First-tier Tribunal (Tax)

[2009] UKFTT 243 (TC)

TC00192

Appeal number LON/2005/1157

VAT – appeal against compulsory registration – whether the exemption for the provision of education by an eligible body applied  – Group 6, Schedule 9, VATA 1994 refers – whether the Appellant an “eligible body” – definition in Note (1)(e) considered – held that taking account of the memorandum of the Appellant which precluded the distribution of profits and also of the fact that significant remuneration was paid to the directors who were also the members of the Appellant, the aim of the Appellant was on the facts to make a profit which was distributed as directors’ remuneration – this prevented the Appellant being an “eligible body” – Kennemer Golf Club v Staatssecretaris van Financien applied – appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

                                       TRANS MEDIUM LIMITED

                                       trading as CONNECTIVITY                      Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Value Added Tax)                                                                Respondents

                                    TRIBUNAL: JOHN WALTERS QC

                                                            MRS. ELIZABETH M. MACLEOD                                                                       

Sitting in public (as the VAT and Duties Tribunal) in London on 20 October 2008

The Appellant did not appear and was not represented

David Manknell, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.     We heard this appeal in the absence of the Appellant, Trans-Medium Limited, on 20 October 2008, pursuant to rule 26(2) of the VAT Tribunals Rules 1986.  At the conclusion of the hearing we reserved our decision, but on Mr. Manknell, for HMRC, making an application for costs in the event that our decision was in favour of HMRC, we directed (1) that HMRC serve a Schedule of Costs and written submissions in support of their application; and (2) that the Appellant be at liberty to make submissions in response.

2.     In the event, by a letter dated 30 October 2008 from HMTC Solicitor’s Office, the Tribunal was informed that “on consideration [HMRC] have decided not to pursue their application for costs, but reserve the right to make such an application in the event that the taxpayer should seek to set aside the decision under rule 26”, by which was presumably meant this decision.

3.     The Tribunal received an email from Mrs. Pat Young (one of the directors of the Appellant) dated 14 January 2009 referring to then recent correspondence and a telephone conversation with the Tribunal staff.  Mrs. Young stated that HMRC “have indicated to us that they do not intend to submit such a schedule [of costs] providing that the appeal is not continued.  Since we intend to comply with this requirement, we assumed that no response was necessary.  Could you please confirm that this is correct.”

4.     As a result of these developments, the Tribunal assumed that the Appellants had withdrawn, or were formally going to withdraw their appeal.

5.     HMRC have however since written to the Tribunal asking for “some clarity” in the case and indicating that they expect a decision from the Tribunal.

6.     It is not clear to us whether or not there is still any basis for us to issue a decision in the appeal, but we have concluded that if the appeal has not already been withdrawn, it should be dismissed, and therefore we issue this decision to indicate this and to give our reasons.

7.     The appeal was against a decision of HMRC given in a letter dated 6 June 2005 and upheld on review in a decision letter dated 6 September 2005 to require compulsory registration for VAT of the Appellant.

8.     The Appellant carries on business providing information technology training. It claims that its supplies are exempt from VAT by virtue of Item 1 of Group 6, Schedule 9, VAT Act 1994.

9.     Pursuant thereto, the provision by an “eligible body” of (a) education or (c) vocational training is exempt from VAT. 

10.  The point at issue in the appeal is whether or not the Appellant is an “eligible body” for these purposes.  “Eligible body” is defined by Note (1)(e) to Group 6 as “a body which (i) is precluded from distributing and does not distribute any profit it makes; and (ii) applies any profits made from supplies of a description within this Group to the continuance or improvement of such supplies”.

11.  Item 1 of Group 6 is derived from article 13(1)(i) and 13(2) of the Sixth VAT Directive (77/388/EC) – replaced by articles 132 and 133 of Directive 2006/112 – which make it clear that the definition of “eligible body” must be interpreted as restricted, in the circumstances of this case, to bodies having as their aim the provision of education, vocational training or retraining which do not systematically aim to make a profit and of which any surpluses nevertheless arising “must not be distributed, but must be assigned to the continuance or improvement of the services supplied”.

