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Zoological Society of Wales v Customs and Excise [2004] UKVAT V18786 (08 October 2004)

18786

VALUE ADDED TAX – exempt supplies – supplies by an eligible body of the right of admission to a zoo – one member of Appellant's Council of Management held a debenture from the Appellant giving the right to repayment and interest which was always waived and also received rent for the letting of a garage and a small pension in respect of previous service with the Appellant's predecessor company - whether Appellant managed and administered on an essentially voluntary basis by persons who had no direct or indirect interest in its activities – yes – appeal allowed – EC Sixth Council Directive (77/388/EEC) Art 13A(1) (n) and 13A(2)(a) second indent – VATA 1994 S 31 and Sch 9 Grp 13 Item 2(a) and Note (2)(c)

LONDON TRIBUNAL CENTRE

THE ZOOLOGICAL SOCIETY OF WALES

Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE

Respondents

Tribunal: DR NUALA BRICE (Chairman)

MR R L JENNINGS FCA FTII

Sitting in public in London on 1 and 2 July 2004

Dario Garcia of Messrs Ernst & Young LLP, for the Appellant

Owain Thomas of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appeal

The Zoological Society of Wales (the Appellant) appeals against a decision of Customs and Excise dated 11 October 1996 refusing to repay an amount of output tax which the Appellant claimed was not due. The reason for the refusal was that Customs and Excise were of the view that the supplies made by the Appellant were standard-rated supplies. The Appellant appealed because it was of the view that its supplies were exempt supplies as they were supplies made by an eligible body of the right of admission to a zoo and the body was managed and administered on a voluntary basis by persons who had no direct or indirect interest in its activities. We were informed that the amount of tax at issue in the appeal was in the region of £1M for the period from 1 January 1990 to 4 June 2003.

The legislation

Article 13A(1)(n) of the EC Sixth Council Directive (77/388/EEC) (the Sixth Directive) provides that member states shall exempt:

"(n) certain cultural services and goods closely linked thereto supplied by bodies governed by public law or by other cultural bodies recognised by the Member State concerned".

Article 13A(2)(a) provides:

"Member States may make the granting to bodies other than those governed by public law of each exemption provided for in (1) … (n) of this Article subject to one or more of the following conditions:

- they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied,

- they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned".

With effect from 1 June 1996 these provisions were implemented in the Value Added Tax Act 1994 (the 1994 Act). Section 31 provides that a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9. Item 2 of Group 13 of Schedule 9 specifies:

"2. The supply by an eligible body of a right of admission to-

(a) a museum, gallery, art exhibition or zoo …

Note (2)(c) provides:

"(2) For the purposes of item 2 "eligible body" means any body (other than a public body) which - …

(a) is precluded from distributing, and does not distribute, any profit it makes;

(b) applies any profit made from supplies of s description falling within item 2 to the continuance of the improvement of the facilities made available by means of the supplies; and

(c) is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities."

The issues

The Appellant is a charity and runs the Welsh Mountain Zoo. It argued that the supplies it made from 1 January 1990 to 31 May 1996, in the form of admission charges to the zoo, were exempt supplies relying on the provisions of Article 13A(1)(n) of the Sixth Directive which, it argued, had direct effect but without the condition in Article 13A(2)(a) and that from 1 June 1996 to 4 June 2003 the supplies it made were exempt supplies relying on the provisions of item 2(a) and Note (2)(c) of Group 13 of Schedule 9 of the 1994 Act.

