First-tier Tribunal (Tax)

[2010] UKFTT 607 (TC)

TC00848

Appeal number: LON/2009/0808

SUPPLY – sponsorship of Formula One drivers -- whether of sporting services or advertising services – predominantly sporting services – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

WILLIAMS GRAND PRIX ENGINEERING LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN F AVERY JONES (TRIBUNAL JUDGE)

NIGEL COLLARD

Sitting in private in London on 21 and 22 October 2010

Raymond Hill, counsel, instructed by Grant Thornton UK LLP, for the Appellant

Rodney Dixon, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.     This is an appeal by Williams Grand Prix Engineering Limited against decision letters of 13 November 2008 and 12 February 2009 and two assessments to VAT on 21 April 2009 for periods 01/07 to 01/09 and on 8 September 2009 for period 06/09.  The Appellants were represented by Mr Raymond Hill, and the Respondents (“HMRC”) by Mr Rodney Dixon. 

2.     The issue in this appeal is whether supplies by the Appellant to Toyota in connection with the Appellant’s Formula One racing team was a supply of sporting services, for which the place of supply is where the services are physically carried out, which to some extent is in the UK (as HMRC contends); or whether it was a supply of advertising services, for which the place of supply is where the recipient belongs, which is outside the UK (as the Appellant contends).  It is common ground that only one of these can apply to the services as a whole and there is no possibility of any apportionment.

3.     We had a ring binder of documents and heard evidence from Miss L M Evans, Head of Finance of the Appellant, and Mr J R Wright, formerly Head of Marketing of the Appellant.  We find the following facts:

(1)        The Appellant entered into an agreement (“the Agreement”) dated 25 August 2006 with Toyota Motor Corporation (a Japanese company) called a “Formula One Driver Development Agreement” which contained the following provisions:

(a)     The recitals note that the Appellant has generated considerable prestige and recognition of its technological and racing capabilities and that

“(C) Toyota is a major global motor manufacturer with a history of technical excellence and successful motorsport participation.  Toyota currently competes in the Championship [defined as the FIA Formula One World Championship] as the ‘Panasonic Toyota Racing Team.’  Toyota wishes to enter into a driver development agreement with [the Appellant] to develop capabilities of and to promote the success of Toyota sponsored drivers.”

(b)     Three Japanese Development Drivers are named and the term includes other suitable drivers nominated by Toyota.  The Appellant is to appoint one of them as the Race Driver, the Third Driver or the Test Driver for each season during the term of the Agreement which is the 2007, 2008 and 2009 seasons (which run from March to November):

(i) if the Appellant appoints one of them as Race Driver Toyota is to pay €X [the figure being commercially confidential] per Season

(ii) if the Appellant appoints one of them as Third Driver Toyota is to pay one half of €X per Season

(iii) if the Appellant appoints one of them as Test Driver Toyota is to pay a proportion of one half of €X per Season corresponding to the proportion of kilometres driven in the tests compared to the Appellant’s driver who completes most kilometres in the tests.

(c)     The Appellant may not appoint a Development Driver who has first been appointed as race driver, third driver or test driver of the Panasonic Toyota Racing Team.  Once appointed the Appellant has priority over Toyota to reappoint him for later seasons.

(d)     The Development Drivers are contracted by Toyota and leased to the Appellant.  The Appellant could not contract with them while they were contracted with Toyota.  The Appellant makes no payment to the drivers.

(e)     Toyota procures that the Development Driver wears the race wear and track wear supplied by the Appellant at the Grand Prix and the Tests.  The Appellant is to permit the driver to display the Toyota logo on race wear and track wear and to display the Toyota logo on the helmet in the position specified in the Agreement.  The Toyota logo on the race wear and track wear is in red while all the others are in dark blue but the size of the lettering is smaller than some of the other logos, particularly that of RBS.  The Toyota logo is on the side of the helmet and can be seen when the car goes past although this will be at speed.  In addition the driver is permitted to display two personal sponsors on the helmet, race wear and track wear in the specified positions so long as this does not conflict with one of the Appellant’s sponsors.

