First-tier Tribunal (Tax)

[2010] UKFTT 453 (TC)

TC00718

Appeal reference: TC/2009/15299

VAT – input tax – attribution of input tax – Appellant making both exempt and taxable supplies –construction of new pitch – whether costs wholly attributable to the exempt supply of members’ subscriptions for playing rugby – no – expenditure on pitch directly linked with both exempt and taxable supplies – input tax should be treated as residual for the purposes of the partial exemption calculations

FIRST-TIER TRIBUNAL

TAX

CIRENCESTER RUGBY FOOTBALL CLUB Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting (Judge)

John Lapthorne FCMA (Member)

Sitting in public in Birmingham on 2 August 2010

Rob Lister, chairman, for the Appellant

Vinesh Mandalia, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.           Cirencester RFC (“the Club”) appeals against an assessment in the sum of £14,150 plus interest and penalties issued on 11 March 2009.  The assessment was raised to give effect to the Commissioners’ determination that the costs incurred by the club in its construction of a new pitch were wholly attributable to the exempt supply of members’ subscriptions for playing rugby.

2.           The Club is an eligible body supplying exempt sporting services as defined in item 3, group 1, schedule 9 VAT Act 1994.  The Club makes a combination of exempt and taxable supplies and is therefore, for VAT purposes, partially exempt.  In summer 2006, the Club incurred the costs of the construction of a new pitch to supplement the two existing pitches.  The issue between the parties is whether the input tax incurred by the club on the construction costs is exempt input tax on the grounds that it is attributable exclusively to the making of exempt supplies, as the Commissioners contend, or, as the Club contends, was directly linked with both exempt and taxable supplies and should therefore be treated as residual for the purposes of the partial exemption calculations.

3.           The Club’s case was presented by its current chairman, Rob Lister, and oral evidence on behalf of the Club was given by its former treasurer and chairman, Lloyd Williams.  On behalf of the Commissioners we heard oral evidence from Mrs. Mel Poolton, the assessing officer.

The relevant legislation

4.           Section 24 of the VAT Act 1994 provides:

“(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say -

(a) VAT on the supply to him of any goods or services;

(b) VAT on the acquisition by him from another member State of any goods; and

(c) VAT paid or payable by him on the importation of any goods from a place outside the member States;

being (in each case) goods or service used  or to be used for the purpose of any business carried on or to be carried on by him.”

5.           Section 26 of the Act provides:

“26. Input tax allowable under section 25

(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business –

(a) taxable suppliers;

…

(3) The Commissioners shall make regulations for securing for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above, and any such regulations may provide for –

(a) determining a proportion by reference to which input tax for any prescribed accounting period is to be provisionally attributed to those supplies;

(b) adjusting, in accordance with a proportion determined in like manner for any longer period comprising two or more prescribed accounting periods or parts thereof, the provisional attribution for any of those periods;”

6.           Regulation 101 of the VAT Regulations 1995 (SI 1995/2518) provides:

“Attribution of input tax to taxable supplies

101(1) Subject to regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.

(2) In respect of each prescribed accounting period –

(a) goods imported or acquired by and… goods or service supplied to the taxable person in the period shall be identified

(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or service as are used or to be used by him exclusively in making taxable supplies;

(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplied, and

(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total or such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.

7.           Before setting out the evidence, we should make two points.  First, as we set out fully below and for the reasons also set out, there was a considerable time lapse between the construction of the new pitch and the supply of the advertising rights which the club wished to link with it.  During his closing submission, Mr. Mandalia contended that as during the relevant period there were no outputs against which the input tax could properly be offset, this was an irrevocable bar to the input tax being treated as residual, quite apart from other issues.  This point had not previously been raised by the Commissioners.  It was not pleaded; was not put to Mrs. Poolton during the course of her evidence and was not one which the club had come prepared to argue.  It was therefore agreed that we should at this stage concern ourselves only with the substantive issue before us and make a ruling in principle on that.  If this ruling were to be against the club, any further argument on timing would be redundant.  If we were to rule in favour of the club, it was agreed the appeal would be left open for 28 days to allow the parties to discuss any further points arising out of the ruling and then reapply to the tribunal for a final determination if agreement could not be reached.