Customs and Excise argued that, for the period from 1 January 1990 to 31 May 1996, the provisions of Article 13A(1)(n) did not have direct effect as they were not unconditional or sufficiently precise relying upon Becker v Finanzamt Münster-Innenstaat [1982] ECR 53 and Glastonbury Abbey v Commissioners of Customs and Excise [1996] V&DR 307 at 320 para 54. They also argued that, for the period from 1 June 1996 to 4 June 2003, the Appellant was not an eligible body within the meaning of item 2(a) of Group 13 of Schedule 9 because Mrs Margaret Jackson, one of the members of the Council of Management of the Appellant, had a financial interest in its activities because she held a debenture granted by the Appellant under which she was entitled to repayments and interest; was paid rent by the Appellant for the use of one of her garages; and received a small pension from the Appellant in respect of her employment with the Appellant's predecessor company. That meant that, although the Appellant was managed and administered on a voluntary basis, it was not so managed and administered by persons who had no direct or indirect financial interest in its activities.

It was agreed that after 5 June 2003 the supplies made by the Appellant were exempt supplies because Mrs Jackson retired from the Appellant's Council of Management on that date.

Thus the issues for determination in the appeal were:

(1) whether, for the period from 1 January 1990 to 31 May 1996, the provisions of Article 13A(1)(n) had direct effect but without the condition in Article 13A(2)(a); and

(2) whether, for the period from 1 June 1996 to 4 June 2003, the fact that Mrs Jackson, one of the members of the Council of Management of the Appellant, held a debenture by the Appellant, was paid rent by the Appellant for a garage, and received a small pension from the Appellant meant that the Appellant was not managed and administered on a voluntary basis by persons who had no direct or indirect financial interest in its activities within the meaning of Note (2)(c) of Group 13 of Schedule 9 of the 1994 Act.

Application to reserve an issue

At the commencement of the hearing Mr Garcia, for the Appellant, applied to reserve issue (1) for argument at a later date if the Appellant were to be unsuccessful with respect to its arguments relating to issue (2). If the Appellant were to be successful with respect to its arguments relating to issue (2) then Customs and Excise agreed that they would allow exemption back to 1 January 1990 pursuant to the provisions of Public Notice 701/47 (June 1996). As we have decided that the Appellant is successful on issue (2) this decision applies also to the period from 1 January 1990 to 31 May 1996 and issue (1) does not now arise.

The evidence

A bundle of documents was produced by the parties. Oral evidence was given on behalf of the Appellant by Mr Chris Jackson, the Company Secretary and Administrative Director of the Appellant.

The facts

From the evidence before us we find the following facts.

1963 – 1983 - The origins of the Zoo – the rent and the pension

The Welsh Mountain Zoo and botanical gardens at Colwyn Bay Wales (the Zoo) was founded by Mr Robert Jackson and opened in May 1963 with the assistance of his wife, Mrs Margaret Jackson, and his three sons Mr Nick Jackson, Mr Tony Jackson and Mr Chris Jackson. The Zoo was then owned by Zoological Exhibitions Limited which was a company wholly owned by members of the Jackson family including Mrs Jackson and her three sons. During this time Mrs Jackson and Mr Tony Jackson worked for Zoological Exhibitions Limited.

In May 1969 Mr Robert Jackson died tragically in a fishing accident. The family rallied together; Mr Chris Jackson joined the business immediately and Mr Nick Jackson undertook training at two zoos. Mrs Jackson became managing director and in due course Mr Nick Jackson took responsibility for the animals; Mr Tony Jackson for the gardens; and Mr Chris Jackson for finance and marketing.

Mrs Jackson's residence is near to the Zoo and it includes a disused garage. Since the 1970s this has been used for locust breeding in order to provide animal feed. For this Mrs Jackson receives a nominal annual rent. We were not informed of the amount of the rent in earlier years. However, we were informed that the amount of the rent in 1994-95 was £492 and it increased to £516 in 2002-03. The arrangement for the rent was not recorded in writing and the practice of paying it continued after 1983 when the Zoo was transferred to the Appellant

On 18 September 1981, on her sixtieth birthday, Mrs Jackson retired as managing director of Zoological Exhibitions Limited. That company had no formal pension arrangement but it was agreed that a modest pension should be paid to Mrs Jackson to recognise her service both in establishing the zoo and also in maintaining it after the death of her husband in 1969. The arrangements for the pension were not put into writing and the practice of paying it continued after 1983 when the Zoo was transferred to the Appellant. We were not informed of the amount of the pension in earlier years but we were informed that the amounts paid as pension to Mrs Jackson increased from £5,199.96 in 1994-95 to £5,988 in 2002-03.

