The High Court held that a taxpayer, a registered charity, which staged performances of operas for which it charged those attending, was managed and administered on a voluntary basis by a person with no financial interest in its activities, so that it made exempt supplies and was not liable to register for VAT.

Facts

In 1991, operas were first staged by G, a director and trustee of the taxpayer in a theatre situated in the grounds of G's residence. LDL, a company of which G and his wife were directors, continued to produce operas on a commercial basis from the same premises. LDL was succeeded by the taxpayer, a registered charity, which was incorporated in 2000 as a company limited by guarantee. G dealt with the financial affairs of the taxpayer and permitted it to use the theatre for no charge. He provided two letters to the taxpayer in 2002, the first undertaking to provide funds to cover any deficit arising in the 2002 season and the second undertaking that he or LDL would make good any financial deficiency which might arise in the following year.

In 2003, an issue arose as to whether admission charges were liable to VAT. Customs pointed out that in order to qualify for exemption, the taxpayer must not be managed and administered by anyone who had a direct or indirect financial interest in the opera activities, as required by VATA 1994, Sch. 9, Grp. 13, Note (2)©. They informed the taxpayer that, as a result of standing as guarantor for the losses of the charity, G had a financial interest in its activities; his personal financial position was directly affected by the performance of the taxpayer.

The taxpayer contended that it was managed and administered on a voluntary basis by persons with no financial interest in its activities. It submitted that the purpose of art. 13(A)(2)(a) of the sixth directive was to grant exemption to bodies operating outside commercial spheres, bodies existing to promote cultural services. The word ‘profit’ as used in that article and in note (2)© to Grp. 13 meant a surplus of income over expenditure. In C & E Commrs v Zoological Society of London (Case C-267/00) [2002].

BTC 5,224; [2002] ECR I-3353, the Advocate General had identified the aim of the limitation of exemption as being to preclude exemption where a body was ostensibly non-commercial but was operated for commercial gain. The second indent of art. 13(A)(2)(a) ensured that a formally non-profit making organization did not produce private profit for those who directed its activities. The taxpayer submitted that the findings in Zoological Society of London and in Kennemer Golf & Country Club v Staatssecretaris van Financien Case C-174/00) [2002] BTC 5,205; [2002] ECR I-3293 gave a plain and authoritative statement of the law. The fact that there was a prospect of G and LDL being called on to provide funds to the taxpayer in the event of a loss was not ‘financial interest’ within the meaning of either the second indent of art. 13(A)(2)(a) or Note (2)(c). G was incapable of benefiting financially from the taxpayer and a contributor to a charity who had no prospect but to be out of pocket had no interest. Accordingly, in the taxpayer's view, it was an eligible body within the meaning of Note (2)(c) and its supplies were exempt. Customs submitted that as a result of the financial guarantee given by G, the taxpayer was being managed by a person with a financial interest. The interlink between LDL and the taxpayer was such that the taxpayer was not stopped from distributing profits. For the same reason, G and his wife had a financial interest in the outcome of the taxpayer's activities. They argued that on the express wording of the first two indents of art. 13(A)(2)(a), a body was disqualified from exemption if it was managed by a person who had a direct or indirect financial interest in the results of its activities. They submitted that nothing in the legislation supported the taxpayer's case. A financial guarantee given by a person who ran the taxpayer tied his personal financial position to the taxpayer and fell squarely within art. 13(A)(2)(a). The tribunal dismissed the taxpayer's appeal ([2005] BVC 2,650; Decision No 19,096). The taxpayer appealed to the High Court.

Issues

Whether, on the facts found by the tribunal the taxpayer was an eligible body as defined in note (2), in particular: whether it was precluded from distributing and did not distribute its profits; and whether the trustee managed and administered the taxpayer on a voluntary basis and had no direct or indirect financial interest in its activities.

Decision

Lightman J (allowing the appeal) said that the fact that a cultural body's activities were directed to a noncommercial purpose did not of itself entitle it to exemption. The conditions laid down in national legislation in pursuance of art. 13 had to be satisfied. The first indent of art. 13(A)(2) was directed (amongst other things) at preventing the dilution of profits by the conferment by the cultural body of financial benefits on directors, members and others whilst the second indent was directed at securing the disinterestedness of those who directed it at the highest level (‘the directors’) in the results of its activities.

The first condition in the first indent was that the cultural bodies to be exempted should not systematically aim to make a ‘profit’, i.e. the enrichment of, or conferment of financial advantages on, natural or legal persons and in particular those who controlled or had a financial interest in or were members of it. The focus was on the aims of the body, and not the results of its activities and, in the present case, there was no question of any non-compliance with that condition.

The second condition in the first indent was that any profits arising should not be distributed but should be assigned to the continuance or improvement of the services provided. Note 2 required that the body was legally precluded from distributing its profits and was required to apply them as there set out. That restriction was implicit in the first indent and in any event, the provision to that effect in Note 2 was within the margin of appreciation afforded to the UK to ensure the correct and straightforward application of the exemption and prevent possible evasion, avoidance or abuse.

Therefore, the first indent created no obstacle to the eligibility of the taxpayer. The necessary constraint was implicit in its memorandum and articles and the fiduciary duties of the directors. In this condition the word ‘profits’ meant surplus or profit on the bodies’ activities. It did not preclude the entry into contracts by the cultural body with members, staff or third parties provided that, by their true character or terms, they were not a method of distribution of profit to another party. If the contract was for goods or services (or in this case the use of the opera house or equipment) needed by the body at the best price reasonably obtainable and was not made with the member, employee or third party as such and for his benefit, the provisions of the first indent were complied with.

The aim of the second indent was to distinguish between commercial undertakings and bodies not aiming to achieve profits for their members and to reserve the exemption to the latter by requiring that the persons participating in the management and administration had no financial interest in their results. In this context the disqualifying ‘financial interest’ was plainly directed at potential enrichment and was not designed to preclude participation in management by persons who, for the benefit of the cultural body assumed responsibility for some one or other liability of the body and accordingly the risk of an actual impoverishment. The actual or potential liability of a director might be in the mind of the director when managing and administering the body but, whether that was desirable or not, it was not the mischief at which the second indent and note 2(c) was directed.

Further, a body was not disqualified because it legally could and in fact did enter into commercial contracts with a director so long as the contract did not confer any interest in the body's results or profits. The terms of the second indent and note 2, para. 3 were directed at precluding a director of a body not from having a contract with the body, but from having an interest in its results. The mere facts that a contract was concluded between a body and a director and remuneration was paid to the director would not without more give the director a financial interest for the purposes of that legislation (Bournemouth Symphony Orchestra v C &E Commrs [2005] BTC 5,516 applied).

Chancery Division. Judgment delivered 27 January 2006.