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South Herefordshire Golf Club v Revenue & Customs [2006] UKVAT V19653 (13 July 2006)

19653

VAT – EXEMPT SUPPLIES – SPORTING SERVICES – The partnership ran a golf club which transferred the golfing services to two companies limited by guarantee – were the companies eligible bodies – no – they were not non-profit making bodies because they had the aim of making profit for the partnership – in the alternative they were under the commercial influence of Mr Lee, the senior partner of the partnership – the companies were liable to be compulsorily registered for VAT – Appeal dismissed.

VAT – ASSESSMENT – partnership assessed for VAT on standard rated supplies of staff to the companies – Appeal settled by consent.

LONDON TRIBUNAL CENTRE

SOUTH HEREFORDSHIRE GOLF CLUB Appellant

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

PAUL ADAMS FCA (Member)

Sitting in public in Birmingham on 9, 10, 11, and 12 May 2006

Rupert Baldry Counsel instructed by Dorsey and Whitney, Solicitors, for the Appellant

Peter Mantle Counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

The Appellant was appealing against a decision by the Respondents dated 25 October 2000 which was confirmed on review on 4 February 2002.

The disputed decision consisted of the following elements:

(1) Whether South Herefordshire Golf Club Limited and South Herefordshire Golf Limited should be compulsorily registered for value added tax from 1 September 2000 and 1 November 2000 respectively.

(2) An assessment in the sum of £13,477 of unpaid value added tax against South Herefordshire Golf Club in respect of two accounting periods from November 1998 to January 1999, and November 1999 to January 2000. The basis of the assessment was that South Herefordshire Golf Club made undeclared supplies of services, namely the supply of staff, to South Herefordshire Golf Club Limited and South Herefordshire Golf Limited.

Terminology

South Herefordshire Golf Club will be referred to in the decision as the partnership.

South Herefordshire Golf Club Limited and South Herefordshire Golf Limited collectively will be referred to in the decision as either the two companies or the companies. South Herefordshire Golf Club Limited individually will be referred to as Club Limited, whilst Golf Limited will apply to South Herefordshire Golf Limited.

The decision is in the name of South Herefordshire Golf Club which was the Appellant in the original Notice of Appeal entered on 11 February 2002. The Appeal, however, was presented on the basis that the partnership (South Herefordshire Golf Club) was appealing against the assessment and the companies were appealing against the compulsory registration. The term, "Appellant", where used in the decision refers collectively to the entities of the partnership and the companies.

It was not clear from the pleadings whether the Tribunal made a formal direction to add Club Limited and Golf Limited as Appellants to the Appeal. We note that

(1) Correspondence between the Appellant's advisers and the Respondents that the companies were Appellants to the Appeal.

(2) A Notice dated 5 May 2005 from the Appellant's solicitors to consolidate the Appeal of Club Limited (Tribunal reference number LON 2005/0125) with this Appeal.

(3) The Respondents' Amended Statement of Case dated 1 July 2005 which named Club Limited and Golf Limited as Intended Second and Third Appellants respectively.

Respondents' counsel at the hearing did not make a substantive submission about the standing of the companies with the Appeal.

Whatever the formal status of the companies as Appellants, we are satisfied on the facts that South Herefordshire Golf Club had a sufficient legal interest in maintaining the Appeal against the compulsory registration of the companies.

Background

In 1991 Mr Roger Lee and his father, Mr Peter Lee, jointly purchased land near Ross on Wye. In 1993 they developed it as a golf course which comprised 18 holes, a driving range and a club house which was erected in 1995 or 1996. Mr Roger Lee and Mr Peter Lee formed a partnership, trading as South Herefordshire Golf Club, making supplies of services in connection with golf for consideration.

In 1996 Mr Peter Lee sadly died which resulted in the golf business passing to a new partnership which eventually comprised Mr Roger Lee, his mother, Mrs Hilda Mary Lee, and his wife, Mrs Vanessa Lee.

On 22 January 1998 the partnership transferred its members' sporting activities to Golf Club Limited for £200 and its non-members' sporting activities to Golf Limited, also for £200. The two companies were limited by guarantee and incorporated on 23 and 24 December 1997 respectively.

The partnership retained the freehold of the golf course and granted a Tenancy at Will to the companies allowing them to use the golf course and parts of the clubhouse for the provision of sporting services in consideration of a monthly rent of £433.33. On 21 August 2000 the Tenancy at Will was replaced with a seven year lease with an annual rent of £50,000 per annum.

As well as granting a Tenancy at Will the partnership entered into service agreements with the companies on 22 January 1998. Under the service agreement with Club Limited the partnership received a management fee of £5,000 per annum, an agency fee of £1,000 per annum, and a facilities fee of £4,000 per annum. Whereas under the service agreement with Golf Limited the partnership received a management fee of £2,000 per annum, an agency fee of £1,000 per annum, and a facilities fee of £2,000 per annum.

Under the Tenancy at Will and service agreements the partnership continued to provide the shop, bar and restaurant facilities.

The purpose of the new arrangements was to enable the companies to supply sporting services that would qualify for exemption from value added tax.

The purported effect of the new arrangements was that

(1) The partnership supplied management services to the companies which were standard rated supplies for VAT purposes.

(2) The partnership allowed the companies to use the golf course and part of the club house in consideration of rent, an exempt supply for VAT purposes.

(3) The companies supplied sporting services in connection with the playing of golf to members and non-members, exempt supplies for VAT purposes.

(4) The partnership continued to provide the shop, bar and restaurant facilities to the users of the golf course which were standard rated supplies for VAT purposes.

On 30 December 1997 the directors of the two companies were Mr Roger Lee and Mrs Hilda Lee with Mrs Vanessa Lee as company secretary. They resigned their positions on 27 October 1998 and were replaced by Mr Kenneth Bates and Mr Robert Sedgeley as directors and Mr Richard Hayward as company secretary. Mr Bates, who was Mr Lee's brother in law, resigned his position as director on 1 May 1999 and replaced by Mr Phillip Merrell. Mr Sedgeley resigned as director on 15 May 2001 and replaced by Mr Geddes Coull Mustard. Mr Barrie William Smith was appointed as a third director on 15 May 2001. Mr Andrew Charles Moncur Sime replaced Mr Hayward as company secretary on 14 December 2001. Mr Mustard and Mr Merrell resigned from their positions as directors on 17 September 2004 and 1 October 2005 respectively. Mr Brian John Pinnell was appointed as director on 25 November 2004, leaving himself and Mr Smith as the two directors of the companies.