1983 - The transfer to the Appellant – the debenture

It had been the intention of Mr Robert Jackson so to develop the Zoo as to give it a serious role in species conservation, public education and scientific research. Also, he wanted it to be owned by a charity. These ideas were taken up by the family again in the 1980s when they decided to found a trust to take over the Zoo, even though this meant giving up ownership of the family company. Prominent local citizens in public and academic life were approached to form a Council of Management (the board of trustees) and the Appellant was duly formed in 1983.

The Appellant was incorporated on 10 June 1983 as a private company limited by guarantee and not having a share capital. It is a registered charity. It was registered for value added tax as from 11 July 1994 as the representative member of a group comprising it and its subsidiary trading company called the Zoological Society of Wales Trading Company Limited whose activities are not at issue in this appeal.

On 30 September 1983 Mrs Jackson and her three sons (called the vendors) entered into a share sale agreement with the Appellant under which the Appellant acquired the whole issued share capital of Zoological Exhibitions Limited in consideration of the certified value of the assets of that company. The consideration for the sale of the shares was to be satisfied by the issue of a debenture by the Appellant to each of the vendors securing the amount of the certified value of the assets; for each vendor the amount of his or her debenture was the same proportion of the total certified value of the assets as his or her individual shareholding was of the total shareholding. Since 1983 the Appellant has operated the Zoo

On 30 December 1985 the certified value of the assets of Zoological Exhibitions Limited had been established and the Appellant granted a debenture in favour of Mrs Jackson to secure £25,902.82. (Other debentures were granted to the three sons up to a total for all four of £150,000). The debentures gave a right to interest at the rate of 2% per annum above the base rate of National Westminster Bank Plc and a right to repayment by twenty equal half yearly instalments beginning on 31 December 1993. If the Appellant failed to pay any interest due then the debenture holder was entitled to give notice after which all the secured sums became payable. Mrs Jackson always waived any payment of interest or repayment. The debentures charged by way of legal mortgage all of the freehold and leasehold property vested in the Appellant and by way of specific charge other assets including book debts and by way of floating charge all the undertaking and other property and assets of the Appellant.

The structure of the Appellant

The Memorandum of Association of the Appellant provides that the objects for which it is established are "to advance the education of the general public by increasing knowledge, interest and appreciation of animals and plants" and "to provide and assist in the provision of facilities for recreation". The Memorandum gives the Appellant powers to breed and conserve animals of every type and to cultivate and conserve every category of plant. The Appellant also has power to make reasonable and necessary provision for the payment of pensions to or on behalf of employees or former employees and their wives, husbands and other dependants. Article 4 of the Memorandum of Association provides that the income and property of the Appellant shall be applied solely towards the promotion of its objects and no portion shall be paid or transferred by way of dividend, bonus or otherwise by way of profit to members of the Appellant and that no member of the Council shall receive any remuneration or other benefit in money or money's worth from the Appellant. However, a payment in good faith by the Appellant of interest on money lent or a reasonable and proper rent for premises demised to the Appellant could be made. Article 7 provides that on a winding up of the Appellant any surplus should not be distributed to members of the Appellant but should be given or transferred to some other charitable institution having objects similar to the objects of the Appellant.

The Articles of Association of the Appellant provide that no business may be transacted at a general meeting unless a quorum is present and usually three members personally present shall be a quorum. The Articles also provide for a Council of Management (the Council) the number of which is to be not less than three nor more than nine. The business of the Appellant is to be managed by the Council. At meetings of the Council three shall be a quorum. The Council shall elect a Chairman who is entitled to preside at all meetings of the Council at which he is present.

