United Kingdom Special Commissioners of Income Tax Decisions

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URL: http://www.bailii.org/uk/cases/UKSPC/2009/SPC00732.html
Cite as: [2009] UKSPC SPC732, [2009] UKSPC SPC00732, [2009] STI 514, [2009] WTLR 499, [2009] STC (SCD) 226

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Peter Anthony Simpson and others as Trustees of the East Berkshire Sports Foundation v Revenue & Customs [2009] UKSPC SPC00732 (19 January 2009)

Spc00732

Income Tax - Donations to charity - Assessment made to recover income tax initially refunded, the recovery based on the claim that donations to an alleged charity had not ranked as qualifying donations under section 25 Finance Act 1990 - whether the alleged donations took the form of "a payment of a sum of money" – whether the recipient of the donations was a charity - Appeal dismissed

THE SPECIAL COMMISSIONERS

PETER ANTHONY SIMPSON and others as

TRUSTEES OF THE EAST BERKSHIRE SPORTS FOUNDATION Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 15 December 2008

Mr Peter Simpson, solicitor, in person on behalf of himself and the other trustees

Mr Akash Newbatt, counsel, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

This was a very difficult case. It was difficult in the sense that it raised a number of difficult factual and legal questions. It left me agonising over how to arrive at the correct answer, and somewhat mindful that I would have welcomed more guidance in relation to charity law to assist me in arriving at that decision. The numerous difficult legal questions also left me bewildered at the battle that the Appellant had had to wage in order to persuade the Respondents to consent to the case being heard by a Special Commissioner rather than by the General Commissioners. The case was also difficult in the other sense. In other words, having very reluctantly decided that I must dismiss this appeal, I have to say that I cannot help but applaud the public-spirited generosity of the Appellants who have between them donated over £123,000 to save and improve their local amateur football club, for no personal benefit whatsoever, and in a way which, at the very least, bordered on having been effected by way of the payment of a charitable donation.

The facts and evidence

Peter Simpson, a solicitor and partner in the firm of Lovegroves LLP, presented the case personally and on behalf of the other former trustees of the East Berkshire Sports Foundation ("the EBSF"), namely Kevin Stott and Abbas Shams. He alone gave evidence, and no witnesses were called by the Respondents.

The background facts

The three Appellants were strong supporters of their local East Berkshire football club, namely Windsor & Eton Football Club. This club was formed in 1892, and has occupied its present ground since 1911. Since 1994 the club has been operated by, and the lease of its ground held by, Windsor & Eton Football Club (Holdings) Limited (the club and the company both being referred to below as "the Club"), a company limited by guarantee. As a company limited by guarantee, the Club reinvested any profits in its business, having no shareholders to whom to distribute profit. In the event of there being any surplus on the winding up of the Club, the surplus was to be distributed in the familiar manner for guarantee companies, in other words to other similar clubs, institutions or charities as selected by the guarantor members or the Football Association.

The Club has suffered a rather poor period in his history in that its main team has fallen a couple of Leagues. It had competed in the Suburban Football League, and later in the League now known as the Ryman League. For the last three seasons the Club has competed in the South Western Division of the Southern Football League. As well as the team having been relegated to this League which Mr. Simpson described as "the bottom of the pyramid" of League football, the Club had other problems which even threatened its survival, in that its pitch was in poor repair, suffering drainage problems, and all its other facilities (the changing facilities and the concrete structure of its small stand) were all run down, and somewhat dangerous. Some of the damage to the pitch was caused by over-use in that the Club operated not only its first team, but a second team and a youth team, and when Slough football club were without a ground for a period, the Club permitted Slough to use the Club's ground. In addition a considerable number of finals of other minor amateur competitions are held at the Club's ground. Coupling all this usage with coaching for anyone who wanted to participate in the coaching, and fundamental problems associated with the clay sub-soil meant that a great deal of work needed to be done, and a significant amount of money needed to be spent.

Prior to considering the required work, and the way in which the work was financed and done, I need first to comment on the status of the First Team and the question of whether it was an amateur, semi-professional, or professional team. I was told that in the clubs competing in Leagues 5 and 6 (two and three levels about the Club itself) players could be either professional footballers or part-time players retaining other full-time employment outside football. At the Club's level, I was told that all players were either full-time students or were full-time workers engaged in other activities. The players in the Club's First team were paid roughly £100 a week, by way of expense allowance to cover the costs of the players driving to the Club twice a week for training sessions (some a considerable distance), and then driving to home and, more significantly, to away fixtures.

Others using the club premises and pitch were invariably amateurs, or indeed just any members of the public who might wish to participate in football coaching.

The project of improving the Club's pitch, its mini training pitch and its premises would not have been achieved but for the keenness and initiative of the three Appellants. They not only inspired a number of people to give voluntary labour, and persuaded traders to supply materials at a discount, but they managed to secure a few grants, and most significantly between them, they provided in excess of £123,000. Mr. Simpson himself became Chairman of the Club, and I did not remotely doubt his remark when he said that but for these efforts and this expenditure, the Club would probably have ceased to exist. Its demise would clearly have been a loss to the community because some at least of its facilities could be used by the public generally, rather than just being dedicated to the use of the First team or the three teams together, and so they provided the local community with some sports facilities, there apparently being few other similar grounds or facilities in the area.

The way in which the three Appellants financed the expenditure was slightly complicated, and indeed there are factual disputes as to several points. One clear point is that when materials were supplied or chargeable work was charged for by a contractor, the Appellants individually paid the suppliers or contractors directly. I was shown countless invoices from builders' merchants, which regularly invoiced one of the individuals, and of course indicated that the delivery address for the materials was the Club's premises. In the case of materials paid for directly by Mr. Simpson, I was shown a Schedule, which listed 27 items of expenditure, paid between 25 November and 25 January 2002, with each item being labelled in the Schedule, "Loan", and the total of the expenditure on this first Schedule for Mr. Simpson being £30,753.