(2)        The parties entered into an amending agreement signed on 9 March 2007 (by Toyota) and 16 March 2007 (by the Appellant) just before the start of the 2007 season:

(a)     That agreement recites that they wished to clarify the understanding of the parties with regard to testing during the official race practice sessions following changes in the Formula One rules.  A new definition of Friday Driver was inserted:

“means the Test Driver engaged by [the Appellant] as an additional driver in accordance with the Rules and engaged by [the Appellant] to drive one of the Cars which shall be used in the race during at least one Practice Session [defined as the official practice session typically on the Friday of a Grand Prix preceding the official qualifying sessions] of a particular Grand Prix.”

(b)     If one of the Development Drivers was appointed Friday Driver Toyota pays a fixed daily fee with a total maximum of one half of €X per Season and the driver is not to be treated less favourably than the other Appellant’s driver in the same Practice Session (defined as being typically on the Friday but it could be on other days).

(c)     The Appellant, subject to its prior written consent, granted Toyota a worldwide, royalty-free, licence to use the image of the Development Driver in the Car while wearing the Appellant’s race wear or track wear for marketing purposes including, but not limited to, promoting Toyota and the Toyota driver development program.  The right is to continue notwithstanding termination of the Agreement but not so as to imply any continuing relationship between the Development Driver and the Appellant.

(d)     Subject to the Appellant’s consent Toyota is entitled to use the Development Driver’s services provided that the Appellant has priority to use his services in case of conflicting dates.

(3)        One of the named Development Drivers was Mr Kazuki Nakajima.  He was appointed by the Appellant as Test Driver for the 2007 season (and drove as Race Driver in the last race of that season finishing 10^th out of 22 and setting the 5^th fastest lap), and was appointed Race Driver for the 2008 and 2009 seasons.  While Test Driver he was in practice also the Friday Driver.  He had a background of racing in Japan.  He was the only Japanese driver regularly racing in Formula One in the 2008 and 2009 seasons.  Whilst a Development Driver,  in 2007 he obtained, for the first time, a super licence, which is required for a driver to drive in Formula One races, under a rule that required him to drive at least 300 km in a current Formula One car at racing speeds and be judged by the Bureau of the Formula One Commission.  He was entitled to renew the licence for later seasons.

(4)        In addition to testing on the Friday before a race the Test Driver drives for the Appellant in private testing sessions usually in Spain.

(5)        The Appellant’s Formula One cars were in the seasons concerned powered by a Toyota engine.  The Appellant leased the engines from Toyota Motorsport GmbH of Germany under an agreement dated 26 July 2006 that expired at the end of the 2009 season with the possibility of a one year’s extension (which did not occur).  Toyota was to supply 60 engines per season for an annual fee.  Scheduled to that agreement was a trade mark agreement requiring the Appellant to display on the car “Powered by Toyota” in the position specified.  No payment was made for such right and Formula One rules require the name of the engine maker to be used in the team’s title, which was the “AT&T Williams Toyota” team.  Toyota therefore obtained the benefit of publicity in the name of the team without making any payment.

(6)        Toyota had a Driver Development Programme in Japan aimed at identifying potential Formula One drivers and associating them with Toyota.  The Appellant does not provide any driver training.  As mentioned, Toyota took part in Formula One racing through the Panasonic Toyota Racing Team.  Formula One is extremely popular in Japan particularly among young people.  We did not have any evidence from Toyota although we saw one page from a Japanese magazine showing Mr Nakajima in front of the Appellant’s car wearing his race overalls with the Toyota logo visible.  In the end Toyota were unable to use the benefit of Mr Nakajima’s experience with the Appellant, at least in Formula One racing, as it decided not to continue competing in Formula One after the end of the 2009 season.

(7)        Formula One racing is heavily dependent on sponsorship for financing.  The attraction to sponsors is the global television audience of some 600 million (in 2008) and 520 million (in 2009).  Typically the sponsor will require the Appellant to display the sponsor’s logo on parts of the car, the driver’s overalls, and the team personnel’s uniforms.  Some sponsors give less importance to the use of their logo but require access to hospitality for their clients.  This is particularly true of sponsors who normally make supplies to other businesses. 