On 17 May 2005 the partnership entered into a series of agreements with the companies and Leaver Golf Management Limited (hereinafter referred to as Leaver). The effect of these agreements was to transfer the rights and obligations of the partnership under the service agreements to Leaver and to create a lease agreement between the partnership and Leaver with a sub-lease between Leaver and the companies. Thus from 17 May 2005 Leaver replaced the partnership as the managing agent and landlord for the companies.

The Issue to be Decided

The issue was whether the companies, Club Limited and Golf Limited, met the requirements to qualify for exemption from VAT in respect of the sporting services they provided. In order to qualify for exemption the companies must be eligible bodies within the meaning of Group 10 of Schedule 9 of the Value Added Tax Act 1994 (hereinafter referred to as the 1994 Act).

Note (2A) of Group 10 of Schedule 9 of the 1994 Act defines eligible body as:

"a non-profit making body which –

a) is precluded from distributing any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body;

b) applies in accordance with Note (2B) any profits it makes from supplies of a description within Item 2 or 3; and

c) is not subject to commercial influence

The Respondents contended that the companies were not eligible bodies on two grounds. First, they were profit making bodies with the aim of achieving profits which were distributed or capable of distribution to the partnership. The agreements between the partnership and the companies provided the means for distributing the profits. Second, they were under the commercial influence of Mr Roger Lee who effectively operated as shadow officer of the companies.

The Appellant submitted that the Respondents had misconstrued the facts. In its view the fact that the companies made payments to the partnership should not lead to the conclusion that the companies were profit making organisations. On the contrary, the payments reduced the companies' surpluses to a minimum, thus helping to ensure that the companies were non-profit making, in accordance with their aims. Similarly, the fact that Mr Roger Lee continued to be involved with the two companies in his capacity as partner in the partnership did not mean that he was shadow officer of the two companies.

Thus the two issues to be decided in respect of each company were:

(1) Was the aim of the company to achieve profits for the partnership which were distributed or capable of distribution to the partnership?

(2) Was Roger Lee a shadow officer of the company from 1 January 2000?

If the answer is yes to either of the above questions then the companies would not be an eligible body, and, therefore, not qualify for exemption from VAT in respect their supply of sporting services. If the companies did not so qualify, they would be required to register for VAT.

During the hearing the parties reached an agreement on the second aspect of the Appeal dealing with the assessment for the supply of staff from the partnership to the companies.

The Limits of the Dispute

The Respondents accepted that the companies supplied the golfing services. Therefore, there was no dispute as to who made the supplies. They also accepted that the companies' supplies of golfing services fell within the definition of sporting services.

The Respondents did not advance their case on the ground that the arrangements constituted an abuse of law, even though a good part of their Counsel's cross examination of the Appellant's witnesses was directed at establishing that the sole motivation for setting up the companies was to obtain the VAT exemption. We, therefore, approached the Appeal on the basis that the Respondents were not suggesting that Mr Lee or his advisers had done anything improper in creating the companies. A taxpayer was entitled to make a commercial decision to arrange his affairs in such a way as to bring a particular supply within the terms of a statutory exemption. The issue in this Appeal was whether the companies were eligible bodies to qualify for the sporting exemption.

The Appellant did not dispute the date of registration for the two companies if the companies were not eligible bodies.

The Appellant accepted that the partnership made "relevant supplies" to the companies for an emolument.

There was a dispute between the parties about the time span of the evidence we were required to consider to reach our decision on the compulsory registration of the companies. There has been considerable delay in bringing this Appeal to a hearing which inevitably has meant that the circumstances upon which the Respondents made their original decision on 25 October 2000 have changed. We decided that the facts relating to the replacement of the partnership by Leaver were not relevant to this Appeal. On the face of it, the Leaver arrangements presented a different set of circumstances and far removed in time, almost five years, from those circumstances upon which the Respondents made their decision. In our view the Respondents should be given the opportunity to assess whether the new arrangements with Leaver meet the requirements for exemption from VAT, and if need be the Appellant has the right of Appeal against the Respondents' assessment of the Leaver arrangements.

Equally we were not being asked by the Respondents to determine the VAT liability of the companies' supplies prior to the 1 January 2000. The disputed decision was that the companies were liable to account for VAT on their supplies from 1 January 2000 with a date of registration of 1 September 2000 for Club Limited and 1 November 2000 for Golf Limited. We were, therefore, primarily concerned with the facts as at 2000, however, we took the view that the facts prior and subsequent to 2000 up to the substitution of the partnership with Leaver were relevant to our determination.

The Legislation

Article 13A.1 of the Sixth Directive (77/388/EEC) requires Member States to exempt:

"(m) certain services closely linked to sport or physical education supplied by non-profit making organisations to persons taking part in sport or physical education".

Article 13A.2 provides for a number of limitations, some optional and some mandatory which the Member States can impose on the granting of the "sporting exemption" to bodies other than those governed by public law. The optional limitations are as follows:

a) 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,

b) 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,

c) they shall charge prices approved by public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to value added tax,

d) exemption of services concerned shall not be likely to create distortions of competition such as to place at a disadvantage commercial enterprises liable to value added tax.

The mandatory limitations state that

The supply of services or goods shall not be granted exemption …if

it is not essential to the transactions exempted,

its basic purposes is to obtain additional income for the organisation by carrying out transactions which are in direct competition with those of commercial enterprises liable for value added tax.

In the context of the "golf club" the mandatory limitations would catch the catering and bar services supplied in the club house.

The "sporting exemption" is enacted in the domestic legislation in Item 3 of Group 10 of Schedule 9 of the 1994 Act. The domestic legislation incorporates only one of the optional limitations set out in Article 13A.2(a), namely, the limitations on the distribution of profits. The domestic legislation dealing with the sporting exemption has been amended on several occasions since its introduction in the Value Added Tax Act 1972. The most recent amendment arose from Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999 SI 1999/1994 which came into force on 1 January 2000 and brought about significant changes, in particular the provisions about commercial influence.

Item 3 of Group 10 of Schedule 9 of the 1994 Act states that

"The supply by an eligible body to an individual, except where the body operates a membership scheme, an individual who is not a member, of services closely related with and essential to sport or physical education in which the individual is taking part".

Note (2A) of Group 10 of Schedule 9 of 1994 Act defines an eligible body as:

"a non-profit making body which –

a) is precluded from distribution any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body;

b) applies in accordance with Note(2B) any profits it makes from supplies of a description within Item 2 or 3; and

c) is not subject to commercial influence".