The Appellant's Council of Management (trustees)

The Council first met on 30 September 1983. The initial members of the Council (the trustees) were: Professor J M Dodd, Professor of Zoology at the University of Bangor; Councillor Ray Formstone; Mr Geoffrey Edwards, former Chief Executive of Colwyn District Council; Mr Ronald Jones, Head Teacher; and Mr Colin Jacobs, former Chief Planning Officer. Mrs Jackson was elected Chairman. By the time of the next meeting Mr Peter Morgan, the Keeper of Zoology at the National Museum of Wales in Cardiff had joined the Council. All provided their services for no reward. Since 1983 there has been a number of changes in the identities of the members of the Council.

In December 1988 Mrs Jackson stepped down as Chairman of the Council but remained a member of the Council. At that time an honorary and purely nominal title of President was created to recognise her contribution to the Zoo. This title does not appear in the Memorandum or Articles of Association and does not confer any legal position. Mrs Jackson's three sons are not members of the Council (and so are not trustees). Mrs Jackson is now an elderly lady and has not attended meetings of the Council since December 2000 nor recent annual general meetings of the Appellant.

The Report of the Directors and Financial Statements of the Appellant for the year ending on 31 March 2002 indicate that under the articles of association of the Appellant the directors were known as members of the Council and were its trustees for the purposes of charity law. In the Report they were referred to as trustees. Eight trustees served during that year including Mrs Jackson. The other seven trustees were very eminent individuals. The Report also indicated that during the year, in addition to receiving admission fees in respect of the Zoo, the Appellant also received grants (including one from the Wales Tourist Board), donations and legacies. Total incoming resources for the year was £667,447 and total resources expended was £565,772.

In June 2003 Mrs Jackson resigned as a trustee because of ill health and also because she was concerned that her position was preventing the Appellant's supplies being exempt for the purposes of value added tax. On 10 November 2003 Customs and Excise confirmed that from the date of the resignation the supplies of the Appellant became exempt.

The arguments of the Appellant

For the Appellant Mr Garcia argued that the Appellant was managed and administered on an essentially voluntary basis. The test was to be applied to the Council as a body and not to the individual members. As a member of the Council Mrs Jackson was always in a minority and if she had a disqualifying interest it could not change the nature of the Appellant. In any event the interest held by Mrs Jackson in the debenture was that of a creditor and was not an interest in the result of the activities. A debenture was a fixed and floating charge which gave the holder a proprietary interest in rem whereas an interest in the results of activities was a right in personam. Also the waiving by Mrs Jackson of the interest to which she was entitled under the debenture was not the behaviour of a person seeking profit Further, the pension and rent received by Mrs Jackson from the Appellant had no connection with the results of the activities of the Appellant. They would be payable irrespective of the results of the activities of the Appellant and even if the Appellant did not make an operating surplus.

Mr Garcia relied upon Customs and Excise Commissioners v Zoological Society of London (Case C-257/00) [2002] STC 521 at paragraphs 17 and 18 for the principle that it was necessary to have regard not only to all the words of Article 13A(2)(a) but also to the purpose of the provision. Mr Garcia also relied upon paragraphs 25 and 26 and argued that the small or token or nominal payments made to Mrs Jackson were not sufficient to deprive the Appellant of its essentially voluntary character or to justify the conclusion that the Appellant pursued a disguised commercial purpose; the Appellant was not a commercial undertaking and had no profit-making aim and did not aim to achieve profits for its members. He also relied upon paragraph 19 of the Opinion of the Advocate-General (for the principle that the relevant provisions had to be considered in their context so that the exemption applied where it was intended to apply); on paragraph 21 (for the principle that the purpose of the condition was to ensure that a formally non-profit-making organisation did not produce private profit for those who directed its activities); and on paragraph 30 (for the principle that the condition was designed to preclude those who ran the organisation from being in a position to further their own enrichment).