(8)        Mr Wright was involved in the negotiations of the Agreement with Toyota until he left at the end of March 2006 by which time the commercial decisions had been made.  He had approached Toyota with proposals which he considered would be attractive to Toyota such as an association based on the Lexus brand and involving their dealer network, but these did not appeal to Toyota.  Both he and Miss Evans believed that promotion connected with the driver was what Toyota considered was the benefit of the Agreement. 

4.     The Value Added Tax (Place of Supply of Services) Order 1992 provides:

“15 Where a supply of services consists of—

(a)   cultural, artistic, sporting, scientific, educational or entertainment services;…

it shall be treated as made where the services are physically carried out.

16 Where a supply consists of any services of a description specified in any of paragraphs 1 to 8 of Schedule 5 to the Act, and the recipient of that supply—

(a)   belongs in a country, other than the Isle of Man, which is not a member State; …

it shall be treated as made where the recipient belongs.”

Paragraph 2 of Schedule 5 is “Advertising services.”

5.     The equivalent provisions of the Sixth VAT Directive are:

“9(1).  The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.

(2).     However:…

(c) the place of the supply of services relating to:

—     cultural, artistic, sporting, scientific, educational, entertainment or similar activities, including the activities of the organisers of such activities, and where appropriate, supply of ancillary services,…

shall be the place where those services are physically carried out;…

 (e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:…

— advertising services,…”.

The corresponding provisions of the Recast VAT Directive are in art 53 and art 59(b).

6.     Mr Hill, for the Appellant, contends:

(1)        Advertising services have a wide meaning (Commission v France, Case C-68/92, see below).

(2)        There is no priority between the different rules for place of supply of services; the scope of each is to be decided in the light of its purpose as set out in the seventh recital in the preamble to the Sixth Directive including a special regime: “.. in the case of certain services supplied between taxable persons where the cost of the services is included in the price of the goods.”

(3)        In Kronospan, Case C-222/09 the ECJ approached a similar question involving choosing between art 9(2)(c) or (e) of the Sixth Directive on the basis that services within para (c) were supplied to a number of different recipients, while services within para (e) were supplied to a single recipient.

(4)        In the context of sponsorship of racing cars the Tribunal has categorised the supply as one of advertising services in John Village Automotive v Customs and Excise Commissioners [1998] V&RD 340.  One of the ten sponsors named a driver to drive the car.

(5)        Here the economic reality was that that the supply was predominantly of advertising services (a) by looking at the Agreement, (b) by looking at the broader context in which the Agreement was entered into and (c) through the Appellant’s evidence of the negotiations for the Agreement.  The Agreement did not provide for any training for the driver, and the Appellant was likely to appoint the driver who needed the least training.  Toyota were prevented from using the driver chosen by the Appellant for three seasons so the only way they could recoup the cost was through advertising.

7.     Mr Dixon, for HMRC, contends:

(1)        The correct approach was to determine the nature of the supplies made by the Appellant.

(2)        The facts in the John Village case were different and included the display of advertising signs.  The circumstances of the one case where the driver was named were not explored by the Tribunal.

(3)        The Agreement was, as the title Driver Development Agreement states, one where the predominant element was for the driver to obtain experience.  There was no link between payment and advertising.  If the Appellant appointed one of the Development Drivers as one of its drivers for the three seasons Toyota would at the end of the period have the benefit of the experience gained.  If the Appellant did not appoint a particular driver in any season Toyota were free to use him in their team.

(4)        No weight should be given to the Appellant’s evidence of what they considered Toyota wanted from the Agreement.  What mattered was what was supplied by the Appellant.

8.     Our task is to choose between sporting and advertising services both of which are present to a large degree.  Recital (C) to the Agreement states, we consider correctly, that “Toyota wishes to enter into a driver development agreement with [the Appellant] to develop capabilities of and to promote the success of Toyota sponsored drivers,” thus giving its purpose as both developing the driver’s capabilities (a supply of sporting services) and promoting the driver’s success (an advertising service).  Toyota would benefit if one of its potential drivers gained valuable experience of driving in the Appellant’s more established and successful team for up to three seasons so that after the 2009 season Toyota could use the driver for its Panasonic Toyota Racing Team.  Toyota would also benefit from being able to use the fact that a Japanese driver sponsored by it was driving in the Appellant’s team in a car powered by a Toyota engine for publicity purposes particularly in Japan.  Both of these aspects were present.  We have to decide which of these predominated.