Note 2(B) provides:

"For the purposes of Note (2A)(b) the application of profits made by any body from supplies of a description within item 2 or 3 is in accordance with this Note only if those profits are applied for one or more of the following purposes, namely:

a) the continuance or improvement of any facilities made available in or in connection with the making of the supplies of those descriptions made by that body;

b) the purposes of a non-profit making body."

Note 4 deals with commercial influence and provides that

"For the purposes of this Group a body shall be taken in relation to a sports supply to be subject to commercial influence if, and only if there is a time in the relevant supply when –

a) a relevant supply was made to that body by a person associated with it at that time;

b) an emolument was paid by that body to such a person;

c) an agreement existed for either or both of the following to take place after the end of that period, namely –

i) the making of a relevant supply to that body by such a person; or

ii) the payment by that body to such a person of any emoluments".

Note 6 deals with relevant supplies which includes "the grant of any interest in land" and "the supply of services consisting in the management or administration of any facilities provided by that body". The Appellant accepted that the partnership provided relevant services to the companies but the Appellant disputed that the partnership was a person associated with the companies.

Note 8 deals with the meaning of a person associated:

"Subject to Note 10, a person shall be taken, for the purposes of this Group to have been associated with a body at any one of the following times that is to say –

a) the time when the supply was made to that body by that person;

b) the time when an emolument was paid by that body to that person; or

c) the time when an agreement was in existence for the making of a relevant supply or the payment of emoluments,

if, at that time, or another time (whether before or after that time) in the relevant period, that person was an officer or shadow officer of that body or an intermediary for supplies to that body"

Note 10 stipulates that the relevant period in Note 8 does not include periods prior to the 1 January 2000 where a person was an officer or shadow officer.

Note 16 provides that an "officer" in relation to a body includes –

i) a director of a body corporate; and

ii) any committee member or trustee concerned in the general control and management of the administration of the body."

The Respondents accepted that Mr Roger Lee was not an officer of the companies because his period as director pre-dated 1 January 2000. The dispute centred on whether Mr Lee was a shadow officer.

Note 16 defines a shadow officer of a body as:

"a person in accordance with whose directions or instructions the member or officers of the body are accustomed to act".

The Authorities

The European Court of Justice considered the meaning of Article 13A(1)m and 13A(2)(a) in Kennemer Golf & Country Club v Staatssecretaris van Financien (2002) (Case C – 174/00).

The Court ruled that a non-profit making organisation must not have the aim of achieving profits for its members. The fact that an organisation subsequently achieved profits, even if it seeks to make them, or makes them systematically, would not affect the original categorisation of the organisation as long as those profits were not distributed to its members as profits. Kennemer is, therefore, authority for the proposition that an organisation may be categorised as non-profit making even if it systematically seeks to achieve surpluses which it then uses for the purpose of the provision of its services.

The term "profit" was used in Article 13A(1)(m) as financial advantages for the organisations' members rather than as surpluses at the end of the accounting year. The Advocate General described financial advantages as the enrichment of natural or legal persons, in particular those having a financial interest in the organisation. Financial advantage would include not only overt distribution of profits but also covert distributions, such as unusually high remuneration for employees, redeemable rights to increasingly valuable assets and the award of supply contracts to members.

The Advocate General considered the overlap between the non-profit making criterion in Article 13A(1)(m) and the optional limitation imposed by Article 13A(2)(a). The Advocate General considered that the optional limitation comprised three conditions which were cumulative:

(1) there may be no systematic aim of making profit;

(2) any profits nevertheless arising may not be distributed;

(3) such profits must be used for the continuance or improvement of the services.

The Advocate General was of the view that the limitation restricted the circumstances where a non-profit making organisation would qualify for the sporting exemption despite the overlap between the terms used in the limitation and the definition of a non-profit making organisation. The Advocate General construed profit in Article 13A(2)(a) as surplus of income over expenditure rather than enrichment of natural or legal persons. He concluded that the first condition of Article 13A(2)(a) essentially replicated the non-profit making criterion in Article 13A(1)m, whereas the second and third conditions of Article 13A(2)(a) referred respectively to prohibited and compulsory uses of any surplus of income over expenditure.

In De Vere Golf and Leisure Limited (LON/01/58) the VAT and Duties Tribunal considered the meaning of a non-profit making organisation. In this respect the Tribunal identified twelve principles derived from the Kennemer case, which were that

1) the exemption applies to non-profit making organisations and not to non-profit making services;

2) the exemption should not apply to commercial sports undertakings as, given the opportunities for shrewd cross-subsidising, that would lead to distortion of competition;

3) the question is whether natural or legal persons (in particular those having a financial interest in the organisation such as shareholders) are enriched;

4) a commercial undertaking run for the profit of those who control and/or have a financial interest in it is not a non-profit making organisation;

5) it is necessary, but not sufficient to look at the organisation's express objects as set out in its constitution;

6) it is necessary to examine whether the aim of making and distributing profit can be deduced by the way that the organisation operates in practice;

7) it is necessary to look not only for overt distributions of profits but also covert distributions, for example supply contracts to members whether or not at higher than market prices;

8) the purpose of the exemption is for organisations acting in the public interest whose activities are directed to non-commercial purpose;

9) a non-profit making organisation must not have the aim of achieving profits for its members;

10) it is for the national authorities to determine, having regard to the object of the organisation as defined in its constitution, and in the light of the specific facts of the case, whether an organisation satisfies the requirements enabling it to be categorised as non-profit making. The fact that it subsequently achieves profits would not affect the original categorisation so long as the profits are not distributed to the members as profits.

11) an organisation might be categorised as non-profit making even if it systematically seeks to achieve surpluses which it then uses for the purposes of the provision of its services; and

12) it is not profits (in the sense of surpluses arising at the end of an accounting year), which precludes categorisation of an organisation as non-profit making, but profit in the sense of financial advantages for the organisation's members".

De Vere Golf and Leisure Limited had an annual turnover of about 24 million pounds and was a subsidiary company in the corporate group known as De Vere Ltd. The Tribunal found that the company was an integral part of a commercial organisation whose purpose was to make profits for its shareholders. The companies' activities enriched the corporate group by making available its cash resources to other members of the group through the provision of loans for which no interest was immediately chargeable. The Tribunal concluded that the De Vere Golf and Leisure Limited was not a non-profit making body.

The Court of Appeal in Messenger Leisure Developments Ltd v Revenue and Customs Commissioners [2005] STC 1078 also considered the meaning of non-profit making organisation in the context of a company which ran three golf and country clubs. The company as with De Vere Golf and Leisure Limited was a wholly owned subsidiary of a commercial profit making company. Jonathan Parker LJ drew the following conclusions at paragraphs 88 & 89:

"…Kennemer is not authority for the very different proposition that an organisation which has no power to make and which does not make distributions to its members is necessarily a non-profit making organisation for the purposes of Article 13A(1)(m), … There are two reasons why, in my judgement, this is so.