8.           The second point concerns the Commissioners’ understanding of the nature of the work undertaken by the club.  This does not affect our decision but it is pertinent because it brings into question the effectiveness of the reviews and whether the same decision would in fact have been made by the reviewing officers had they had a proper understanding of the facts.  When Mrs. Poolton visited the club, she appeared to understand exactly what had been done in that her notes refer to “the creation” of new pitches (although in fact there was only one).  Her decision letter of 30 December 2008 clearly referred to “the construction of the new pitch”.  A reconsideration of Mrs. Poolton’s decision was sought and was carried out by Mr. White, Mrs. Poolton’s line manager.  In his letter of 26 June 2009, he treated the work as merely a pitch renewal.  A full review of Mrs. Poolton’s decision was carried out by an independent officer, Mr. Stacey Watts who in his review dated 20 August 2009, also treated the work as a pitch renewal only.  Both Mr. Watts and Mr. White, perhaps understandably given their understanding, ruled that “pitch renewal costs are considered to be wholly attributable to the wholly exempt supply of members’ subscriptions / playing activities” (Mr. Watts’ letter).  It is therefore clear that both reviews were carried out in ignorance of the extent of the works.  This lack of understanding is then perpetuated in the Commissioners’ pleaded case where in paragraphs 16 to 19, the work is described throughout as “pitch renewal”.  It is important at the outset that we make clear that we do not treat the work in question as pitch renewal but as, what it in reality was, the construction of a brand new pitch on a part of the site where none had previously been.

The evidence

9.           The evidence on behalf of the Club was presented in the form of two very clear written submissions, supplemented by Mr. Williams’ oral evidence.  The Club was founded in 1949 and a graphic picture was given of the decline of a once successful and thriving club and the struggle to revive it.  The Club is a non profit making body run by volunteers and headed by a management committee.  It has three principal income streams, playing and non-playing subscriptions, bar profits and sponsorship / advertising.  Historically the club competed at regional level but in 2002 was demoted and, until this coming season when, having earned promotion it will do so again, it has played only at county level.  This demotion impacted on every aspect of Club life.  Its senior teams fell in number from five to three as playing standards and competitive opportunities reduced and the playing membership fell.  Financially, once the playing membership fell so did membership subscriptions; the opportunities for sponsorship income were reduced and bar income fell.  Nevertheless the overheads of the site and clubhouse remained the same.  Over the years various schemes to halt the decline had been considered.  Moving site was considered, as was the redevelopment of the clubhouse – all such schemes were rejected on the grounds of cost.  Then in 2005, the Management Committee came up with and implemented a long term strategy, the aim of which was to bring the Club out of the doldrums and back up to Regional level competition.

10.        The strategy was an ambitious and far-reaching one which was to impact on every aspect of the Club.  At the time the Club had just two pitches, both pretty elderly, and the keystone of the new strategy was the creation of a third showpiece pitch on some hitherto unused ground within the site.  Mr. Williams described the pitch as, in effect, a dual facility, playing and financial.  It was to be a new playing facility which would be used routinely by the Club’s own first fifteen, but given its high quality it would also provide a potential for renting it out and would attract larger outside events, for example the county festival.  The original pitches had only a rope perimeter surround, presenting no opportunity for advertising.  As a showpiece pitch, the new pitch would have safety fencing erected around the perimeter which would provide the infrastructure for the selling of advertising boards.  The only advertising previously done had been a couple of named companies advertising on the notice board at the entrance to the car park.  There had been no pitch-side advertising.

11.        In summary, with the creation of the third pitch, the Club hoped to attract new and better players, with better facilities, better coaching and better kit.  The opportunity given for pitch-side advertising would bring in much-needed funding to go towards achieving this aim.  With the introduction of “showpiece events”, the opportunity was also there for the selling of match day programmes and charging for admission.  The Club had previously had sponsors for, for example the juniors’ kit, and there was not to be much change in the sponsorship.

12.        The cost of the new pitch was to be in the region of £60,000.  This was funded in the main by an RFU grant supplemented by an appeal to members and a voluntary levy on junior subscriptions.

13.        The creation of the pitch was slow going.  As we say, work began in 2006 but before the pitch could even be built, the ground had to be excavated and levelled and drainage had to be installed.  Once set up, the pitch then had to settle for two years but even at that stage further drainage problems came to light which had to be remedied.  It was not until September 2008 that the pitch became playable and the first advertising hoardings were not erected until January 2009.  Since then the advertising has built up to the extent that the ground is now surrounded by 32 boards all contracted to a minimum of three years.  The table below shows the income in both real and percentage terms achieved from the pitch-side advertising:

14.        Mr. Williams accepted, in cross-examination, that the club had no written contracts with the advertisers and no formal terms and conditions.  There would be a letter of acceptance and an invoice.  Mr. Williams also accepted that none of the advertising was conditional on the condition of the pitch, nor the number of spectators.  It was in effect unconditional.  It is hoped in the not too distant future to start making a charge for admission to the large outside events and at those events there would also be match day programmes for which a charge would also be made.  To date there has only been one match day programme produced in May 2010.  It was Mr. Williams’ view that without the promise of future advertising revenues the scheme would probably not have gone ahead.  Before making its grant, the RFU had to have a definitive assurance that the asset into which their funding was being put could be properly maintained.  We were told that before making the grant, the RFU sought assurances on the levels of future playing, bar revenue, advertising and sponsorship.

