2005] EWHC 1566 (Ch), which dismissed the appeal; BSO’s appeal to the Court of Appeal was dismissed ([2006] EWCA Civ 1281). LFO: VAT & Duties Tribunal decision ([2005] UKVAT V19087) dismissed LFO's claim; Lightman J allowed LFO’s appeal in the High Court ([2006] EWHC 40 (Ch)); HMRC applied for permission to appeal to the Court of Appeal and that application was refused in this judgment.