First … I can see no basis for treating the expression "financial advantages for organisation members" …as restricted to a particular category of advantage, viz a distribution of surplus funds to members.

Second, whether or not an organisation is "non-profit making" for the purposes of Article 13A(1)(m) must…. depend on the aim which it pursues. As to that ….. in determining what is the "aim" which the organisation is pursuing when it makes the supply in question it is necessary to look at the transactions in their full factual context".

At paragraph 92, Jonathan Parker LJ said:

"As to whether the test of "aim" is a subjective or an objective one … I have no difficulty in accepting that the owners' subjective intentions in relation to the company were relevant matters for the Tribunal to take into account as part of the general context, but … they are far from conclusive as to the company's aim in making the supplies in question".

The Court of Appeal concluded that the company was an integral part of the commercial operation and, therefore, did not qualify as a non-profit making body.

The De Vere Golf and Leisure Limited and Messenger Leisure Developments Ltd decisions were concerned solely with the meaning of a non-profit making body. The De Vere Golf and Leisure Limited decision was made in relation to the law that existed prior to the amendment of Group 10 of Schedule 9 of the 1994 Act by the Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999 SI 1999/1994.

The Impact of the Legislative Provisions and Authorities on the Disputed Issues of this Appeal

The central issue in this Appeal was whether the companies were eligible bodies within the meaning of Note 2(A), Group 10 of Schedule 9 of the 1994 Act which provides that

"a non-profit making body which –

a) is precluded from distribution any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body;

b) applies in accordance with Note(2B) any profits it makes from supplies of a description within Item 2 or 3; and

c) is not subject to commercial influence".

Note (2B) allows the non-profit making body to apply profits for the continuance or improvement of any facilities in connection with the making of the exempt supplies and or for the purposes of a non-profit making body".

The sporting exemption should be strictly construed because it constituted an exception to the general principle that tax was to be levied on all supplies. However, a strict construction of the exemption should not be whittled away by restrictive interpretation. The correct approach is that exemptions and any limitations on them must be interpreted in such a way that the exemption applies to that to which it was intended to apply and no more. Thus the contention that the exemption did not apply to the companies because they were set up by a commercial organisation (the partnership) would be a restrictive interpretation.

The structure of Note (2A) imposes a series of hurdles before an organisation can qualify as an "eligible body". The first is that it must meet the definition of a non-profit making body which is an organisation that does not have the aim of achieving profits. Profits in this context have a wide meaning, namely, financial advantages that enrich natural or legal persons, in particular those having a financial interest in the organisation.

A non-profit making body can nevertheless fail to fulfil the requirements for an eligible body if it does not meet conditions a), b) and c) of Note 2A. The construction of those conditions appears to fit with the Advocate General's interpretation of the optional limitation Article 13A(2)(a) namely that each of the conditions are cumulative and not alternatives, and that they are capable of excluding some non-profit making organisations from the benefit of the exemption.

Thus a non-profit making body which is precluded from distributing profits otherwise than to a non-profit making body and applies its profits for the furtherance of its purposes or to continue or improve the facilities provided for the sporting supplies will not be an eligible body if it is subject to commercial influence.

Note 4 specifies that the body will be subject to commercial influence if an associated person makes relevant supplies to the body. An associated person is either an officer or a shadow officer. The latter is defined as a person in accordance with whose directions or instructions the members or officers of the body are accustomed to act. The Oxford English Dictionary, (1970) Clarendon Press, defines accustomed as "practise habitually, habitual or usual".

The first issue in this Appeal was whether the companies were non-profit making bodies. The Authorities make it clear that the non-profit making status will be determined by whether the companies had the aim of achieving profits in the wider sense of financial advantages for the partnership which will be assessed from the full factual context of the supplies in question. Appellant's counsel submitted that the term financial advantage was restricted to members which did not apply in this Appeal because the partnership was not a member of the companies. The De Vere and Messenger Leisure judgments referred to financial advantages for members but both those cases concerned subsidiary companies within a larger corporate group. The Advocate General in Kennemer, however, referred to financial advantages to natural or legal persons, in particular those persons with a financial interest in the organisation. We consider that the Advocate General's interpretation is sufficiently wide depending upon the facts to include natural or legal persons who are not technically members of the companies.

The second issue of commercial influence would only be relevant if the companies fell within the category of non-profit making bodies. The Appellant accepted that the partnership made relevant supplies to the companies in respect of the lease and the provision of management services. The sole area of dispute was whether Mr Roger Lee was a shadow officer of the companies, in that its officers and members habitually acted in accordance with Mr Lee's instructions or directions.

Evidence

We heard evidence on oath from

(1) Roger Lennox Aversperg Lee, one of the partners of the partnership.

(2) Lawrence David Mitchener, a former Club Captain of the Golf Club.

(3) Brian John Pinnell, member of the golf Club and director of the companies.

(4) Barrie William Smith, a former Club Captain and current director of the companies.

(5) Andrew Sime FCA, FCCA, ATII, Company Secretary and Accountant for the Companies and Accountant for the partnership.

(6) James William Leaver, joint owner of Leaver Golf Management Limited which currently provided the management services to the companies.

(7) Elizabeth Roper, Officer of HM Revenue and Customs, who visited the Appellant and conducted the initial interviews.

(8) Emma Louise Mary Cox, Senior VAT Assurance Officer of HM Revenue and Customs, who made the initial decision issued on 25 October 2000.

We were presented with seven lever-arch files of documents which we received in evidence. Our decision is based upon the evidence and those documents relied upon by the parties at the Tribunal hearing and those specifically referred to by the Tribunal. We informed the parties of our intention in respect of the document bundles and gave them an opportunity to bring to our attention any other documents in the bundles which had not been previously referred to in the hearing or the pleadings. The parties' Counsel raised no objections to our proposal and no additional documents were brought to our attention.

The Facts

The Partnership

In 1991 Mr Peter Lee, Mr Roger Lee's father, purchased the land for the golf course which opened as a nine hole course in 1992 and extended one year later to a par three 18 hole course. The clubhouse was constructed in 1995/1996. A partnership comprising Mr Roger Lee and Mr Peter Lee with the name of South Herefordshire Golf and Country Club ran the golf course. Sadly Mr Peter Lee died in 1996 with Mr Roger Lee inheriting the majority of his father's partnership share. As at the year ending 31 January 2002 Mr Lee was entitled to 90 per cent of the partnership profits with his mother and wife each entitled to a five per cent share. In the year ending 31 January 2003 the profit sharing arrangements changed with Mr Lee and his wife each sharing 47.5 per cent of the profits and Mr Lee's mother retaining her five per share.