Mr Garcia also relied upon Glastonbury Abbey at paragraphs 32 to 52 and argued that the facts in this appeal were very similar to the facts in that appeal. He especially relied upon paragraph 50 and argued that Mrs Jackson was in the position of a creditor with a proprietary interest over the assets rather than in the position of sharing the results of the Appellant's activities. Finally, Mr Garcia relied upon Customs and Excise Commissioners v Bell Concord Educational Trust Limited [1989] STC 264 at 266g for the principle that it was necessary to look at the organisation and ask whether the services were provided for profit and that the answer to that question lay in the purpose, intention or motive of the organisation. He also relied upon the principle at 267d that the exemption should depend on a long-lasting and objective yard-stick rather than on a frequent review of the state of mind of those running the organisation.

Finally, Mr Garcia argued that if there were any ambiguity in the words of the national legislation then the provisions of the directive should prevail.

The arguments of Customs and Excise

For Customs and Excise Mr Thomas agreed that the Appellant was managed by the Council of Management which took the decisions of last resort concerning policy and direction. He relied upon Zoological Society of London for the principle that the members of the Council of Management had to manage and administer on an essentially voluntary basis and so must not have any financial interest in the Appellant. He argued that Mrs Margaret Jackson, who was a member of the Council of Management, had a direct financial interest in the activities of the Appellant as a result of the debenture she held, the rent she received and the pension she was paid because her continued ability to receive those payments from the Appellant depended on the results of the Appellant's activities. Mrs Jackson had an interest in ensuring that the results at the end of each year were sufficient to cover the amounts due to her.

First, Mr Thomas argued that the second indent of Article 13A(2)(a) had two separate components. The first was that the body concerned should be managed and administered on an essentially voluntary basis and that precluded the payment of remuneration for such management and administration. The second component was that the persons managing and administering the body should not have an interest in the results of the activities of the body. He argued that such an interest did not have to be linked to the performance of tasks relying upon Glastonbury Abbey at paragraph 49.

Mr Thomas went on to argue that Article 13A(2)(a) was an exclusion from an exemption and so should not be construed strictly. He relied upon Stichting Uitvoering Financiële Acties (SUFA) v Staatsecretaris van Financiën [1989] ECR 1737 for the principle that exemptions had to be construed strictly and on Blasi v Finanzamt München I (Case C-346/95) [1998] STC 336 at paragraph 19 of the judgment for the principle that exclusions from the exemptions should not be construed strictly. He argued that the construction of Article 13A(2)(a) should follow the general purpose of the Sixth Directive which was that tax should be charged on each transaction.

Finally, Mr Thomas argued that, as the phrase "the results of the activities concerned" should not be narrowly construed it should, in particular, not be confined to profits. Accordingly, the phrase included interests of any nature, including interests in the ownership of assets or ownership of beneficial interests in assets; interests in charges over assets such as a debenture, claims against the body by creditors, and interests in remuneration (whether by way of salary or pension); as well as shares of profits. For the principle that the phrase was not restricted to interests in profits he relied upon paragraph 18 of the judgment in London Zoological Society and the reference to "any other financial interest, even indirect". He also relied upon paragraph 17 of the same judgment and argued that the phrase "profits for their members" in that paragraph meant "personal rewards for their members". He argued that it was significant that in Article 13A(2)(a) the words "profit" and "profits" had been used in the first indent but the wider phrase "the results of the activities" had been used in the second indent. That indicated that the latter phrase had a different, and wider meaning, from just "profits". For a similar reason Note (2)(c) of Group 13 of Schedule 9 of the 1994 Act was also wider than a prohibition on profit-sharing as that was prohibited by Note (2)(a). Mr Thomas also relied upon paragraphs 26 and 27 of the judgment in London Zoological Society and paragraphs 25 and 26 of the Opinion of the Advocate General for the principle that management and administration on a voluntary basis was the same as not having a financial interest.

