[2011] UKFTT 354 (TC)

TC01214

Appeal number: TC/2009/12226

VALUE ADDED TAX — exemptions — golf club green fees — members’ club charging green fees to non-members — whether within exemptions — Principal VAT Directive arts 132 – 134, VATA Sch 9 Group 10 Item 3 — domestic legislation failing to implement Directive correctly — supplies exempt — appeal allowed

FIRST-TIER tribunal

tax chamber

THE BRIDPORT AND WEST DORSET

GOLF CLUB LIMITED Appellant

- and –

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

Tribunal: Judge Colin Bishopp

Sitting in public in London on 21 and 22 February 2011

Amanda Brown, non-practising solicitor of KPMG LLP, for the Appellant

Raymond Hill, counsel, instructed by their solicitor’s office, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1. The principal question in this appeal is a seemingly simple one: are the charges, known as “green fees”, made by the appellant, the Bridport and West Dorset Golf Club Limited, to visiting non-members who play golf on its course exempt from VAT, as the appellant maintains, or standard-rated, as the Commissioners have determined? For many years the appellant has accounted to them for VAT on its green fee income in accordance with that determination but, it says, recent case-law shows that it should not have done so. In 2009 it made a voluntary disclosure by which it sought to recover £140,358.16 of output tax for which, if its view is correct, it was not liable to account. The Commissioners rejected the voluntary disclosure, and maintain their position that the green fees are standard-rated.

2. There are in addition two subsidiary issues: whether part of the appellant’s claim is precluded by the operation of the three-year capping provisions, and whether any sum which may be found to be repayable attracts compound interest. I am not asked to make an immediate decision in respect of either of those issues, since the parties preferred to await the outcome of other appeals in which they are to be determined.

The relevant law

3. A critical question is whether the United Kingdom’s domestic law correctly implements the requirements of what is now art 132(1)(m) of the Principal VAT Directive (Council Directive 2006/112/EEC), formerly (and in identical terms) art 13A(1)(m) of the Sixth VAT Directive; I shall refer in this decision to the articles of the later Directive. Article 132(1) provides that

“Member States shall exempt the following transactions: …

(m) the supply of certain services closely linked to sport or physical education by non-profit-making organisations to persons taking part in sport or physical education.”

4. The application of art 132 is subject to arts 133 and 134 which, again, merely repeat the corresponding provisions of the Sixth Directive. The former provides that

“Member States may make the granting to bodies other than those governed by public law of each exemption provided for in points (b), (g), (h), (i), (l), (m) and (n) of Article 132(1) subject in each individual case to one or more of the following conditions:

(a) the bodies in question must not systematically aim to make a profit, and any surpluses nevertheless arising must not be distributed, but must be assigned to the continuance or improvement of the services supplied;

(b) those bodies must be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned;

(c) those bodies must charge prices which are approved by the public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to VAT;

(d) the exemptions must not be likely to cause distortion of competition to the disadvantage of commercial enterprises subject to VAT.”

5. Article 134 provides that

“The supply of goods or services shall not be granted exemption, as provided for in points (b), (g), (h), (i), (l), (m) and (n) of Article 132(1), in the following cases:

(a) where the supply is not essential to the transactions exempted;

(b) where the basic purpose of the supply is to obtain additional income for the body in question through transactions which are in direct competition with those of commercial enterprises subject to VAT.”

6. The corresponding provisions of domestic law are to be found in Group 10 of Sch 9 to the Value Added Tax Act 1994, which deals with “Sport, sports competitions and physical education”. Item 3 of the Group is in these terms:

“The supply by an eligible body to an individual, except, where the body operates a membership scheme, an individual who is not a member, of services closely linked with and essential to sport or physical education in which the individual is taking part.”

7. The Item must be read with some Notes, as follows:

“(1) [immaterial]

(2) An individual shall only be considered to be a member of an eligible body for the purpose of Item 3 where he is granted membership for a period of three months or more.