15.        Mr. Williams drew our attention to two telephone calls which the Club had made to the Commissioners’ Helpline.  Mr. Mandalia referred us to a third call which in fact had been the first in time.  The calls had been made to the helpline by the Club with the sole aim of making sure that they treated the costs of the pitch correctly.  It would appear that the advice they were given was at best contradictory.  In the first call they were told that it would be exempt.  In the final call they were told categorically that they could claim back the VAT,.  We do not feel that much hangs on the contents of the phonecalls and don’t intend to set them out in any detail.

Submissions

16.        Mr. Mandalia submitted that the expenditure incurred on the pitch could not in any proper sense be attributable to the onward supply of sponsorship, match day admissions or match day programmes, there being no direct and immediate link between these items and the costs incurred.  Further, any sponsorship or advertising which there may have been was for the club as a whole and was not in any way conditional on the pitch itself.  In paragraph 22 of his written submission, Mr. Mandalia states “furthermore the costs associated with the renewal / renovation of the pitch was not a cost component of the sponsorship offered”.  The wording of this sentence implies that the misunderstanding as to the nature of the work had also reached Mr. Mandalia when he was instructed by the Commissioners.  However, Mr. Mandalia clearly understood the extent of the work by the end of the hearing and we take his submissions to refer to the work which was actually carried out rather than that which he had believed it to be.  Mr. Mandalia also stressed the complete lack of any written contractual documents or terms and conditions.

17.        It was the Club’s submission that the building of the new pitch and the opportunity which it would give to raise additional revenues were inextricably linked and further that as shown by their table, those revenues have materialised as a direct result of the new pitch.  The pitch project could and would never have gone ahead in isolation and would not be sustainable on subscriptions alone.  That it is now sustainable and indeed successful is due to the numerous new income streams that have been generated.

Conclusions

18.        The Club makes both exempt and taxable supplies.  Its exempt supplies are of members’ subscriptions for playing rugby.  Its taxable supplies are of sponsorship, advertising, match day admissions and match day programmes.  It was accepted by the Club that it had not yet charged for admission to matches but that it anticipated in time it would to larger or show events.  The position with regard to programme sales was similar, although there had been the one event in May 2010 when a match day programme had been sold, generating taxable income of £450.  Limited sponsorship had existed prior to the pitch development and it was again accepted that the project had little impact on this.  It is the taxable supply of advertising rights which is key to the Club’s case.  The question before us is therefore, in effect, was the input tax incurred on the pitch development exempt input tax on the grounds that the pitch was used exclusively in making exempt supplies of subscriptions, as contended by the Commissioners, or was the cost of the development used for both the exempt supply of subscriptions and for the taxable supply of advertising rights, as was the Club’s case.

19.        The test to be applied is whether the input is directly and immediately linked to the particular taxable transaction or, put another way, is it a cost component of the output?  Hart J in Mayflower Theatre Trust (2006) STC 1607, paragraph 44, said the quest was “not for the closest link but for a sufficient link”.  Applying this test, in order to succeed, the Club has to establish the relevant link between the cost of the construction of the new pitch and its supply of advertising rights.  We limit our consideration, for the reasons stated at the outset, to this substantive issue, putting aside at this stage any question of timing.

20.        Mr. Mandalia pointed out quite rightly the total lack of any written contracts between the club and its advertisers and indeed there appeared to be no terms and conditions at all.  However this is hardly surprising and probably no more than one would have expected.  The Club, at the time when this project was set up, was a small, locally-based club, being run on a shoestring, in their spare time, by a small group of dedicated volunteers, passionate about their rugby and about their club.  They pursued single-mindedly their one overarching objective which was to reverse the falling fortunes of the Club.

21.        The Club was in decline both in its playing and financially.  The project was designed to address both.  The business objective, in making the investment, was to promote further income streams and specifically to bring in to the Club advertising revenue as part of an overall funding plan.  The playing objective was to increase membership, attract new and better players and enhance the coaching and equipment facilities.  To attract higher level games and showcase events would meet both objectives.  The creation of the additional pitch provided a playing and a money-raising facility which in the drive to rejuvenate the club were inextricably linked.  The other side of the coin was that to justify the investment, there had to be an expansion of its business activity.  The Club could not spend £60,000 to maintain the status quo of a club in decline.  The pitch generated the additional business activity which justified the investment.

22.        Putting aside any question of timing, we therefore find in favour of the Appellant on the substantive issue.  It is our finding that there was a direct and immediate link between the cost of the development of the pitch and the taxable supply of advertising rights.  As stated previously therefore we now leave the appeal open for 28 days to enable the Commissioners to give further thought to the question of the timing of the taxable supply of advertising rights and if need be to hold further negotiations with the Club.  Either party has liberty to reapply to the tribunal.

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.

LADY MITTING

JUDGE
Release Date: 28 September 2010