Longborough Festival Opera v HM Revenue & Customs

For VAT cultural exemption, a body is not disqualified merely because it may contract with its directors or connected companies. The relevant question is whether the arrangements confer an interest in the body’s profits or results, and whether conflicted persons can influence the relevant decisions.

Under the First Indent and Note 2 of Group 13 in Schedule 9 to the Value Added Tax Act 1994, profits must be legally protected from distribution or dilution for the benefit of directors or members. Under the Second Indent, “financial interest” concerns potential enrichment, not merely potential liability or impoverishment. An unenforceable guarantee or interest-free loan therefore does not of itself disqualify the body.

Longborough Festival Opera, a charitable company limited by guarantee, appealed under section 11 of the Tribunals and Enquiries Act 1992 against a decision of the VAT and Duties Tribunal dated 26 May 2005.

The Tribunal had held that LFO was not an eligible body for the cultural exemption because its directors and a connected commercial company could potentially receive rent, interest, professional charges or other financial benefits, and because assurances given by Mr Graham created a financial interest.

The central issue was whether LFO satisfied Note 2 to Group 13 of Schedule 9 to the Value Added Tax Act 1994, implementing Article 13A of the Sixth Directive.

1. Appeal allowed. LFO was eligible for exemption from VAT and was not obliged to be registered for VAT.
2. The United Kingdom was entitled, within the margin of appreciation under Article 13A(2) of the Sixth Directive, to require the statutory safeguards set out in Note 2 to Group 13 of Schedule 9 to the Value Added Tax Act 1994. The First Indent and Note 2 require legal protection against distribution or dilution of profits for the benefit of directors or members.
3. The First Indent was satisfied. LFO’s constitutional provisions and the directors’ fiduciary duties legally prevented the distribution of profits. Contracts with members, staff or connected companies were permissible if they were genuinely in LFO’s interests, made on the best reasonably obtainable terms, and were not entered into to benefit another party.
4. The Second Indent concerns the disinterestedness of those directing the body at the highest level. “Financial interest” in the results of the activities means potential enrichment or financial gain. It does not ordinarily include liability undertaken for the body’s benefit, such as liability under a guarantee or trustee obligations.
5. A director’s potential or actual contract with the body does not itself create a disqualifying interest. The effect depends on the contract’s terms and on the constitutional and legal arrangements governing participation in the decision. Article 94 of Table A to the Companies Act 1985, incorporated into LFO’s Articles, prevented Mr and Mrs Graham from voting on contracts in which they had a material interest. Mr Crombie and Mr de Navarro were therefore the decision-makers.
6. The letters of comfort were not enforceable guarantees and could at most create a moral obligation. They did not give Mr Graham a disqualifying financial interest. Nor did interest-free loans made by Mr Graham or Longborough Developments Ltd.
7. The Tribunal’s concerns about bar, catering and programme receipts did not affect the result. The appeal was accordingly allowed.

• High Court (Chancery Division) [2006] EWHC 40 (Ch): appeal from the VAT and Duties Tribunal allowed. LFO held eligible for exemption from VAT.