Reasons for Decision

What we have to decide in this appeal is whether the Appellant was, between 1996 and 2003, managed and administered on an essentially voluntary basis by persons who had no direct or indirect financial interest in the results of its activities. Customs and Excise accepted that the Appellant was managed and administered by the Council of Management of the Appellant, none of whom were remunerated, and so it was managed and administered on a voluntary basis. The only issue was whether the payments of the pension and rent to Mrs Jackson, and her entitlement to payment of interest and repayment under the debenture, meant that she had a direct or indirect interest in the results of the Appellant's activities.

We first comment on the facts surrounding the three payments.

The first payment arising in point of time (the 1970s) is the rent. There was no suggestion that the amount of this rent was other than a market rent; it was referred to as a nominal rent. In other words, there was no suggestion that the rent was higher than a market rent and so amounted to the extraction of profits. We therefore conclude that the rent paid to Mrs Jackson was consideration paid to her in return for her provision of the garage and was made on a commercial basis.

The next payment arising in point of time is the pension (1981). That was paid in consideration of Mrs Jackson's eighteen years employment (from 1963 to 1981) by Zoological Exhibitions Limited and was paid by Zoological Exhibitions Limited for two years before the transfer of the business to the Appellant. It was not paid for any services rendered to Zoological Exhibitions Limited between 1981 and 1983 nor for any services rendered to the Appellant after 1983. It was clearly a term of the transfer of the business to the Appellant that the pension would continue to be paid. It was not suggested that the amount of the pension was higher than the amount which would normally be paid for a person who had made such a significant contribution to the business as Mrs Jackson. We therefore conclude that the pension paid to Mrs Jackson was in consideration for the work she did for Zoological Exhibitions Limited; it was initially a liability of Zoological Exhibitions Limited and was taken over by the Appellant at the time of the transfer of the undertaking.

The final entitlement to payment in point of time was from the debenture (1983). In fact, no payment either of interest or repayment has been made by the Appellant to Mrs Jackson. The debenture was executed by the Appellant in consideration of Mrs Jackson's transfer of her shares in Zoological Exhibitions Limited to the Appellant; without the debenture the Appellant would either have had to pay the full price of the shares in 1983 or not have received them at all. The Appellant has benefited from having the shares since that date without having to pay any interest or repayments. It is the Appellant who has benefited from the generosity of Mrs Jackson and not Mrs Jackson who is benefiting from the Appellant.

With those comments on the facts in mind we turn to consider the arguments of the parties. We first consider whether Article 13A(2)(a) should be construed strictly. SUFA (1989) established that the terms used to specify the exemptions are to be interpreted strictly since they constitute exceptions to the general principle that value added tax is levied on all services supplied for consideration by a taxable person. Blasi (1998) established that, because an exception to an exemption subjects the transactions to which it refers to the general rule (that tax is to be charged on all taxable transactions), such an exception cannot be interpreted strictly. In this appeal the exemption in Article 13A(1)(n) is wide and the conditions in Article 13A(2)(a) narrow the scope of the wide exemption by restricting its application. Accordingly, we conclude that the conditions in Article 13A(2)(a) are not to be interpreted strictly.

Next we consider whether the phrase "the results of the activities concerned" means an interest in profits (as argued by the Appellant) or interests of any nature (as argued by Customs and Excise).

The most recent authority on the meaning of this phrase is London Zoological Society (2002). That case also concerned a zoo where none of the members of the council received remuneration. However, that zoo also had 400 paid employees, including a director-general and other directors who were not members of the council. The issue was whether the existence of the paid employees meant that the zoo was not managed and administered on an essentially voluntary basis. The Court of Justice held that the condition requiring a body to be managed and administered on an essentially voluntary basis referred only to members of the body designated in accordance with its constitution to direct it at the highest level and other persons who directed it inasmuch as they took decisions of last resort concerning policy, especially finance, and carried out the higher supervisory tasks and that the words "on an essentially voluntary basis" referred both to the composition of the organs entrusted with the tasks of managing and administering the body and the persons who actually directed it.