There is a factual dispute as to whether, when Mr. Simpson and the other two Appellants paid for items on behalf of the Club, they did so on the basis that the Club would be indebted to them for the monies laid out, or whether the provision of the materials and labour was simply donated to the Club. Without at this stage resolving that dispute, I should refer to the pointers in each direction. Certainly so far as the amounts paid by Mr. Stott were concerned, the Club produced Schedules itemising all the amounts provided by Mr. Stott, and in two columns in this Schedule, there were details given of "Name of co", and "Nature of Expense". Where a payment by Mr. Stott was paid directly to a supplier, the entries in the columns would be along the following lines, namely "Big Mower Co" and "Toro/Wheel Horse Tractor not starting". Where cash was provided to the Club by Mr. Stott, the entries in the two columns would be "cash" and "donation" respectively. The Respondents thus suggested that the intention in the case of Mr. Stott, and perhaps in the case of the others as well, was that all amounts paid to the Club or its suppliers were effectively donated outright by the benefactor. Another pointer in favour of the amounts being donations was the fact that at some early date Mr. Simpson was clearly contemplating, and discussing with HMRC, the possibility of obtaining a deduction for the expenditure on the basis that it was "sponsorship money". On discovering that this would only be feasible if the money was donated by the solicitors' practice of which Mr. Simpson appeared to be senior partner, Mr. Simpson clearly abandoned this approach because he considered it unthinkable to expect other partners to share in the donations to the Club, in which the others were not particularly interested. Whilst this flirtation with the possibility of obtaining tax relief on the basis that the monies were provided as sponsorship monies somewhat indicates that the monies were donated outright, it is nevertheless possible that at the early stage, before the financial structure had been worked out, the monies might have been intended to be loans, the expectation perhaps being that the sponsorship (had that proved a viable mechanism for obtaining tax relief) could have taken the form of the waiver of the loans.

A counterbalancing indicator is that the Accounts of the Club for the periods 31 May 2002 and 2003 define turnover to refer to ticket sales less VAT and discounts, and it is only the Accounts for the year to 31 May 2004 that first include "donations" in the definition of turnover. It will become clear below why donations might first have been referred to in the Club's accounts in the period ending 31 May 2004. In all accounts, there were debts shown as being due after more than one year in amounts considerably in excess of the expenditure with which this appeal is concerned, and I have no reason to doubt Mr. Simpson's evidence that those loans were "Director's loans". I was however not given any breakdown of the loans.

The creation of EBSF

EBSF was formed as a recreational charity by the three Appellants, with the Appellants as trustees, on 14 August 2003, and registered in the Central Register of Charities on 23 September 2003. Mr. Simpson, as a solicitor with considerable experience in relation to charity law, drafted the Trust Deed and ensured that the objects of the trust adopted the wording of the Recreational Charities Act 1958. Needless to say, when the Trust was formed, the Charities Act 2006 had not been enacted, albeit that some reference was made to it in the course of argument. This reference was largely because that Act specifically acknowledged that a proper charitable object was the promotion of "amateur sport", albeit still subject to the fundamental charitable condition that the objects of the charity should be to promote "public benefit". The fact that the 2006 Act had not been enacted in 2003 however is obviously why the objects of the new trust followed the wording of the 1958 Act. In short those provisions provided that:

"Section 1 (1) … it shall be and be deemed always to have been charitable to provide, or assist in the provision of, facilities for recreation or other leisure-time occupation, if the facilities are provided in the interests of social welfare".

"Social welfare" was defined to require that:

"the facilities are provided with the object of improving the conditions of life for the persons for whom the facilities are primarily intended; and

that either:-

(i) those persons have need of the facilities by reason of their youth, age, infirmity or disability, poverty, or social and economic circumstances, or

(ii) the facilities are to be available to members of the public at large or to male, or to female, members of the public at large".

The Respondents conceded that, viewing the wording of the Trust Deed in isolation, and ignoring the way in which it was contended that the trust was actually intended to operate, the trusts objects were exclusively charitable, and thus that it rightly ranked as a charity. I should also add that there had been considerable correspondence between Mr. Simpson and the Charity Commissioners in which he had described the sort of works that the charity intended to finance. It is fair to comment that he did not specifically describe the only two transactions that the trust would actually implement in its early period of operation, but he did describe the sort of works that it would be funding, and the Charity Commissioners expressed themselves to be satisfied that the trust would be charitable, and as already indicated it was put on the register of Charities in September 2004.

Along with the above general references to the Objects clause of the charity, I should refer specifically to Clause 12, which provided that:

"In the professed execution of these trusts and powers no trustee being an individual shall be liable for any loss to the Trust Fund arising by reason of any improper investment made in good faith (so long as he shall have sought professional advice before making such investment) or for the negligence or fraud of any agent employed by him or by any other trustee hereof in good faith although the employment of such agent was not strictly necessary or expedient (provided reasonable supervision shall have been exercised) or by reason of any mistake or omission made in good faith by any trustee or by reason of any other matter or thing except wilful and individual fraud or wrongdoing or wrongful omission on the part of the trustee who is sought to be made liable".

The claimed significance of this clause will become clear below.

The critical transactions

It will be simplest to describe generally the broad objective sought to be achieved by the formation of EBSF before referring to the precise mechanics and wording actually adopted.