(2A) Subject to Notes (2C) and (3), in this Group ‘eligible body’ means a non-profit making body which—

(a) is precluded from distributing any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body;

(b) applies in accordance with Note (2B) any profits it makes from supplies of a description within Item 2 or 3; and

(2B) For the purposes of Note (2A)(b) the application of profits made by any body from supplies of a description within Item 2 or 3 is in accordance with this Note only if those profits are applied for one or more of the following purposes, namely—

(a) the continuance or improvement of any facilities made available in or in connection with the making of the supplies of those descriptions made by that body;

(b) the purposes of a non-profit making body.

(2C) In determining whether the requirements of Note (2A) for being an eligible body are satisfied in the case of any body, there shall be disregarded any distribution of amounts representing unapplied or undistributed profits that falls to be made to the body’s members on its winding-up or dissolution.”

8. In its briefest form, the question before me is whether the limitation of the exemption in domestic law to supplies to members finds any warrant in Community law.

“… all the exemptions listed in art 13A(1)(h) to (p) of the Sixth Directive cover organisations acting in the public interest in a social, cultural, religious or sports setting or in a similar setting. The purpose of the exemptions is therefore to provide more favourable treatment, in the matter of VAT, for certain organisations whose activities are directed towards non-commercial purposes.”

21. The aim of the exempting provision in this case was, plainly, the encouragement of participation in sport. That core aim was, however, extended to services “closely linked” to sport, as was apparent from the judgment of the CJEU in Staatssecretaris van Financiën v Stichting Kinderopvang Enschede (Case C-415/04) [2007] STC 294. The issue in that case was whether exemption extended to intermediary services of putting those in need of childcare services in touch with those willing to provide such services. The Court decided that whether the services were themselves exempt (because they fell within one or both of what are now paras (g) and (h) of art 132(1) of the Directive) was a matter for determination by the national court; but at para 22 it observed:

“The Netherlands government refers with good reason in this regard to the wording of art 13A(2)(b) of the Sixth Directive, which provides that:

‘the supply of services or goods shall not be granted exemption as provided for in (1)(b), (g), (h), (i), (l), (m) and (n) above if … it is not essential to the transactions exempted.’

It is apparent from these provisions that the main transaction, to which the supply of goods or services in question is closely linked, must itself also be an exempted transaction. In the case in the main proceedings, the exemption of the Foundation’s services as intermediary between the parents of the child being cared for and the host parents thus presupposes that the childcare service provided by the latter is itself exempt from VAT.”

22. The significance of these observations becomse clear, Mrs Brown continued, if one accepts that membership of a club, however common it may be for golfers to be members of a club, is not essential to the playing of golf. The United Kingdom’s implementation of the Directive, however, by discriminating between members and non-members, elevates membership to a role it cannot legitimately play: it is used as a criterion which bears no relation to the activity which is the proper subject of the exemption. It is necessary to focus on the substance and economic effect of a transaction (see RCI Europe v Revenue and Customs Commissioners (Case C-37/08) [2009] STC 2407 and MacDonald Resorts Ltd v Revenue and Customs Commissioners (Case C-270/09) [2011] STC 412); the substance and economic effect of the grant of the right to play golf in return for a green fee is indistinguishable from the substance and economic effect of the grant of the right to play golf in return for a subscription.

23. Article 134 is not to be applied, as the domestic legislation does, as if it authorised a discretionary limitation on the scope of the exemptions, but as the basis on which they are to be properly interpreted, in a fiscally neutral way, in the context of the extension of the core exemption to those services “closely linked” with it. Thus at para 26 of its judgment in European Commission v France (Case C-76/99) [2001] All ER (D) 33 the CJEU said:

“… it should be observed that, according to settled case-law, although the introductory sentence of Article 13(A)(1) of the Sixth Directive states that Member States are to lay down the conditions for exemptions in order to ensure the correct and straightforward application of the exemptions and to prevent any possible evasion, avoidance or abuse, those conditions cannot affect the definition of the subject-matter of the exemptions envisaged .… From that point of view, the subjection to, or exemption from, VAT of a specific transaction cannot depend on its classification in national law.”