9.     On the meaning of advertising services the ECJ decided in Commission v French Republic Case C-68/92 that this was a Community concept, and that:

“16.  The concept of advertising necessarily entails the dissemination of a message intended to inform consumers of the existence and the qualities of a product or service, with a view to increasing sales.”

It is not in dispute that the services in question are capable of being advertising services.

10.  The ECJ has recently stated in HMRC v Loyalty Management Limited, Case C-53/09 at [39] that “It must also be recalled that consideration of economic realities is a fundamental criterion for the application of the common system of VAT.”  We shall accordingly approach the question as one of economic reality.

11.  Mr Hill particularly relies on the approach of the ECJ in Kronospan, Case C-222/09 in which the issue was similar; whether services were scientific within art 9(2)(c) or those of engineers within art 9(2)(e).  The services were described by the Court as follows:

“9.  Kronospan, which has its registered office in Poland, provided, for a customer established in Cyprus, services in the field of technical investigations and analyses and carried out research and development work in the fields of natural sciences and technology.

10 Those supplies of services relate more specifically to work that encompasses the investigation and measurement of emissions, including the conduct of investigations relating to emissions of carbon dioxide (CO₂) and trading in CO₂ emissions, the preparation and checking of documentation in relation to such work and the analysis of potential sources of pollution linked to the manufacture of goods consisting mainly of wood. That work is carried out with the objective of acquiring new knowledge and new technological know-how aimed at the production of new substances, products and systems and the application of new technological procedures to production processes.”

The Court decided that the services were those which may principally and habitually be carried out by engineers and that there was nothing to prevent services supplied by engineers being innovative and creative, as might normally be the case for scientific services.  The Court decided the case on this basis:

“24 It is important to add that, as is apparent from the case-law of the Court, the services referred to in Article 9(2)(c) of the Sixth Directive are characterised, inter alia, by the fact that they are provided for a number of different recipients, that is to say, all the people taking part, in a variety of capacities, in cultural, artistic, sporting, scientific, educational or entertainment activities (see Gillan Beach, paragraph 23).

25 In the present case, however, it is clear from the order for reference that the services performed by Kronospan were not provided for a number of different recipients, but were carried out for one single Cypriot recipient which commissioned the research and development work at issue in the main proceedings. The fact that that sole recipient of services might find it necessary to sell, to third parties or to undertakings belonging to the same group as that of which it is part, the results of the work which it has commissioned is irrelevant in that regard. The dissemination, by the recipient of those services in the course of its business, of those results to a wider public does not allow the conclusion to be drawn that those services have been provided to a person other than that recipient.

26 It follows that services such as those at issue in the main proceedings must be regarded as being covered by Article 9(2)(e) of the Sixth Directive.

27 That finding is not called into question by the argument alluded to in paragraph 16 of the present judgment, according to which, in the main proceedings, the recipient of the services does not directly include the costs of those services in the price of the goods and services which it offers, with the result that those services come within the scope of Article 9(1) of the Sixth Directive.

28 First, as is apparent from the use of the words ‘in particular’ in the seventh recital in the preamble to the Sixth Directive, the scope of Article 9(2) of that directive is not restricted to services between taxable persons where the cost of the services is included in the price of the goods.

29 Secondly, the Sixth Directive does not contain anything which allows the conclusion to be drawn that the fact that the recipient includes the costs of the services not directly, but indirectly, in the price of the goods and services which it offers is relevant for the purposes of establishing whether a service is covered by Article 9(1) or (2) of the Sixth Directive.”

12.  If this approach is applied here it favours the Appellant’s contention because the services are supplied to one person, Toyota, and the costs are indirectly included in the price of its cars.  We consider that this cannot be a general rule because some art 9(2)(c) services, such as some artistic and educational services and normally the valuation of goods, can be supplied to one recipient, and some art 9(2)(e) services, such as advertising services, telecommunication services and radio and television broadcasting services, can be supplied to many recipients.  It seems that in Kronospan the Court was faced with a supply of services that could equally fall within either heading.