The basic aim of the creation of EBSF appears to have been to enable the three Appellants to donate funds to the charitable trust in amounts equal to their loan balances with the Club; whereupon EBSF would resolve to distribute equivalent amounts to the Club; whereupon the Club would repay equivalent amounts of the directors' loans. The directors would then claim relief on the basis that they had made qualifying donations to charity, which should enable the charity to reclaim the basic rate of income tax that the donors would have declared that they had suffered on the income donated, and EBSF would then donate the tax recovered to the Club to cover the cost of further works.

Although the steps actually implemented were economically identical to those just indicated, the mechanics were different. The directors first wrote on 19 August 2003 (actually the letter was mistakenly dated 2004) to the Club in the following terms, taking Mr. Simpson's letter as an example of the three letters which were identical except for the figures:-

"I refer to the Loans made to Windsor & Eton Football Club (Holdings) amounting to £30,753.00.

I request that these Loans now be repaid and I authorise and request you to immediately make payment to the East Berkshire Sports Foundation, whose receipt may be accepted by you in full discharge for the same."

It is not clear why the direction at this stage was only to repay the amount of loan by Mr. Simpson that had been incurred by November 2002, but for some reason that appears to have been the intention.

Somewhat later, on 14 November 2003, there are Minutes of both the Club and EBSF in the following terms. The Minutes for the Club, with all three trustees who were also Directors of the club being present, said:-

"Repayment of loans

The Directors drew attention to the series of loans made by the Board of Directors to the Club of which sums of £28,571 was attributable to loans made by Mr. Stott, £30,753 attributable to loans made by Mr. Simpson and £1,500 was a loan made by Mr. Shams. The Directors requested that these loans be repaid in full without interest but requested that such repayments should under instruction of the Directors be made to the East Berks Sports Foundation, a registered charity, Charity No. 1099592.

There being no other business the meeting was concluded at 8.15 p.m."

It is worth nothing two things in relation to that Minute. The first is that the Directors do not actually appear to resolve to do anything by way of effecting repayment. The other point is that the total of loans indicated in the Minute, and indeed those totalled in the three letters written by the individual directors, was £60,824.

15 minutes after the meeting referred to in the previous paragraph, there is then a minute of the trustees of the EBSF (wrongly referred to as a meeting of the Board of Directors) to the following effect:-

"1. Mr. Simpson drew attention to the fact that certain loans had been made to Windsor & Eton Football Club which now fell due for repayment. The meeting was advised that letters of request for repayment had been made by those concerned and that they had requested that repayment be made to East Berks Sports Foundation thereby enabling the Sports Foundation to make application for Gift Aid provision. It was agreed that subject to the receipt of such funds by the Sports Foundation, the Foundation would then apply the monies for charitable purposes relating to the provision of facilities for recreation or other leisure time activities either for the benefit of the general public or the benefit of those who, by reason of their youth, age, infirmity or disablement, poverty, social or economic circumstances have need of such facilities.

There being no other business the meeting was concluded at 8.30 p.m."

On the following day, 15 November, the EBSF wrote to the Club in the following terms. I imagine that the original letter was signed by Mr. Simpson since the letter bears his initials, but the copy that I was shown was not signed. It read:

"Re: Charitable Gift

East Berkshire Sports Foundation was founded on the 14^th August 2003. The object of the Foundation allows the Trustees at their discretion to provide assistance in the provision of facilities for recreation or other leisure time occupations either for the benefit of the general public or the benefit of those who by reason of their youth, age, infirmity or disablement, poverty or social and economic circumstances have a need of such facilities.

It may at the Trustees' discretion provide funding in the advancement of education and assist in the organisation and provision of facilities, which will enable and encourage young people to participate in physical recreation and sport.

Having considered the Club's activities we are satisfied that the Club provides a Community facility and assists young people in the areas of charitable provision and hand in this letter and in consequence it is prepared to make as initial grant of £50,000 in this furtherance of these objectives. [original wording not corrected].

A cheque for this sum is enclosed herewith and we would appreciate your acknowledgement of receipt ad confirmation that the funds will be used for the purposes outlined in this letter."

It is perhaps worth noting that although in the third paragraph of this letter reference is made to the trustees being satisfied of various matters as regards the operation of, and facilities provided by the Club, no mention was made of this in the Trustees' Minute of the previous day.

Bank statements for both the Club and EBSF indicate that on 18 November 2003, cheques were swapped for £50,000 in each direction. The EBSF account indicated that the balance before and after these transactions was £0. The Club's account was overdrawn in the amount of £2,973 before and after the transactions.

In November 2003 the three Appellants made Gift Aid declarations in respect of donations to EBSF in the aggregate amount of the loans identified in the various letters, repayment of which had been directed to EBSF, and not just in the amount of £50,000. The basic rate of income tax was refunded to EBSF. Whether the donors claimed or received any tax repayments at any higher rates of tax was not in issue.

In February 2004 there was a further similar exercise of the Directors calling for repayment of further loans. This was accompanied by the Minutes of the meeting of the Directors of the Club (again noting the calls for repayment but not actually resolving to do anything), and the Minutes of the trustees of EBSF (again referred to as the Board of Directors) these Minutes being prepared along the lines of those quoted in paragraphs 17 and 18 above. On the February occasion however, I appear to have no equivalent of the letter written by EBSF to the Club quoted at paragraph 19 above, and it also appears that there were no swapped cheques for any amounts. Gift aid declarations were again made however for the total amount of the loans for which the Directors called for repayment, that total amount being £62,414.14.