24. It was also apparent from the passage I have set out at para 20 above, from the Court’s judgment in Kennemer Golf & Country Club, Mrs Brown said, that the Directive made the avoidance of the distortion of competition subordinate to the principal aim of the exempting provision. It is inherent in art 133(c) that distortion of competition is a possible outcome, since the bodies benefitting from the exemption are expected, if that condition is implemented, to charge “prices lower than those charged for similar services by commercial enterprises subject to VAT”, even if para (d) goes on to make the avoidance of distortion a further possible condition.

25. Mr Hill, too, relied on observations of the Court in Kennemer Golf & Country Club. It was apparent, he said, that the answers given to the referred questions were based on the Court’s view that the green fees in issue in that case were not covered by the exemption. The similarity between that case and this was shown by para 11 of the judgment:

“Besides the use of the facilities by members of Kennemer Golf, non-members may use the course and the associated facilities in return for payment of a day subscription fee. According to the case file, Kennemer Golf earns relatively large sums in this way, amounting to approximately one-third of the amounts paid by members as annual subscription fees.”

26. The issues in that case were, however, dissimilar. The first question was whether a body’s non-profit making status was to be determined by reference only to its income from exempt activities, or by reference also to other income. At para 21 of its judgment, the Court said

“If the categorisation of an organisation as ‘non-profit-making’ must be based on the nature of the organisation itself and not on the services which it provides in the form of those specified in art 13A(1)(m), it follows that, in order to determine whether such an organisation meets the conditions for application of that provision, account must be taken of all its activities, including those which it provides by way of extension to the services covered by that provision.”

27. That conclusion clearly proceeded, Mr Hill said, from the premise that green fees represented the consideration for a supply which was provided “by way of extension to the services covered by” the exemption—in other words the Court was to be taken to have considered such supplies to be outside the exemption.

28. He relied too on a decision of my own, in the VAT and Duties Tribunal, Keswick Golf Club v Customs and Excise Commissioners (1998, VAT Decision 15493) in which precisely the same question arose, namely whether green fees charged by a non-profit making club to non-member players were exempt. He referred in particular to para 21 of the decision:

“Two factors are identified in the second indent to paragraph 2(b) [now art 134(b)]—the desire to generate ‘additional income’ and the element of competition with commercial enterprises. A problem of interpretation is immediately perceived: nowhere is there to be found any definition of the basic income to which this income is ‘additional’. [Counsel for the Commissioners] made the point that a member’s club is to be regarded as a non-profit making body because its members engage in mutual trading, that is they provide between themselves the income necessary to support the expenditure which they incur in the pursuit of their common activity. Income which they derive from making supplies to non-members is thus ‘additional’. A charity dependent principally upon benefaction for its activities might likewise generate ‘additional income’ from supplies made for a consideration. This argument is consistent with the first indent of Article 13A(2)(a) and I have concluded that the phrase ‘additional income’ must be construed in this way. [Counsel for the appellant] did not suggest any other.”

29. This was, Mr Hill argued, the central issue, a proposition Mrs Brown did not dispute. She sought to distinguish the two cases by advancing the argument that, whatever the position of Keswick Golf Club, this appellant’s core income was not limited to that generated from mutual trading, that is its subscription income, but included the revenue it derived from green fees. Mr Willcox’s evidence showed that the appellant’s budget was based on the receipt of a substantial, continuing element of its overall income from that source; it could not be said to be “additional” to the income it needed to support its activities, but was an essential and routine part of it. What art 134(b) was designed to exclude was supplies, as Mrs Brown’s skeleton argument put it, “one step removed from the transaction exempted”, and she gave as examples the sale of clubs or the giving of lessons. The supply of the right to play golf to a non-member was of a different kind.