The partnership accounts for years ending April 1993 through to April 1997 revealed that the partnership was trading at a loss. The sources of income as at 30 April 1997 were green and membership fees, bar and shop sales. The partnership's fixed assets included the freeholds of the golf course, the barn complex, driving range, clubhouse and store which were valued at £879,941 in the 1997 accounts..

The next full set of accounts within the bundle were for the years ending 31 January 2001 through to 31 January 2003. The years ending 31 January 2001 and 2002 recorded net profits of £10,330 and £20,083 respectively with a net loss of £22,367 for the 2003 accounts. The major sources of income during this period were rent, management charges, bar, catering and shop sales. The partnership retained the freehold of the properties which were valued in the 2003 accounts at £916,302.

The Appellant accepted that the partnership had the aim of making profits, albeit not a very successful one. We were satisfied on the evidence that Mr Roger Lee took the decisions on behalf of the partnership after the death of his father. Mr Lee gave evidence that he consulted with the other partners and they made joint decisions. However, we did not find his evidence convincing. His mother spent the majority of her time in Austria where she ran another golf course and club. Mr Lee could only give one example regarding the proposed loan on the clubhouse where his mother's views had swayed the decision. Mr Lee gave no substantive evidence about his wife's involvement in the partnership.

Mr Lee had several business interests outside the partnership. He managed the family estate of 1,000 acres in England comprising a 600 acre farm, 14 housing properties, a shoot, gardens and a tea room. He was also sub-postmaster of How Caple.

The Setting up of the Companies

In 1997 Mr Lee on behalf of the partnership engaged Mr Perry of Davies Meyers, Accountants, as project manager to re-organise the partnership affairs so that it could benefit from VAT exemption. Mr Perry outlined the proposal in a letter dated 31 October 1997 addressed to Mr Lee:

"As you are aware, many sports club proprietors are re-organising their affairs in order to benefit from VAT exemption. Broadly speaking VAT exemption is available for non-profit making entities. The various stages of the planning arrangement are briefly as follows:

formation of a company limited by guarantee which has a non-profit making constitution. The partners of the existing golf club will be Trustees/Guarantors of the new company. By virtue of this status the company will qualify for VAT exemption.

The sporting activities are transferred from the partnership to the new company.

The partnership will charge the new company for the following supplies:

Rent (exempt)

Salary/.wage disbursements (outside the scope of VAT)

Management and agency services (standard-rated)

Mr Perry estimated that the annual saving in VAT would be £20,000. His fees for the project would be £7,000 which included the legal services from Linnells and accountancy services from Mr Sime.

On 25 November 1997 Mr Sime wrote to Mr Lee thanking him for his instructions to form a separate non-profit making VAT exempt company covering the membership subscription income and associated receipts of his sporting/leisure club. Mr Sime attached an annexe headed "Essential Comments" which formed part of the agreement. Extracts from the "Essential Comments" included:

"The opportunity for VAT Exempt membership subscriptions available to sporting clubs has come about through recent changes in legislation designed to bring the UK into line with European Common Market and the government's current treatment of Local Government run sports and leisure centres.

The aim is to help genuine sporting ventures which enjoy an independent management structured to deal with the minutiae of running these sporting clubs. This management involves the supervision and payment of all personnel caring for the sporting membership – which is the prime cost and concern of these businesses.

The proprietors of the principal company are in this way enabled to run their separate business in a properly commercial manner. This includes acting as property managers in the provision and finance of sporting facilities for rent.

It is essential that there is clear separation between the two companies, so that Customs and Excise cannot employ an interpretation of aggregation of trading".

On 31 December 1997 Mr Miscampbell of Linnells, solicitors, wrote to Mr Lee enclosing the following documents to effect the re-organisation of the partnership affairs and the creation of two new companies:

(1) Agreement to the transfer of the members' sporting activities to Club Limited.

(2) Agreement to the transfer of the non-members' sporting activities to Golf Limited.

(3) Service agreement relating (inter alia to management services) with Club Limited.

(4) Service agreement relating (inter alia to management services) with Golf Limited.

(5) Tenancy at Will.

(6) Companies' Act Form.

(7) Copy minutes of the first board meetings of each Newco.

(8) Draft minutes for the second board meetings of each Newco.

Mr Miscampbell explained the effect of the various agreements, in particular:

Service Agreements:

These documents provide for the current owners of the Club to charge facilities fees, management fees and possibly an agency fee to the Club for undertaking various activities.

The termination provisions enable the agreement to be terminated by the Manager or Newco by not less than six months prior written notice.

Clause 7.5 of the termination provisions enables the manager to retain information in the manager's possession and to use it after termination. In particular if the manager had been acting as agent in the recovery of membership fees, it would have a full membership list. The manager would then be able to use this information to re-establish the club if the scheme is brought to a conclusion without reference to a liquidator or receiver of Newco.

Tenancy at Will

The figure inserted in the Tenancy at Will reflects the figure specified by Andrew Sime and Peter Perry.

The reason for considering a Tenancy at Will at this stage is to enable the scheme to be put in place immediately and in advance of formal consent from your mortgages.

A Tenancy at Will does not give rise to any security of tenure on the part of the tenant. The lease that will eventually replace the Tenancy at Will will also be contracted out of the Landlord and Tenant Act 1954 so as to prevent the tenant from obtaining security of tenure.

Certificate of Incorporation and Memoranda and Articles

The Newcos have been formed as companies limited by guarantee in such a way as to ensure that the members of the company do not receive any distribution of assets whether on winding up or otherwise during the lifetime of each Newco. The intention is that each Newco will be non-profit making and that it will not build up any substantial or significant assets hence the importance of ensuring that the ability of each Newco to make a claim for improvements is managed or limited so far as possible or prevented by the improvements being undertaken by the landlord as suggested.

Unlike a company limited by shares ownership and control of the company does not pass with the ownership of shares as there are no shares, ownership and control is by appointment to membership of the company and to the board. This means that on the death of a member of a company the board has power to appoint replacement or new members. This means that it is impossible for you to be certain of absolute control of the board or the members of each Newco. It is for this reason that the Newcos are to be given no security of tenure under the leasehold interests that are to be created or under the Tenancy at Will".