Whilst Mr. Simpson said that he could not explain why cheques had not been swapped in relation to the balance of the loans meant to be settled as a result of the November 2003 exercise, and in relation to the total loans involved in the February 2004 exercise, it is interesting to see that this picture is accurately reflected in the accounts of EBSF at 22 September 2004. The Income and Expenditure Account indicates that EBSF received donations of £123,339.60 (that being the exact amount of all loans required to be "repaid" to EBSF) and donations to the Club of an identical amount. The Balance Sheet by contrast shows a debtor, in the shape of "donations receivable" of £73,339.60 and it shows the Club as a creditor in the same amount. The difference between the two figures is of course the £50,000 that was settled in each direction. The picture emerging from the Accounts therefore is that:-

• whilst the letters from the various Directors asked for the loans to be repaid, and for the repayment amounts to be paid to EBSF, the loans over the £50,000 were treated effectively as having been assigned to EBSF;

• somewhat more dubiously EBSF was treating itself as owing the Club the equivalent balance of £73,339.60 though this is certainly not explained by the equivalent Minutes in February to those that I quoted in paragraph 18 above because neither of those Minutes actually resolved to distribute charitable funds to the Club, and there is no February equivalent of the letter that I quoted in paragraph 19 above. Equally obviously there were no further swapped cheques, certainly by the September balance sheet date, or else the balance sheet would not have been recording the debts in both directions;

• and the third significant thing that emerges from the Balance Sheet is that, because the entire balance of the total donations is shown as a matching debtor owed to the Club, it follows that EBSF cannot have made any distributions, out of the donations received, for any charitable objects other than the claimed charitable objects of funding the Club's renovations.

The subsequent HMRC enquiries

Following the two Gift Aid claims, both of which were initially accepted and amounts paid to EBSF, in August 2004 HMRC contacted EBSF and indicated that the claims were to be reviewed. Amongst the points made by HMRC was that they wanted to see evidence not only of the receipt and banking of the gifts, but also evidence of the receipt and banking of the repayment of tax. That latter point does incidentally focus attention on quite what happened to the repayment of tax, because it seems odd that the Income and Expenditure Account of EBSF dated 22 September 2004 made no reference to the additional receivable due or paid to EBSF, and to the issue of what happened to it.

Following a considerable number of exchanges of correspondence between Mr. Simpson and HMRC, it became clear that HMRC were not satisfied that the donations made to EBSF had ranked as "qualifying donations to charity". Before listing the numerous points that are in dispute between the parties, I ought first to mention that at some time it appears that HMRC contacted the Charity Commissioners, in an effort presumably to secure their support in contesting the claims. This approach resulted in a Mrs. Murphy from the Charity Commissioners writing to Mr. Simpson at EBSF in the following terms. I should first explain that by the time Mrs. Murphy wrote to Mr. Simpson on 5 February 2007, Mr. Simpson had concluded that, with all the difficulties that he had had with HMRC, and perhaps also because the claimed charity had either performed (or failed to perform) its intended function of re-circulating the monies that had been applied in improvements to the Club, EBSF should be wound up. The letter from Mrs. Murphy was as follows:-

"Thank you for your letter dated 24 January.

The issue has always been the extent to which the funds have been applied for charitable purposes for public benefit. In this respect it would appear that the funds were applied in favour of a non-charitable body for the improvement of its facilities for non-charitable purposes.

That those facilities may have in part been made available for junior and youth football does not make it charitable, since it is provided for the benefit of the Football Club itself. Further, a substantial part of the funds were spent on improvements to spectator facilities at the ground which in any event could not be regarded as being provided in the interests of social welfare.

I note that you were going to propose that the Trust be wound up. Please could you update me on this? Even if the East Berkshire Sports Foundation is to be, or has been, wound up then, insofar as the funds were ever held for a charitable purpose, the question of restitution of funds which have been applied for non-charitable purposes would remain.

However, it would appear that the funds have never been held for charitable purposes. Rather it would appear that the Foundation has merely acted as a conduit for funds to the Football Club. Funds were originally advanced by way of loan to the Football Club. The loan was noted as repaid but was immediately advanced to the Football Club by way of donation through the Foundation. It would appear that the purpose of the donation was to provide facilities at the Football Club which were not charitable. Accordingly, it would appear the funds were never held for charitable purposes. In those circumstances the question of the potential liability of the trustees for restitution of the funds would not apply.

If the Foundation has now been wound up we will immediately remove it from the Register of Charities. Otherwise we propose to remove the East Berkshire Sports Foundation from the Register on the basis that it has never operated as a charity.

In accordance with our usual procedure you have six weeks from the date of this letter in which to supply us with additional information, or evidence of argument which demonstrates why you feel a decision to remove the Foundation from the Register is wrong.

I am sending a copy of this letter to the Inland Revenue at Bootle for information. The Inland Revenue is a "person affected" by the registration of a charity.

I look forward to hearing from you.

Yours sincerely,"

On 12 March 2007 the trustees resolved to wind up the EBSF. At that point it was said to have no creditors or debtors and to have just £289 in hand and that amount was said to be about to be transferred to a charity or other body with similar objects.

HMRC remained of the view that tax had wrongly been refunded to EBSF, and assessments were made in 2005 and 2008 to recover the tax that had been repaid. The explanation of the 2008 assessments is that those made in 2005 had been made in the name of EBSF. Mr. Simpson contended that as EBSF had been wound up and no longer existed, and had had no assets when it was wound up, the assessments fell away. Although HMRC contended that assessments on EBSF were in effect assessments on the trustees, HMRC issued new assessments in the name of each of the former trustees, so that regardless of whether the former assessments automatically encompassed the trustees or not, there would be valid assessments on the trustees.

The relevant law

There is little need here to refer to any aspects of charity law, though I will endeavour to address these in giving my decision.

The legislation that I must quote, however, is the tax provision contained in section 25 Finance Act 1990, which deals with qualifying donations to charity in the following terms.

"(1) … a gift to a charity by an individual ("the donor") is a qualifying donation if:

(a) it is made on or after 1^st October 1990,

(b) it satisfies the requirements of subsection (2) below, and

(c) the donor gives an appropriate declaration in relation to it to the charity.