At paragraphs 17 and 18 of its judgment of the Court of Justice said:

"17. As for the interpretation of that extra condition, to the effect that a body availing itself of one of the exemptions in Article 13A(1) of the Sixth Directive must be managed and administered on an essentially voluntary basis, it follows from the legal context in which that condition occurs that the Community legislature wanted to make a distinction between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members … .

The aim of that condition is therefore to reserve the VAT exemption for bodies which do not have a commercial purpose, by requiring that the persons who participate in the management and administration of such bodies have no financial interest of their own in their results, by means of remuneration, distribution of profits or any other financial interest, even indirect."

It will be clear from what we have already said that we are of the view that Mrs Jackson had no financial interest in the Appellant by means of remuneration or distribution of profits. But did she have "any other financial interest, even indirect"? Here paragraphs 26 and 27 of the judgment are relevant and they state:

"26. In that respect it is apparent from the second indent of Article 13A(2)(a) of the Sixth Directive, as explained in para 17 of this judgment, that the condition laid down by that provision is intended to make a distinction between the activities of commercial undertakings and those of bodies having no profit-making aim, that is to say those not aiming to achieve profits for their members. The words "on an essentially voluntary basis" thus refer both, on the one hand to the composition in terms of membership, of the directing organs or, as the case may be, to the persons who actually direct without being designated by the constitution, and on the other hand, to the reward which the latter may receive, habitually or by way of exception, from the body concerned.

It is for the competent national authorities to determine, for each body in question and by means of an overall assessment, whether by reason of any contribution to the management of the body… by persons having a financial interest in it, the essentially voluntary character of the management or administration of a body can be accepted nor not."

Applying those principles to the facts of the present appeal we find that the activities of the Appellant are not the activities of a commercial undertaking but are the activities of a body having no profit-making aim, that is to say it does not aim to achieve profits for its members. We do not consider that Mrs Jackson receives any "reward" or any financial advantages from the Appellant because she provides or has provided commercial consideration for each of the payments made to her by the Appellant. Accordingly, we do not consider that Mrs Jackson had a financial interest in "the results of the activities" of the Appellant. However, even if Mrs Jackson were to be regarded as having a financial interest in the results of the activities of the Appellant, having made an overall assessment, and having borne in mind particularly the small amount of the payments made to Mrs Jackson by reference to the amount of the incoming resources of the Appellant, we are of the view that the contribution to the management of the Appellant made by Mrs Jackson did not affect the essentially voluntary character of the management and administration of the Appellant.

By following the principles established by the Court of Justice in London Zoological Society we can reach our decision without having to reach a specific finding as to whether the phrase "the results of the activities concerned" means an interest in profits or an interest of any nature. However, as arguments were put to us we briefly express our views.

Here, the first case cited to us was Glastonbury Abbey (1996) which was a decision of the Tribunal and, therefore, not binding on us. The main issue was whether a charity who had fourteen trustees, all of whom were unpaid, and eleven employees (including a Custodian and a Deputy Custodian) who were paid, was "managed and administered on an essentially voluntary basis by persons who had no direct or indirect interest … in the result of the activities concerned." The Tribunal found that the charity was managed and administered by the trustees together with the Custodian and the Deputy Custodian. Taking all relevant factors into account the Tribunal concluded that the charity was managed and administered on an essentially voluntary basis even taking into account the two salaries paid to the Custodian and the Deputy Custodian. The Tribunal then went on to consider whether any of the persons involved in the management and administration of the charity had any direct or indirect interest in the results of its activities. At paragraph 50 the Tribunal said:

"Once again I have construed this phrase by reference to the Sixth Directive. In the English text the words are "persons who have no direct or indirect interest, by themselves or through intermediaries, in the results of the activities concerned". In the French text the words are "par personnes n'ayant, par elles-même ou par personnes interposés, aucun intérêt direct or indirect dans les résultants de l'exploitation". It seems to me that, in the context of the Article in which these words appear, the reference to "the results of the activities" and to "dans les résultants de l'exploitation" are references to the sharing of profits or gains of the organisation and not to the receipt of a salary. A salary is paid before "the result of the activities" is known. Also, the amount of a salary is not related to the "result". A person in receipt of a salary is more in the position of a creditor of an organisation than an owner, shareholder or partner."