13.  We turn to consider whether this is the case here.  In favour of the Appellant’s advertising services contention is that, from its point of view, it was obtaining sponsorship for which advertising was the motive; and the value to Toyota of exploiting the connection of its sponsored Japanese driver in the Appellant’s established team in a car with a Toyota engine was obviously high.  In favour of HMRC’s sporting services contention is that the agreement is called a driver development agreement and that is what Toyota obtained for a payment that varied with the amount of experience obtained (per day for the Friday driver, in proportion to kilometres driven as Test Driver, and by the fact of the driver being Race Driver or Third Driver).  We consider that the sporting service should be described as providing experience of driving in the Appellant’s Formula One team rather than training.

14.  We ask ourselves which alternative the Agreement fits better.  The format of the Agreement is that clause 2 is headed “Appointment of Development Drivers,” section 2.1 deals with consideration, section 2.2 is headed “Appointment—status of Development Driver,” section 2.3 is headed “Performance” and section 2.4 “Logos.”  Section 2.4 contains permission by the Appellant for the driver to display the Toyota logo.  If advertising had been the major focus of the Agreement for Toyota one would have expected this to have more prominence in the format of the Agreement.  In particular, it is strange that Toyota did not obtain the right to use the Appellant’s trade mark until the amending agreement when Toyota must have wanted to show the image of the driver with the Appellant’s car and the Appellant’s race wear and track wear in its advertising.  This is not a change that was necessitated by the change in the rules dealing with Friday drivers and looks as if Toyota realised that its advertising rights were deficient after entering into the Agreement.  It was contended that the advertising benefit to Toyota was immediate but that it could not use the driver in its own team until after the 2009 season if the Appellant appointed him in the 2007, 2008 and 2009 seasons.  Against this it can be said that the driver experience was also immediate and that after three years Toyota would have a far more experienced driver, so that we do not consider that this factor points in either direction.  We accept that it was the view of the Appellant’s witnesses that Toyota’s interest was to obtain advertising but we would have been more influenced if Toyota had said this, and in any case it is not determinative of the nature of the services supplied under the Agreement. The amount of the payments is more clearly geared to driver experience rather than driver exposure.  The Test Driver might not be seen in public but might drive only in private testing but nevertheless Toyota agreed to pay up to half the fee for Race Driver and the same fee as Third Driver, although we appreciate that the fact of his appointment as Test Driver could be used in publicity.  While there could be some television coverage for the Friday Driver this would be far less than that for the driver on the Saturday practice day or the race itself.  Presumably the publicity value to Toyota of being able to say that Mr Nakajima was Test Driver in the Appellant’s team is the same whether he drives a large or small number of kilometres as Test Driver so why should Toyota be prepared to pay in proportion to kilometres driven?  On the other hand, the number of kilometres driven is directly relevant to driver experience.  One would also expect that if publicity were the important factor the payment for a driver appointed Test Driver would not be as much as the maximum in respect of appointment as Third Driver or half the payment in respect of appointment as Race Driver.  It may be that in practice the Friday Driver was the same person as the Test Driver and so obtained public exposure that way but this was as a result of how the Appellant operated rather than what was required to happen under the Agreement.  On the other hand, if driver experience was important, experience as Test Driver with high kilometres might be considered to be worth the same payment as Third Driver. 

15.  While the two possible alternatives are very evenly balanced in our view the economic reality of the method of calculation of the fee favours HMRC’s contention.  Since on this basis the Agreement does provide the answer we do not consider that we should base our decision on whether the supply is to one or more than one person as in Kronospan.  While normally a sporting service is something provided in return for an entry payment by a member of the public, here the payment by the public to watch a Grand Prix has nothing to do with the supply to Toyota.  This cannot prevent its being a supply of sporting services.

16.  Accordingly we find that by a small margin predominantly the supply under the Agreement is of sporting services and dismiss the appeal.  The figures assessed are agreed.  HMRC do not ask for costs.

17.  The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. 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.

JOHN F AVERY JONES

TRIBUNAL JUDGE

RELEASE DATE: 25 November 2010