(2) A gift satisfies the requirements of this subsection if:-

(a) it takes the form of a payment of a sum of money;

(b) it is not subject to a condition as to repayment;

(c) …

(d) …

(e) neither the donor nor any person connected with him receives a benefit in consequence of making it or, where the donor or a person connected with him does receive a benefit in consequence of making it, the relevant value in relation the gift does not exceed………£250;"

The points in dispute

There are a considerable number of points in dispute. Rather than list the Appellants' contentions and the Respondents' contentions, I will list all of the points in dispute, since it will be readily apparent in most cases what each party contends in relation to the particular point. Those points in dispute are as follows:-

• The Respondents allege that on a true view of the facts, there were never Directors' loans to the Club, but that the amounts provided in cash and the amounts spent in paying suppliers and contractors were effectively gifted to the Club. In the light of this there were no loans that could be assigned to EBSF, or loans the repayment of which could be directed to be paid to EBSF.

• The Respondents contend that if there were Directors' loans, then because section 25 Finance Act 1990 requires a qualifying donation to take the form of a "payment of a sum of money", the mechanics adopted in this case involved no payment of a sum of money. The Respondents contend that apart from the £50,000 dealt with by the swapped cheques, and covered by the letter quoted in paragraph 19 above, the only basis whereunder EBSF can have ended up with neither assets nor liabilities would have been for the mutual debts to have been set-off against each other such that there would have been no payment of money at all. In relation to the £50,000 I was referred to the fairly old case of Albert Lee v. CIR 25 TC where a covenantor was held not to have paid monies due under a seven-year covenant to the extent that the monies were immediately lent back by the covenantee. That authority apart, the Respondents conceded that if a donation took the form of an assignment of a debt and that debt was satisfied in cash, there would then be a payment of a sum of money that could rank as a qualifying donation in the hands of the assignor. More clearly still, there could be a qualifying donation if the donor did not as such assign the debt but directed the debtor to repay by paying to the charity, and the debt was then discharged by a money payment.

• It was contended that the Appellants also failed to satisfy the conditions of section 25(2) Finance Act 1990 because they derived a benefit from their alleged gifts, in that the subsequent donation to the Club apart, the Club could not have paid off the Directors' loans because the Club was in an overdraft position at its bank, both before and after the swap of the £50,000 cheques. The Appellants contended that the value of the Club's land meant that the Club had some considerable net worth so that in the final analysis of a sale of the Club's land the full debts could have been discharged even if the distributions had not been made by EBSF to the Club.

• There was a suggestion by the Respondents that to some extent the Accounts and some of the paperwork relating to the transactions that I have summarised above may have been written or crafted to deal with the arguments being mounted by HMRC from August 2004 onwards.

• The Respondents argued that the Club's First team participated in a semi-professional League and so could not be classed as amateur footballers. The Appellants contended that since all the players were either full-time students, or engaged in full-time employment outside soccer, and they were only paid amounts to cover assumed expenses, the First team and certainly the other two teams were amateur. On reflection, the whole significance of this debate now escapes me, since "amateur" status is only referred to in the 2006 Act, which was not in force. In giving my decision however I will deal shortly with the status of the footballers and its relevance in relation to both the 1958 and 2006 Acts and their respective tests.

• There was a dispute about the relationship between the Club and EBSF and to the issue of whether EBSF could legitimately have distributed money to the Club even if the Club itself did not have objects that could have enabled it itself to rank as a charity. This dispute was somewhat influenced by the content of the letter from Mrs. Murphy of the Charity Commission which suggested that because EBSF had always been designed only to be a filter for payments to a non-charity, EBSF itself was properly to be regarded as never having been a charity.

• The Appellants contended that because EBSF had been wound up and no longer existed, and had had no assets when it was wound up, the tax assessments could not be satisfied.

• The Appellants also contended that the tax assessments could not be recovered from the Trustees of EBSF because the provisions of Clause 12 of the Trust Deed exonerated the trustees from liabilities, save where they had been found guilty of some fraud or dishonesty. Since the Respondents had specifically confirmed that no such claim of fraud or dishonesty was made, the Trustees claimed that they were protected by Clause 12.

• In any event action to restore assets to a Charity could only be instituted by the Charity Commissioners and dealt with in the relevant Tribunal, so that the Special Commissioners had no jurisdiction in relation to this matter.

My decision

Were there directors' loans at all?

It is difficult to ascertain whether the initial spending by the three benefactors was designed to make outright gifts to the Club, or was always meant to result in there being indebtedness owing by the Club to the Directors. The fact that EBSF was only formed in 2003, when some of the spending dated back to 1998 seems curious, and it is also significant that at some unspecified time, but nevertheless at a time considerably later than 1998 when Mr. Simpson's spending appeared to commence, Mr. Simpson was considering the possibility of securing relief under some sponsorship route. This does not necessarily preclude the notion that, prior to the sponsorship donations being made, the monies would initially be advanced as a loan, but outright donations would perhaps seem more natural to those contemplating seeking some sort of business deduction for sponsorship payments.

Another factor that slightly confuses Mr. Simpson's claim that all amounts were advanced by way of loan, is that the figure for long-term creditors in the 31 May 2003 Balance Sheet discloses that those creditors had actually marginally fallen during the year, notwithstanding that the spending was continuing and the charitable donations were not to be circulated and made until November 2003. This feature is further confused by some inexplicable figures in Note 9 of the same accounts, which appear to give very different figures for the long-term creditors.