That decision concerned the payment of salaries, which is not in issue in this appeal. However, the more recent judgment of the Court of Justice in Kennemer Golf and Country Club v Staatsecretaris van Financiën (Case C-174/00) is more relevant. In that case the main issue was whether the golf club was a non-profit making organisation if it made profits but did not distribute them to its members. The Court of Justice held that it was. At paragraphs 44 to 51 of his Opinion Advocate General Jacobs considered the concept of a non-profit making organisation which, he said, contrasted with a commercial undertaking run for the profit of those who have a financial interest in it. At paragraph 47 he said that it is not enough to look simply for an overt distribution of profits in the form of, say, a direct return on the investment represented by contributions to the organisation's assets. Such a distribution might also take the form of unusually high remuneration, redeemable rights to increasingly valuable assets, the award of supply contracts to members, or other methods of covert distribution. At paragraph 50 he said that a non profit making organisation was one which did not have as its object the enrichment of natural or legal persons.

Of course, in the present appeal, the issue is not whether the Appellant is non profit making but whether the payment of a market rent and a pension earned by long service with the Appellant's predecessor company and the entitlement (but not the receipt) of interest on, and repayment of, a debenture amount to an interest in the results of the activities of the Appellant. However, the same nexus of legislation is in issue and we find it of interest that the Advocate General includes in the meaning of "profits" any return on an investment in the assets of the organisation; unusually high (but not normal) remuneration; and other methods of covert distribution. This would seem to us to exclude payments made in consideration of supplies at a market rate; normal remuneration (or deferred remuneration such as a pension), and payments at a normal rate of interest on loans (or debentures). However, as the issue in Kennemer was not the same as the issue in this appeal we have relied for our decision only on the principles established by the Court of Justice in London Zoological Society.

The other authority cited to us was Bell Concord (1989) where the issue was whether a charity was registerable for value added tax and that depended upon whether it supplied exempt services. Certain services were exempt under the Value Added Tax Act 1983 if they were provided "otherwise than for profit". The Court of Appeal held that the phrase "otherwise than for profit" referred to the objects of the organisation and as the constitution of the charity prevented the distribution of its profits to private individuals it provided its services "otherwise than for profit" and so its supplies were exempt and it was not registerable. In this appeal it was accepted that the Appellant did not distribute its profits within the meaning of Note (2)(a) of Group 13 of Schedule 9 of the 1994 Act and the phrase we have to interpret is "persons who have no direct or indirect financial interest in its activities" to which the principles in Bell Concord have no direct relevance

Decision

Our decision on the second issue for determination in the appeal is that, for the period from 1 June 1996 to 4 June 2003, the fact that Mrs Margaret Jackson, one of the trustees of the Appellant, held a debenture by the Appellant, was paid rent by the Appellant for a garage, and received a small pension from the Appellant did not mean that the Appellant was not managed and administered on an essentially voluntary basis by persons who had no direct or indirect financial interest in its activities.. Customs and Excise indicated that, if the Appellant were to be successful in the appeal in relation to the period from 1 June 1996 to 4 June 2003 they would allow exemption back to 1 January 1990 and so that disposes of the first issue..

Accordingly, the appeal is allowed.

Costs

WE DIRECT that the Respondent shall pay to the Appellant the costs of the Appellant of and incidental to and consequent upon this appeal. The amount of the costs shall be agreed between the parties. If agreement cannot be reached then either party may apply to the Tribunal and the Tribunal will then decide whether to specify the amount of the costs or to direct that the costs be taxed.

DR A N BRICE

CHAIRMAN

RELEASE DATE: 8 October 2004

LON/1996/1615