30. Mr Hill’s retort was that such an interpretation would deprive art 134(b) of any effect, since, if it were correct, anything an eligible body earned by way of income which was not derived from its exempt activity would be excluded from the exemption by art 134(a), on the ground that it was not essential, and there would be no occasion on which art 134(b) was engaged. Similarly, the appellant’s argument that, as long as the beneficiaries of the relevant services are persons taking part in sport the exemption should apply left no room for art 134(b) to apply to any services supplied by non-profit making organisations.

31. That was the only conclusion consistent with the Court’s reasoning in Kennemer Golf & Country Club and with the conclusion I reached in Keswick Golf Club. The rationale of the passage from that decision set out above, he said, was itself consistent with what was said more recently by the CJEU in Canterbury Hockey Club. At para 33 of the judgment it said

“As regards sport and physical education, as activities in the public interest, the exemption under Article 13A(l)(m) of the Sixth Directive is intended to encourage those types of activities but is not a general exemption of all supplies of services linked to them.”

32. The point in issue in Canterbury Hockey Club was whether the exemption was restricted to supplies made directly to participants in sport, or also included services supplied to corporate persons and to unincorporated associations but when the true beneficiaries were such participants. The Court concluded that it did, but, Mr Hill argued, the judgment does not affect the requirement that the basic purpose of the provision of the relevant services must not be to obtain additional income for the relevant non-profit making body by carrying out transactions in direct competition with commercial enterprises. It was this factor which underlay and justified the distinction in the domestic legislation between supplies to members and supplies to non-members, since the right to play golf in return for a green fee was available not only from non-profit making organisations but also from commercial concerns. It was in order to prevent the distortion of competition which would result if green fees charged by the former—the appellant and others like it—were exempt while commercial concerns were required to charge VAT that the legislation incorporated that distinction.

33. Far from supporting the appellant’s argument, the jurisprudence of the CJEU in RCI Europe and MacDonald Resorts Ltd, to the effect that the focus must be on the substance and economic effect of a transaction, favoured the Commissioners’ case. The substance and economic effect of the grant of the right to play golf in return for a green fee was not equivalent to what a member received in return for a subscription, since the member was entitled in addition to the privileges of membership which Mr Willcox had described—the right to vote, the right to certain discounts and the right to play in competitions in which non-members could not play. Those who paid green fees received something indistinguishable from what they received at a commercial golf course, and the domestic implementation of the exemption in Group 3 was designed to, and did, put those indistinguishable supplies on the same footing.

Discussion

34. Although, in what follows, I borrow from the parties’ submissions I am not convinced either of them has approached the analysis of arts 132, 133 and 134 and their domestic implementation correctly. In particular, I think it necessary to focus on the tension inherent within the provisions of the Directive, a tension on which I shall expand.

35. Nevertheless, I agree with Mrs Brown that the first step must be to identify the supply in question. One must then ask whether the exempting provision, applied purposively, encompasses the supply so identified. If it does, it is necessary then to ask whether any of the provisions of arts 133 (so far as the domestic legislature has chosen to implement them) and 134 (which is mandatory) applies so as to remove the exemption from the supply or any part of it. That straightforward approach to arts 133 and 134 requires no deep analysis and is, I think, the essence of what Mr Hill urged upon me. In addition, I accept the thrust of his argument that if arts 133 and 134 have any purpose, it can only be to limit the scope of the exemption. So much is, indeed, obvious; what the limits are, and how they are to be applied, are topics to which I shall return.