12.  The Appellant’s general activity of information technology training was carried on by a connected company, Connectivity Solutions Limited (“CSL”) and, at any rate before 2000, CSL accounted for VAT on its supplies (that is, it did not claim exemption).

13.  Mr and Mrs Young were directors of CSL and became directors of the Appellant.  In 1999 and 2000, Mr Young received professional tax advice on how to restructure the business of CSL so as to take advantage of the exemption from VAT.  That advice was implemented and, as a consequence, the Appellant was created, its memorandum included a clause that prohibited the distribution of profit and it entered into arrangements whereby the business of CSL was transferred to the Appellant, but CSL continued to act as the Appellant’s agent and continued to received from the Appellant a licence fee designed to be related to the Appellant’s turnover.

14.  CSL went into liquidation on or around 1 October 2004 shortly after the Appellant had made arrangements enabling it to trade from the premises hitherto occupied by CSL and Mr and Mrs Young had been appointed directors of the Appellant.  Mr and Mrs Young purchased the assets of CSL from the liquidator and, between 2000 and 2005 have been remunerated by the Appellant.  Mr. and Mrs Young control the Appellant for all practical purposes and are the sole members of the Appellant.

15.  The directors’ remuneration paid by the Appellant has been £40,145 in 2002and £40,448 in 2003.

16.  HMRC submit that the Appellant is plainly a commercial undertaking run for the profit of Mr and Mrs Young who control it and have a financial interest in it.

17.  They refer to the decision of the European Court of Justice in Kennemer Golf and Country Club v Staatssecretaris van Financiën (Case C-174/00) [2002] STC 502 and to De Vere Golf and Leisure Limited (Tribunal V18078) in which Kennemer was analysed.

18.  They submit that these authorities show that a non-profit-making organisation for the purposes of the exemption is one which did not pursue the aim of making profits, unlike a commercial organisation which has the aim of achieving profits for its members.  The fact that an organisation achieves profits does not debar it from being a non-profit-making organisation for these purposes, but such profits must not be capable of being distributed to its members, whether overtly or covertly.

19.  In this case the facts demonstrate that the Appellant has the aim of making profits and, notwithstanding the fact that its memorandum included a clause that prohibited the distribution of profit, as a matter of fact it did distribute profit to Mr and Mrs Young by way of directors’ remuneration.

20.  From correspondence received by the Tribunal it appears that the Appellant’s case is that its non-profit making organisation status (achieved presumably by the inclusion in its memorandum of the clause prohibiting the distribution of profits) was essential to enable it to trade, not only with regard achieving VAT exemption, but also with regard to competing with other non-profit-making organisations in the same area of business and with regard to its ability to market itself as “tantamount to an educational charity”.

21.  The Appellant claims that the salaries paid out to Mr and Mrs Young have, in any event, been modest enough prevent their being able to negate the Appellant’s status as a non-profit-making organisation.

22.  We accept the submissions of HMRC that looking, as we must, at the objects of the Appellant as defined in its memorandum and the specific facts of the case (Kennemer Golf Club [27]) it is clear that the Appellant pursues the aim of achieving profits for the benefit of Mr and Mrs Young.  Although the payments to Mr and Mrs Young are expenses of the Appellant’s business and not, strictly, distributions of net profits (which would be prohibited so long as the Appellant’s memorandum remained in its present form), this does not prevent their being classed as distributed profits for the purposes of the application of the VAT exemption.

23.  For this reason (and also because it is presumably in Mr and Mrs Young’s power to remove the prohibition on distribution of profits from the Appellant’s memorandum) the Appellant does not come within the applicable definition of “eligible body” in Note (1)(e) to Group 6, Schedule 9, VAT Act 1994.

24.  The appeal therefore fails and if it has not been withdrawn (contrary to the assumption expressed at paragraph 4 above) it must be dismissed.    

JOHN WALTERS QC

JUDGE OF THE FIRST-TIER TRIBUNAL

RELEASE DATE: 22 September 2009