Notwithstanding these elements of confusion, Mr. Simpson said that the creditors figure in the May 2003 accounts did include all the liabilities to the directors. Since the accounts figure exceeded the spending, it is possible that the slight reduction in the figure, as against the 2002 figure, resulted from other long-term creditors being reduced by more than the directors' loan accounts were increased, and so with some hesitation I accept that the directors had advanced their monies on loan account. On account of the various oddities that I have referred to however, I also note that a seed of doubt has been cast over the Appellants' claims even at this early stage of the decision process.

Did the donations take the form of a payment of money?

There are a number of points implicit in this question. It might be worth commencing with what seems to me to be the strict legal position, which is that, particularly when the word "payment" is directly coupled with the words "of a sum of money", payment requires money to be paid in cash, by satisfied cheque, or by electronic transfer or other similar means. I think that where a debt is assigned, say to EBSF, and many months or years later the assigned debt is paid off, it is impossible to say that the donation took the form of a payment of money. The donation took the form of the assignment of a debt, and the later remote payment was not the gift at all.

Thus in the present case, addressing the alleged gifts, other than the £50,000, whilst the letters from the various Directors suggested that they were calling for immediate repayment and directing that the amounts should be paid to EBSF (rather than strictly assigning the debts at all), the balance of the loans in excess of £50,000 were not repaid. The September 2004 accounts of EBSF referred to debtors, namely the balance of the amounts after the £50,000 paid by cheque, as owing to EBSF following the Directors' letters (which must thus have taken effect as assignments), and a corresponding credit was shown to be owed to the Club, following some sort of implicit distribution for which there was no documentary support. On the assumption (which seemed to be so) that further cheques were never exchanged, these debts were presumably extinguished or satisfied by set-off, in that when it was wound up, the charity was said to have no remaining assets and liabilities. So the most that can be said is that the effect of the Directors' letters, beyond their effect on the initial £50,000, was to assign loans owed by the Club to EBSF that were acknowledged in its September 2004 accounts, and implicitly thereafter satisfied by set-off. The result of that is that nothing, beyond the £50,000 was ever actually paid by anyone as a sum of money.

There is indeed further confusion in that the September 2005 accounts of EBSF show the broadly similar amounts to the debtors and creditors reflected in the September 2004 accounts, but by September 2005 the amounts are shown as a debtor (owed presumably by the Club) matched by a credit to the general fund of the charity. Whether by that point, the distribution to the Club by EBSF had been reversed or it was acknowledged that the liability to the Club reflected in the 2004 accounts of EBSF had been mistaken, I have no idea. Equally I say that it is only as a matter of cautious inference that I concluded above that at some point, by the time EBSF was wound up, there had been debts in both directions and that they had been settled by set-off. Whatever the position was, I agree with the Respondents that, leaving aside the £50,000, there was no other payment of a sum of money. I also agree with the Respondents that I can also find no trace whatever of the tax refunds that were initially granted to EBSF. They are neither shown in its accounts, nor reflected in any way as additions to income in its income and expenditure accounts, nor reflected as further distributions.

I should mention that two of the authorities to which I was referred deal with the old question of whether a debtor was to be treated as having paid bank interest when an amount was debited against the debtor in its account at the bank (i.e. before the legislative change that deemed there to have been payment in that situation in the case of companies), and I did not find those authorities to be of any relevance in this case.

I consider that the position is different as regards the £50,000. The Respondents conceded that if a gift took the form of a direction by a creditor to his debtor to repay a debt and to pay the money to EBSF, that would constitute a payment of a sum of money. To be legally pedantic, I think that the position might well be technically different if the creditor assigned the debt, and then as a separate matter the debt was later discharged, though in practice the two might be treated as having the same effect. The facts as regards the £50,000 are much closer to the position that the Directors called for immediate repayment to be made, and to be made to EBSF. As regards the £50,000 element, this was then paid immediately by cheque, and so there was a "payment of a sum of money". I agree with the assumption that for the purposes of section 25, it is not fatal that the money payment is not actually made by the donor himself, but rather procured by him.

The next question is thus whether this apparent result as regards the £50,000 is undermined by the case of Albert Lee v. CIR 25 TC 485, where payments by a covenantor under a 7-year covenant were deemed not to have been made because the covenantee immediately lent all but £100 of the money back. I am inclined to think that that is a very special case. Reserved benefit issues were particularly sensitive in relation to the "pure income profit" requirement of annuities and annual payments, and the Lee case seems to me to have been influenced by that consideration. It is very noteworthy that in the period before the enactment of the law in relation to qualifying donations to charities, it was extremely common for covenantors under 4-year covenants to make the first covenanted payment and simultaneously to lend an amount equal to the remaining three annual payments to the charity, with a view to the remaining covenanted payments being contra'ed against partial and final loan repayments. There are of course countless other situations where money flows in two directions are settled by swapped cheques, and it is usually accepted that there have then been payments in both directions. Thus, as regards the £50,000, I consider that the Directors did to that extent achieve their object of making a donation that would take the form of a payment of money (it being irrelevant that the payment was not actually made by the Directors themselves).

Did the Directors, in procuring the payment of the £50,000, fail to satisfy the condition in section 25(2) that they must not receive any benefit in consequence of the making of the donation?

I consider that if the Club had been unable to repay the Directors' loans, but for the distribution by the charity, then the Directors would have been at risk of failing this test. On the reasoning that the value of the Club's premises considerably exceeded the amount of its debts, which Mr. Simpson asserted to be the case, it seems to me that the Directors probably do not fail to satisfy this condition. I accept however that this point is finely balanced. I can well imagine that, on a going concern basis, the value of the land might have been dubious, and I am not clear that banks would have re-financed the Directors' loans had they been called upon to do so. Furthermore, once the Directors had called for repayment of their loans, those loans were due for repayment, and I am not immediately clear that the company could be said to be in a position to repay its debts as they fell due, but for the matching distribution from EBSF. On balance however, and partly because this point is not central to my decision, I accept that the Directors could have secured repayment of their loans, absent the distributions from EBSF (albeit that this might have involved the winding up of the Club, and the sale of its land for other purposes).