The companies were incorporated on 23 December 1997. The Objects of Club Limited as set out in the Memorandum of Association were:

the improvement of the level of facilities for the playing of golf at South Herefordshire Golf Club;

at the Committee Members' discretion to use buildings and sporting facilities for the benefit of external charities and other good causes;

selective allocation by the Committee Members of up to 20 free memberships;

promoting the playing of golf by juniors

to encourage and provide facilities for subsidised coaching for juniors and local schools

encouraging and providing facilities for subsidised coaching of juniors and local schools

at the Committee members' discretion to provide free playing facilities to professional and associated golf bodies

to promote healthy lifestyles

Golf Limited had slightly different objects to reflect that it was supplying services to non-members:

the management of sports facilities;

to promote the playing of golf;

to promote the playing of golf by juniors;

to provide facilities for subsidised coaching for juniors and local schools;

at the discretion of the Management Committee to provide free playing facilities to professional and associated golf bodies;

at the discretion of the Management Committee to provide free golf lessons to juniors.

Under clause 4 of the Memoranda the income and property of the companies were to be applied solely towards the promotion of its objects. The clause prohibited the payment of the companies' income either directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to members of the companies. Members of the management committee were prohibited from being paid a salary or any form of remuneration by virtue of their office. The companies, however, were empowered to pay the fees and remuneration to a member, officer or employee in respect of services rendered to the company. Clause 4.3 permitted the company to pay rent and any associated service charge for premises demised or let by any member of the company or of its management committee. The liability of members was limited to one pound. Clause 7 required surplus assets following the winding up or dissolution of the companies to be given to a non-profit making organisation.

The Articles of Association specified that two members would be registered. The company was required to hold Annual General Meetings. The Articles set out the powers and duties of the management committee which included management of the business and the approval of applications for membership. The minimum number of members for the committee was two. Every member had one vote. The Company at its general meeting had the power to elect committee members with the committee itself having the power to fill casual vacancies.

The Agreements and the Lease

The management committee of the companies comprising Mr Lee and his mother, Mrs Hilda Lee, resolved that the arrangements in the documents between the partnership and the companies: transferring goodwill of the partnership to the companies, service agreements and Tenancy at Will were in the best interests of the companies and authorised their execution. Mr Lee signed the documents on behalf of the partnership of the one part and on behalf of the companies of the other part.

The transfer agreements dated 22 January 1998 transferred the sporting activities in the partnership, the goodwill associated with the sporting activities and the current membership list in consideration of the sum of £200. The membership list was only transferred to Club Limited. The partnership transferred with full title guarantee free from all liens, charges and encumbrances. Book debts were excluded from the transfers.

Under the service agreements the companies appointed the partnership comprising Mr Lee and his mother, Mrs Hilda Lee, as "The Manager" to assist with the management of the companies in respect of their supplies of sporting facilities. The companies paid the partnership in its capacity as manager a management fee of £5,000 per annum in respect of Club Limited, whilst Golf Limited paid £2,000 per annum, facilities fee of £4,000 and £2,000 per annum respectively for the use of the hospitality area, and £1,000 per annum each as an agency fee. The fees were payable quarterly in advance. The total amount of annual fees payable from the companies to the partnership under the agreements was £15,000 exclusive of VAT.

Disputes under the agreements were to be resolved by mediation with the Law Society of England and Wales appointing the mediator.

The agreements permitted the partnership in its capacity as manager to vary reasonably the facilities and agency fees by one month's notice or otherwise by agreement. The manager could also vary the management fee if the manager provided additional or new equipment for use by the companies. The agreements specified that no variations to the agreements shall be effective unless they were in writing and signed on behalf of each party by a director or other authorised person.

The service agreements could be terminated by six months notice on either side. On termination the partnership in its capacity as manager was under no obligation to return to Club Limited any information in its possession in respect of the membership of the golf club. Further, the partnership was not prohibited from using such information for any purpose whatsoever following termination of the agreement.

The service agreements remained in force without amendment until 17 May 2005 when Leaver Management assumed the responsibilities of the manager to the companies in place of the partnership.

Mr Perry and Mr Sime fixed the initial charges under the agreements (see letter from Linnells dated 31 December 1997). Mr Smith when he became director of the companies in 2001 considered that the service charges were reasonable but he stated that Mr Lee collected £25,000 per annum in management fees which was higher than the amounts specified in the agreements. Mr Smith accepted that the directors had not independently tested the reasonableness of the service charges.

On 22 January 1998 the partnership in its capacity as landlord let under a Tenancy at Will the golf course and associated practice areas together with those parts of the clubhouse comprising the changing and locker rooms and all rights as may be reasonably required for the enjoyment of the premises. The companies were required to pay the rent of £4,433.33 pence a month in advance. The Tenancy at Will gave the companies no security of tenure. It could be terminated by the partnership at any time.

On 21 August 2000 the Tenancy at Will was replaced with a lease for a term of seven years. The lease was between the partnership which now included Mr Lee's wife, Vanessa Melanie Lee, and the companies. Mr Lee signed the lease on behalf of the partnership and Mr Merrell, in his capacity as director, signed on behalf of the companies. On the same date as the lease the partnership entered into a debenture with Club Limited which gave the partners security in the event of Club Limited defaulting on the terms of the lease.

Under the lease the companies were required to pay the partnership rent on the first day of each month in advance. The yearly rent was the greater of the base rent (£50,000) or of the turnover rent (30 per cent of the companies' turnover). In addition the companies were obliged to pay a service charge estimated to be £1,000 per annum in respect of repairs and maintenance and insurance incurred by the partnership and to defray outgoings in respect of the demised premises.

The partnership had the right to terminate the lease with one month's written notice. The companies' protections under part II of the Landlord and Tenant Act 1954 including compensation and longer periods of notice to quit on specified grounds were excluded under the terms of the lease following prior authorisation by Oxford County Court on 14 April 2000.

Under the terms of debenture Club Limited covenanted to pay all its receipts and income into an account held by the partnership which would be repaid to Club Limited after deduction of any sums due and owing to the partners.

Mr Perry and Andrew Sime specified the rental figures in the Tenancy at Will. The Appellant provided no independent valuation of the figure of £50,000 for the base rent in the lease dated 21 August 2000. Mr Perry and Mr Sime arrived at the £50,000 using a yield of five per cent on a freehold value of the property at £780,000. During 2000 correspondence was exchanged between Mr Perry and Mr Sime regarding potential increases in the rent so that advantage could be taken of the VAT exempt status of the rental payments which in turn would reduce the management charges, standard rated for VAT purposes. Mr Perry considered that the current level of rent was modest which could lead to a justifiable increase in the rent, particularly if it was based on turnover.