36. The identification of the supply in this case poses no great difficulty: it is the supply of the right to play golf on the appellant’s course in exchange for payment, whether of a subscription or of a green fee. I accept Mrs Brown’s submission, and Mr Willcox’s evidence, that the characteristics of that supply are identical, whether or not the recipient is a member. The fact that members receive additional benefits seems to me to be irrelevant. Those benefits—membership for its own sake, the right to vote and the availability of discounts—are not, and are not claimed to be, within the exemption. Whether they do or could rank as supplies in their own right, and if so whether they are given for no consideration or in return for a part of the subscription are not matters on which I was addressed and I need not decide them. I also do not think it necessary to consider whether the right to play in some competitions closed to non-members is of relevance; even if it is relevant it must be de minimis. What seems clear to me is that the fact that the member receives something the non-member does not cannot affect the nature of the core supply. The important point is that there is no difference between the right to play golf on the appellant’s course as it is supplied to members, and that right as it is supplied to non-members. I do not think it is, or could be, disputed that, taking art 132 alone, that supply is exempt.

37. I now come to arts 133 and 134. At first sight it is a little odd that the mandatory conditions appear after those in respect of which member States are allowed a discretion, but the order in which the provisions are presented is probably of no great moment. The critical provisions in this case are art 133(c) and (d), and art 134(b). The remaining conditions are not the subject of dispute: the Commissioners accept that the appellant satisfies art 133(a) and (b), and I do not think it can seriously be argued (and Mr Hill did not) that art 134(a) can apply to the supply as I have identified it.

38. The purpose of the exemption of sporting supplies by art 132 is to encourage participation. That was made clear, if clarification was necessary, by the CJEU in the extract from its judgment in Canterbury Hockey Club which I have set out above. What is also clear, from a comparison of art 133(c) with art 133(d), is that member States may choose either to encourage the undercutting of commercial enterprises by implementing the former, or to protect commercial enterprises by implementing the latter: the two are mutually exclusive. It is here that the tension to which I have referred becomes apparent. In addition, it is not immediately obvious how distortion of competition might ever be eliminated when the effect of exempting supplies made by some bodies, whether or not they satisfy art 133(a) and (b), will always be to give those bodies a competitive advantage over commercial enterprises which must add VAT to the charges they levy for identical supplies. I do not, I think, need to identify any means of doing so; what is clear is that, while the objective of the avoidance of distortion of competition may override the exemption if the member State so chooses, it does not do so if art 133(d) is not implemented.

39. I next need to move on to art 134(b). The manner in which it is drafted makes it clear that the criteria within it (the securing of additional income and the competition with commercial enterprises) are cumulative. It must also be noted that while art 133(d) refers to the distortion of competition, art 134(b) refers only to competition. Thus despite their superficial similarities, the two conditions have different targets. To fall within art 134(b), it seems to me, the supplies must be of a kind which would otherwise be exempt by virtue of art 132 (since if they are not art 134 is not engaged) but, while they must be essential to sport (in the sense developed in Canterbury Hockey Club), are not of a kind customarily made by the eligible body, and they must be made in competition with commercial enterprises. An example in the present context might be the opening of a course, normally restricted to members and their guests, to visitors, for a defined period, with a view to generating income for a specific purpose.

40. There does not seem to me to be much room for doubt that the second limb of the art 134(b) limitation is satisfied in the instant case: as Mr Willcox accepted, the right to play golf on the appellant’s course in exchange for a green fee is materially indistinguishable from what is provided by commercial enterprises which are required to charge VAT. I have, however, come to the conclusion that the analysis I set out in Keswick Golf Club, albeit without contrary argument in that case, is unduly restrictive. I am persuaded by Mr Willcox’s evidence that the appellant’s green fee income cannot properly be described as “additional” when it is derived from an activity which finds a place in the principal objects clause of the appellant’s Memorandum of Association, is received year after year, is relied upon and included in the annual budget on a continuing basis and is applied, as is the subscription income, in defraying the appellant’s ordinary expenses of maintaining the course and clubhouse. That conclusion may not be appropriate to every club; green fee income might be regarded as “additional” where, to repeat the example I have given, visitors are allowed to use the course only occasionally, at times when extra funds are sought; or if it could be shown that the income from green fees is applied in a particular fashion, and not for meeting the general expenses of the club. I do not find anything in Kennemer Golf & Country Club—which, as I have said, dealt with a rather different issue—which should lead me to a contrary conclusion. In particular, I do not accept Mr Hill’s argument that that the Court decided, even inferentially, that green fees could not represent the consideration for an exempt supply.