Whilst it was not advanced in argument, there seems to me to be another somewhat odd ground, whereunder the Appellants could have argued that they received no counter-balancing benefit as a result of their donation. Had the simple mechanics that I set out in paragraph 15 above been adopted, of the directors making cash gifts to EBSF, which EBSF then paid to the Club so that the Club would repay the Directors' loans in cash, then the "reverse benefit" question that I have dealt with in the previous paragraph would obviously have arisen. But those were not the mechanics adopted. What actually happened is that the Directors made what might be described as "a painless donation", in that without putting their hands into their pockets afresh, they just mandated the repayment of the loans to EBSF, and thus they never actually received the benefit of having their loans repaid to them at all. And I find it very difficult to conclude that by making a donation in a manner that avoids the need to pay new money the Directors derived a benefit in that regard. It may have made the donation "painless", as I put it, but no-one derives a benefit himself when making a painless donation, and this mechanism eliminates the feature of the loans later actually being repaid to the Directors. Odd as this argument may seem, it does seem to me to answer the "reserved benefit" type challenge, were it needed. Indeed had the point been argued by the Appellants I might have thought that this feature would have explained the initial decision to adopt the odd mechanics and steps that were adopted.

Were the Respondents right to suggest that some of the paperwork had been crafted or modified to undermine points addressed by HMRC?

There are certainly some real oddities to the paperwork. Considerable attention seems to have been given to the drafting of the Trust Deed for EBSF, but that level of attention seems to have crashed when it came to writing the various letters and directions. The Accounts were all drawn up considerably in arrear and it is possible that there was an element of nurturing the Accounts to reflect later concerns. The Directors of the Club who met to note the calls for repayment of the Directors' loans appear to have forgotten to resolve anything. When the Trustees of EBSF subsequently met, they resolved to apply donations for charitable purposes only but they utterly failed to resolve anything about directing particular payments to the Club, or to address items of the Club's expenditure to which they could legitimately contribute. In the letter, written on November 15, reference was made to this and to the claim that the trustees had considered whether they might properly contribute to some of the expenditure of the Club. The concern is that the trustees seemed to have given absolutely no attention to that critical matter in their meeting on the very previous day.

There was a total lack of explanation as to how debts in excess of the £50,000 had been dealt with or settled, and as to what had happened to EBSF's recovery of tax from HMRC. The EBSF accounts in September 2004 appear to me to reflect the position that I would expect of matching debts in two directions for the balance of the assigned loans after the repayment of the £50,000, so that I am then at a total loss to understand how, by the preparation of the September 2005 accounts, the money owed to EBSF by the Club was said to be held in EBSF's general fund.

In general the paperwork ends up in a bit of a mess, and whether any of it was written after the events I do not know and I do not need to know. I will just mention two points. The first is that the bank account entries on 17 November 2003 are entirely consistent with the badly-written Minutes of 14 November, and the better-crafted letter of 15 November written by Mr. Simpson to the Club. Whether the letters were written before or after the cheques were swapped, they reflected the steps that the parties clearly contemplated on 17 November, though admittedly the improved wording of the letter of 15 November might have been written to bolster the case that the Appellants realised by August 2004 that they faced. Beyond that, since I consider that no further payments of money were made I do not need to consider the paperwork issue further.

Were the First team footballers "amateur"? Is this anyway relevant? If EBSF was a charity, could it make distributions to a non-charity? Was EBSF a charity?

Much of the Respondents' argument in relation to the charitable issues was geared to the question of whether the First team footballers were "amateur" players. Reference was also made to the provisions of the 2006 Act, which so far as I can see did not contain similar wording to that in the 1958 Act which significantly deemed its recreational purposes "to be, and always to have been, charitable". The provisions of the 2006 Act therefore seem to me to be largely irrelevant, though I will comment on whether the result would have been any different had that Act been in force in 2003 and 2004.

Should it be relevant, which I think it is not, I consider that the First team players in the Club were amateurs and not professionals. The 2006 Act admittedly treats the promotion of amateur sport as a legitimate charitable object, but there is the critical requirement that the promotion of such sport be for the public benefit, and it seems to me that even if the 2006 Act had been in force in the earlier years, the great likelihood is that the distributions to the Club to meet all of the development expenditure would have failed the public benefit test, albeit that this "public benefit" condition is being evolved currently.

This case must, however, be governed by charity law in force in 2003 and 2004, and I consider that Mr. Simpson was thus right to craft the objects of EBSF very much in terms of tracking the provisions of the 1958 Act. That Act concentrated principally in promoting leisure-time activities and recreation in order to "improve the conditions of life for the persons for whom the facilities are primarily intended", and those persons are said principally to be "persons [who] have need of the facilities by reason of their youth, age, infirmity or disability, poverty, or social and economic circumstances", or the facilities are meant "to be available to members of the public at large".