On 26 February 2001 Mr Lee and Mr Perry held a meeting with Mr Smith and Mr Mustard, two of the three directors of the companies, where they agreed that the turnover rent mechanism was fair since increased income received by the companies would benefit Mr Lee in his capacity as landlord and the companies.

Mr Smith in his evidence stated that the annual rent of £49,000 was computed from a seven per cent yield on a freehold valuation of £700,000. Mr Sime told Mr Smith these figures. Mr Smith accepted that he had not been given a copy of the lease and was unaware of the base rent of £50,000.

Meetings of the Companies and the Role of the Directors

Mr Miscampbell and Mr Temple were the first two directors of the companies. At the first meeting of the directors on 30 December 1997 they appointed Mr Lee, and Mrs Hilda Lee as additional directors. Messrs Miscampbell and Temple then resigned their positions as company directors. Mrs Vannessa Lee was appointed company secretary at the 22 January 1998 meeting.

In July 1998 Mr Perry enquired of Mr Lee about whether he had been able to identify "independent" trustees for the new companies. In August 1998 Mr Perry followed up his enquiry by informing Mr Lee that it would be prudent to stay on course by having the companies controlled by trustees who were not themselves under the control of the original club proprietors (the partnership).

On 29 January 1998 Mr Lee wrote to the members of the golf club advising them of the 1998 subscriptions. He also told them his intention to form a new company to run the golf club which would not change the running of the club. Mr Lee also wanted to form a competitions committee which would include himself as a member.

At 27 October 1998 meeting of the companies Mr Bates and Mr Sedgeley were appointed directors of the companies. Following their appointment Mr Lee and Mrs Hilda Lee resigned from their positions as directors with Mr Lee expressing the intention that

"South Herefordshire Golf Limited will evolve into an independent vehicle. The company would then be able to act in the interests of members, and would be able to table issues formally with the owners of the course and buildings".

It was also stated at the October 1998 meeting that the intention would be for Golf Limited to achieve a surplus which would be used for the improvement of the course and facilities. Mr Perry was present at the meeting. The new directors were informed at the meeting about their duties. Linnells, solicitors, later wrote to them advising about their liability as directors. On the 27 October 1998 Mrs Vanessa Lee resigned her position as company secretary and was replaced by Mr Hayward who was Mr Lee's accountant.

Respondents' counsel contended that Mr Lee and Mrs Hilda Lee had only resigned from their positions as directors not from their membership of the companies. Counsel also contended that the Appellant failed to produce the current list of companies' members despite requests for this information. Mr Lee gave evidence that he and his mother had resigned as members. Mr Smith, one of the current directors, also stated on oath that Mr Lee and Mrs Hilda Lee were not members of the companies. On balance we find that Mr Lee and Mrs Hilda resigned their membership of the companies on 27 October 1998.

On 29 October 1998 Mr Perry wrote to Mr Lee advising him that Mr Bates' position as a director was tainted because he was Mr Lee's brother in law. He suggested that Mr Lee trawled for another suitable candidate.

Mr Sedgeley was director of the companies from 27 October 1998 to 15 May 2001. Mr Lee admitted that he identified Mr Sedgeley as a director. Mr Lee could not give a reason why he picked Mr Sedgeley. Mr Lee accepted that he did not choose him because of his extensive experience as a director. Mr Sedgeley did not run a golfing business. Mr Lee got to know Mr Sedgeley socially who had been a member of the golf club for about one year prior to his appointment as director. Mr Lee acknowledged that there were many other members who were more longstanding with the club than Mr Sedgeley.

On 1 May 1999 Mr Merrell was appointed director of the companies holding that position until 1 October 2005. On the appointment of Mr Merrell, Mr Bates resigned from his position as director. According to Mr Smith, Mr Merrell worked full-time as a Crane Inspector for Zurich Insurance. He only played golf on Sunday mornings and was not au fait with what was going on. Mr Smith accepted that he was not aware of how the directors were appointed until he was appointed himself. Mr Smith was a former Club captain and Seniors captain from 1997.

Mr Sedgeley and Mr Merrell did not give evidence before the Tribunal.

The Appellant produced no minutes of the companies' meetings between 27 October 1998 and 16 August 2001. Mr Lee gave evidence that directors' meetings were held but could not explain why minutes of these meetings were not included in the bundle of documents.

On 10 February 2000 Mr Sime wrote a letter to Mr Lee principally about his charges for work undertaken which included the following:

"I do realise that you may not wish to incur the extra professional costs. All I can say is if you want the advantages of tax or VAT savings arrangements, you have to incur the necessary professional costs – whether from Edmund, Peter Perry or myself.

If you want a simple life then you can have the one company but just remember the extra VAT you would have to pay. It is your decision".

On 16 November 2000 Mr Perry wrote to Mr Lee suggesting that the overall position was more natural and robust if the club captains were appointed as trustee/directors, which was found to work very well at other clubs, helping the management and golfers to knit together.

On 21 December 2000 Mr Lee informed the members of an increase in subscriptions of £20, and of a proposed restructure of the committees and their roles which would give members an even greater say in the running of the golf club.

A file note of a meeting between Mr Perry and Mr Lee dated 8 February 2001 revealed that Mr Perry explained that the two playing members were welcomed as trustees but strongly recommended that the club captains become trustees by annual rotation. Mr Perry also advised that regular meetings of the trustee/directors should be held and that there should be a close monitoring of costings with quarterly management accounts to be produced for the benefit of the trustees and Mr Lee. The file note recorded that members were aware of the surplus and wished to have a say regarding expenditure.

On 15 May 2001 Mr Smith and Mr Mustard were appointed directors of the companies. Mr Sedgeley resigned from his position as director. Mr Lee told the Tribunal that he had no part to play in the selection of Mr Mustard. Mr Smith agreed to his appointment provided he could do it properly and have a meaningful role. Mr Smith was not prepared to take part in an unrealistic structure nor take on a nominal role.

Mr Smith stated that he fully understood his role as an independent director of the companies. He had been advised on his role by the companies' solicitors, Linnells, however, he accepted under cross-examination that Linnells had not been instructed by the companies.

Prior to their appointment as directors Mr Smith and Mr Mustard held a briefing meeting with Mr Lee and Mr Perry. Mr Lee explained to Mr Smith and Mr Mustard of the need for both companies to have independent directors but he also hoped that golfing members would step forward to drive the club forward. The meeting agreed that quarterly management accounts for the companies would be made available. Mr Smith commented on unrest amongst the membership regarding delayed improvement works. Mr Lee responded by saying that the quotation was greatly in excess of that initially envisaged and beyond current means. He also stated that the proposed works were the courtesy of the VAT efficient new arrangements.