41. It follows that art 134 does not exclude the appellant’s green fee income from the exemption. It is necessary therefore to turn to the United Kingdom’s implementation of arts 132 to 134, which is effected by Item 3 and the Notes. For convenience I set out Item 3 again:

42. It is readily apparent that the restriction of the exemption to an eligible body (when that term is read with the Notes) is intended to implement art 133(a) and (b). The use of the phrase “closely linked with and essential to” can equally readily be seen to be the implementation of art 134(a). It is plain, too, that no attempt has been made to implement art 133(c). The implementation of the remainder of arts 133 and 134 is rather more obscure. The Commissioners’ case, as it was put by Mr Hill in his skeleton argument, is that “the overall purpose of the exemption [is] to encourage participation in sport through non-profit making organisations whilst also providing protection for commercial enterprises providing similar services”. However, nowhere in the Item, or in the Notes, is there any reference to competition, whether or not distorted, with commercial organisations; and there is no reference to the “additional” income of art 134(b). Instead, Mr Hill said, the wording attempts to achieve the same objective as the Directive, as the Commissioners perceive it, by discriminating between members and non-members (or, strictly, those granted membership for less than three months).

43. I dealt with the background to what are now arts 132 to 134 in Keswick Golf Club. The original proposal was for there to be discrimination between supplies to members (which would be exempt) and supplies to non-members (which would be taxable) but, for one reason or another, the proposal did not find its way into the legislation in its final form and it is, plainly, the European legislation in its final form rather than as it might have been which must be applied. Thus the provisions of domestic law which import the discrimination find no direct warrant in Community law; and the question to be asked, therefore, is whether it is nevertheless a legitimate and effective means of respecting the purpose of the Directive, or more precisely art 133(d).

44. In my judgment it is not. In principle, the exemption extends to all relevant supplies “to persons taking part in sport”. The restriction of the exemption to only some such persons is therefore contrary to the purpose of the exempting provision and cannot stand, unless it is otherwise justified. I am not persuaded that the restriction is justified since I do not consider it has, or can have, the result for which the Commissioners contend. As Mr Hill conceded, both non-profit making organisations and commercial enterprises providing facilities for playing golf operate membership schemes and allow visitors to play in exchange for green fees. The most that can be said is that the domestic provisions have the potential for reducing distortion of competition for the custom of visitors; but in my opinion that is too imprecise an outcome to justify an exclusion which is contrary to the purpose of the Directive. Even if it were the case that distortion of competition in relation to visitors was eliminated, there remains the (economically probably more significant) distortion in relation to members. Moreover, the legislation introduces another anomaly capable of distorting competition, namely the non-profit making body which has no members, such as a charity or philanthropic trust, which may make exempt supplies to all comers.

45. I conclude therefore that the provisions of domestic law which distinguish between supplies to members and supplies to others are not capable of properly achieving the objective of art 133(d) of the Principal VAT Directive and therefore do not correctly implement its terms. They cannot stand. Mr Hill conceded that, if that were my finding, I must go on to determine that the provisions of the Directive have direct effect, and that the appellant’s green fee income represents the consideration for an exempt supply.

Conclusions

46. The exclusions from exemption of art 134 of the Principal VAT Directive do not apply to the appellant’s supplies. I recognise that in so concluding, I am departing from my earlier decision in Keswick Golf Club. The attempt by the domestic legislation to implement art 133(d) of the Directive is ineffective, and does not take the appellant’s supplies of the right to play golf in exchange for a green fee out of the exemption.

47. The appeal is allowed to that extent. I give the parties permission to apply for the hearing to be continued in order that the two other issues I have mentioned may be determined.

Colin Bishopp

Tribunal Judge

Release date: 1 June 2011

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

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