The Court of Appeal dismissed an appeal by a taxpayer orchestra (BSO) against the decision ([2005] BTC 5,516) that it was not entitled to the cultural services exemption from VAT because it was not managed and administered on an essentially voluntary basis by persons with no financial interest in the results of its activities. In the same judgment the court refused Revenue and Customs permission to appeal against the decision in a second case ([2006] BTC 5,101) that an opera company (LFO) was managed and administered on voluntary basis by a person with no financial interest in its activities, where one of its directors had guaranteed its losses.

Facts

The appeal and application for permission to appeal were heard together as they both concerned claims by the taxpayer companies that their activities were exempt from VAT on the grounds that they provided cultural services within Council Directive 77/388 (‘the sixth directive’), art. 13(A)(1)(n). The relevant domestic legislation was VATA 1994, Sch. 9, Grp. 13, item 2 and Note 2. If the claims were correct, the taxpayers would be entitled to a substantial VAT refund and ongoing exemption for future supplies. In BSO, the VAT and duties tribunal ([2005] BVC 4,030) decided that, although the orchestra was run by a board most of whom were volunteers, it was not entitled to the exemption because of the position of its managing director who received a salary and performed a significant role in the central decision-making process of the taxpayer, since he had a financial interest in the taxpayer and it could not be said that the taxpayer was run on an essentially voluntary basis within art. 13(A)(2)(a) to qualify for the exemption.

On appeal the judge held that the MD's remuneration did not give him a financial interest but that his role on the board and in the running of the taxpayer meant that the management was not essentially voluntary. The taxpayer appealed to the Court of Appeal seeking to uphold the judge's decision that the tribunal had erred in holding that the MD had a financial interest in the results of its activities but arguing that the judge had been wrong to ask as a separate question whether the management of the taxpayer was essentially voluntary.

In LFO, the tribunal had concluded that since a director (G) had guaranteed the taxpayer's losses, he had a financial interest in its activities so that it was not an eligible body which qualified for the exemption ([2005] BVC 2,650). The High Court reversed that decision on the ground that financial interest implied an interest in the profits of the taxpayer rather than its losses so that the exemption was available in the circumstances. Revenue and Customs applied for permission to appeal to the Court of Appeal arguing that the taxpayer should be held to be unable to take advantage of the cultural services exemption because of the possibility or contemplation that the taxpayer might enter into commercial contracts with G for a lease or licence of the opera house, or in respect of equipment.

Issue

Whether the taxpayers (or either of them) were eligible bodies for the purposes of VATA 1994, Sch. 9, Grp. 13, item 2.

Decision

The Court of Appeal dismissed the BSO appeal and refused Revenue and Customs permission to appeal in LFO.

BSO

May and Lloyd L JJ held that for the relevant body to have a managing director who was paid for taking part in the decision-making process at the highest level was inconsistent with the exemption, because it did not allow the management and administration to be described as being carried out on an essentially voluntary basis, as the judge had held. The essentially voluntary question and the financial interest question were separate and cumulative. If it had been necessary to decide the issue, the court would have concluded that flat rate remuneration at a proper rate did not give an employee a financial interest in the results of the employer's activities (C & E Commrs v Zoological Society of London (Case C-267/00) [2002] BTC 5,224 considered).

Chadwick LJ (agreeing in the result) held that the judge had been wrong to adopt an independent test of whether the management was essentially voluntary once he had decided that the MD had no financial interest. However on the facts found by the tribunal the MD's position was sufficient to justify refusal of the exemption.

LFO

G had no financial interest in the results of the taxpayer's activities for the purposes of the exemption. The taxpayer was precluded by its memorandum from distributing profits to its members and it did not propose to do so. Whether it would cease to be eligible for the cultural services exemption if it were to take a lease of the opera house from G in the future was a question which would be more appropriately considered with the benefit of knowing the terms of the lease. The possibility of taking a lease, whatever the terms, was not sufficient to preclude the exemption. There was no important point of principle to be decided on the present facts, no point of practice and no compelling reason why the court should entertain a second appeal.

Court of Appeal (Civil Division).

Judgment delivered 9 October 2006