There is still available on the Charity Commissioners web-site (www.charity-commission.gov.uk, by inserting the word "Sport" into the right top search box) a copy of the 2003 edition of the Commissioners' publication RR11, which summarised the then views of the Commissioners of the permissible scope of charitable contribution to sport. This is a long document but it emerges very clearly from it that the emphasis must be on providing facilities for the categories of people summarised in paragraph 43 above, or that in the case of "the public", the attention must be to allowing membership to all. In the relevant context of football, therefore, the right approach, for a Club to be charitable, was that it had to be open and available to all, regardless of ability, and the raison d'etre of the club had to be that of providing a sporting facility for all. It was then acknowledged that sport was competitive so that clubs would often want to compete and to form teams, but the clear emphasis was that the team element had merely to be an incident of the provision of sport for all generally. The teams were there to foster the ambition of the members generally to improve and to join the teams. The Club that would have no chance of demonstrating that its whole object and activity was a legitimate charitable one, was the club where first and foremost the club produced a team that played competition football, and that was the key objective of the club. Even if such a club might open some of its activities to the public, and as the Club did here, offer coaching to all, the club that was principally designed to run a competitive football team (rather than just offer team games to foster the general aims of the club to promote sport equally for all) would not qualify as a charitable organisation.

The first step in the key element of my decision is thus that RR11 should be followed in this case, and in terms of RR11, the Club's emphasis and whole rationale was the wrong way round. The Club was principally a club for the First team and the other teams, and its principal object was to compete in outside leagues, and opportunities offered to the public were secondary. They needed to be the prime driver, and team activities needed to be an adjunct of the public benefit.

The donations made in this case, and in particular the £50,000, which was the only payment of a sum of money that potentially qualified as a charitable donation, was made to EBSF and not to the Club, and I must now address whether EBSF itself was a charity. The fact in other words that the Club was not, and could not have been, a charity is not necessarily fatal to the Appellants' case. I must also address the related question of whether it would be legitimate for a charity to distribute monies to a club that operated like the Club in this case, whose objects could not in my view be charitable.

It seems to me that it would be legitimate for a charity designed to promote recreation to make distributions to an entity such as the Club in this case. However to satisfy the charitable requirements, the trustees would have had to give particular attention to whether the items for which they were making contributions fostered public benefit in the requisite manner. Thus if the trustees had met on 14 November 2003 and had specifically addressed the different activities of the Club, and had concluded, say, that the provision of training facilities for all by the club were targeted primarily for public benefit, then the trustees might legitimately have made a distribution specifically to pay for those facilities. That would have been consistent with their charitable objects and status, and would have been a proper distribution.

In the present case the trustees Minute of 14 November 2003 (the only one that preceded the £50,000 payment) did not address making a distribution to the Club as such, and it certainly did not look to those aspects of the Club's activity which were targeted at the public generally. The letter of 15 November came much closer to doing this, save for the two deficiencies that it referred to the trustees having considered these relevant aspects, when it appears that the trustees did not address them, and, far more damagingly, it is actually obvious that EBSF aimed to meet all the costs for which the Directors had made loans. Accordingly, the proposition that consideration was given to which costs a charity could properly meet, was not made out, and as it is obvious that much of the improvement work was designed to lift the fortunes of the Club as a football club, and particularly to halt and reverse the decline in the performance of the First team that had seen it drop several Leagues, this was not the right approach for a charity to take.

This takes me to the question of whether EBSF ranked as a charity, some or all of whose distribution had been in breach of charity law, or whether because its whole rationale was to be a filter to channel monies to a non-charity, the letter from Mrs. Murray of the Charity Commission was right to say that EBSF had never acted as or been a charity. The fundamental point, it seems to me, is that, whatever the objects of the charity were stated to be in its trust deed, the real and clear object was to filter the totality of donations that it received to the Club in order to meet all the costs that had been met out of the Directors' loans, and thus enable those loans to be repaid. If that object had been made clear to the Charity Commission in advance, I cannot believe that the Commission would have accepted that EBSF was a charity at all. In my view it was not a charity, and this appeal is thus dismissed on that more fundamental ground, rather than on the more technical and less meritorious ground that in some way, that could with hindsight easily have been corrected, the precise mechanics failed to satisfy the conditions of section 25 Finance Act 1990.

Can the Appellant trustees be assessed to tax, now that EBSF has been wound up, and are the Trustees protected from liability by Clause 12 of the Trust Deed, that exonerated them from liability save where they have been guilty of some deliberate act of wrongdoing?

Whilst I note that HMRC have conceded that at no point have the trustees been guilty of any sort of deliberate act of wrong-doing, the answers to the two questions that I have just posed are absolutely clear to me, and they are respectively Yes and No. Questions along the lines of whether tax chargeable on EBSF can be recovered from its trustees are entirely wrong because it is the trustees of any trust that are always liable for the trust tax, regardless (unless there is some statutory limitation) of the level of trust assets. It is also wrong of course to treat the trustees as being distinct from EBSF because when it was in existence, the situation was simply that various trustees held assets with a responsibility to deal with them in accordance with trust and charity law. There was no distinct entity in the shape of EBSF as some sort of independent taxpayer.

It is equally clear that Clause 12 of the Trust Deed could operate only to preclude beach of trust actions by beneficiaries and the Charity Commissioner against the trustees, save in the case of wilful wrongful acts, and no clause in the Trust Deed can possibly eliminate a liability to taxation plainly imposed on the trustees. Furthermore, I do have jurisdiction to deal with the liability of the trustees to taxation, which again the Appellant contested.

Conclusion

I thus conclude that all the assessments made on the trustees are good and that this appeal fails. Whilst the proposition was made out (just, and with considerable hesitation on a number of aspects) that the donation of £50,000 satisfied the mechanical requirements of section 25, this was certainly not demonstrated as regards the balance of the donations, and the appeal falls in all respects because the donations were not made to charity.

Whilst in my view this appeal fails by quite a margin, I still confess that the Appellants should nevertheless be applauded for their selfless generosity, and I also acknowledge that several of the points have been far from clear cut, indeed even the very difficult issue of the proper approach to charitable contributions to sport in 2003/2004.

HOWARD M NOWLAN

SPECIAL COMMISSIONER

RELEASED: 19 January 2009

SC 3052/2008

SC 3107/2008