On 2 August 2001 Companies' House imposed penalties for the late filing of the companies' accounts for the period ending 31 January 2000 which should have been submitted by November 2000.

An annual general meeting of the companies was held on 16 August 2001 at which the three directors, Mr Hayward (company secretary), Mr Lee, Mr Sime and Mrs Taylor were present. The meeting discussed the distinction between the companies trading at a loss and being insolvent. Mr Mustard expanded upon this in a letter to Mr Hayward dated 12 September 2001 where he referred to the subscriptions being used to clear outstanding balances from the previous year which created a heavy dependency upon the owner (Mr Lee) to meet additional expenditure over subscription income. Mr Mustard also considered that these arrangements meant that the sole responsibility for development issues would remain with the owner.

The bundle contained copies of directors meetings held on 21 September 2001 and 1 November 2001. The latter contained 16 action points, of which 12 involved Mr Lee which ranged from an introduction to the new green keeper to the fixing of subscriptions for 2002. At the November meeting the directors agreed to fix the subscription at £440 for full membership which was the same as the previous year but to raise the five day membership by £20 to £300. The directors held a subsequent meeting with Mr Lee on the 15 November 2001 where it was agreed that the subscription for five day membership would be £290 (not £300), and that the play and pay rate for the par three would increase to four pounds.

Mr Sime replaced Mr Hayward as secretaries to the companies. The details held by Companies' House recorded the date of his appointment as the 16 August 2001. On 4 January 2002 he wrote a letter to Mr Perry enclosing copies of the agenda and minutes of the Annual General Meeting held on 16 August 2001 which in his view demonstrated the trustee directors' input. Mr Sime noted Mr Perry's requirement for documentation that demonstrated the participation and operational work of the independent trustees, the need for trustee minutes of meetings and evidence of the VAT independence of the companies by members running the day to day operations.

Mr Sime commented in the same letter about the proposal from the trustees that there should be no increase in the subscriptions, except for one class of membership. Mr Sime was happy to report that this would result in a final profit for the joint limited companies which would then ultimately benefit the partnership. Mr Sime advised that he kept Mr Lee informed of the profit projections but was reluctant to supply the advance figures to the trustee directors, particularly without Mr Lee's approval in advance. Mr Sime told the Tribunal he informed Mr Lee rather than the company directors about the financial projections for the company because the financial survival of the companies depended upon Mr Lee.

On 11 December 2001 Mr Smith in his capacity as director of Club Limited informed members of the new subscriptions rates for 2002. He also mentioned the progress towards membership control of golfing activities via the elected General Committee.

Mr Lee encouraged greater member involvement from 2000 when he set up a general committee of golfers. The purpose of that committee was assisting in the general application of rules and standards of the club, to consider the need and timing for reminding the membership of such rules, and to consider the introduction of additional local rules whether applied to the course or to the clubhouse. We formed the conclusion from the minutes of the 2000 general committee meetings that Mr Lee effectively ran this committee. At the end of 2000 proposals were made to restructure the club which Mr Lee communicated to members in his subscription letter of 21 December 2000 referred to in paragraph 109 above.

On 26 March 2001 Mr Smith informed the members of the general committee of golfers that the restructuring of the administration of the club was on the point of finalisation:

" Under the new arrangements the golf course and its facilities will be leased by the partnership (our italics) to two subsidiary companies, South Herefordshire Golf Club Ltd and South Herefordshire Golf Ltd. The club house, bar staff and professional trading would remain the responsibility of the partnership which would continue to carry out many of its existing duties. Three Honorary Trustee Directors are being formally appointed from the membership of the club; these directors will have some form of liability arising from the running and operation of the two subsidiary companies. The major responsibility of the two subsidiary companies will be the administration and running of the club; this task will be performed by the various committees which are now being formed".

Mr Smith explained that these changes would be enshrined in a written constitution for the golf club. The constitution was approved by the club membership on 9 December 2001. Subsequent changes were made to the constitution following legal advice from Linnells, solicitors, which were approved by an extraordinary meeting of the club membership on 3 November 2002. According to Mr Smith the constitution consisted of various rules required by the Professional Golfers Association, other unions and the directors themselves. Mr Lee also sought the advice of Mr Perry and Linnells on the proposed constitution.

The title for the constitution stated that

"The name of the club shall be South Herefordshire Golf Club. The club is a non profit-making company limited by guarantee. The company through its directors shall have ultimate control over all golfing matters involving members. The object of the club shall be the promotion of golf and affiliated sporting facilities for the betterment and enjoyment of its members. The members of the company are directors and no member of the club shall become a member of the company unless specifically appointed by members of the company. The directors may delegate such functions as they may determine from time to time to the committee, however, the directors shall at all times have the power to overrule or disregard a decision of the committee. No committee or sub-committee of the club shall have any power to incur any expense on behalf of the club save to the extent that such expenditure has been authorised by the directors".

The constitution gave the General Committee of Golfers a legitimate position within the running of the golf club with the committee consisting of the various club captains and elected members from the membership. Within the constitution the partnership was described as the managers. The constitution also defined the classes of membership, set the rules for admission of new members, their resignation and expulsion and for the organisation and running of the club. The Club recognised The Royal and Ancient Golf Club of St Andrews as the ruling body of amateur golf and that it would abide by the Rules of Golf and Amateur Status as laid down by the ruling body.

The constitution did not apply to the non-members sporting activities which fell under the auspices of Golf Limited.

The modus operandi established by the constitution involved:

(1) The General Committee supported by various sub-committees dealt with those matters delegated by the companies. Mr Mitchener, a former Club Captain, considered that the General Committee had extensive control of all activities going on in the club. The minutes of the General Committee painted a different picture. The General Committee's powers of decision-making were limited to organising competitions, deciding handicaps, day-to-day golfing decisions, control of a small fund consisting of monies raised by the Committee from competitions and events. The majority of the action points arising from the General Committee was referred to the companies' directors.

(2) The directors would meet with the Club Captain to discuss the action points identified from the General Committee. The directors would then have meetings with Mr Lee in his home to discuss the action points plus any other matters affecting the companies. Mr Pinnell, director appointed 25 November 2004, explained that the purpose of these meetings was to enable the making of joint decisions between the directors and Mr Lee and agree a timetable for action. Mr Smith and Mr Lee disagreed with Mr Pinnell's understanding of the meetings' purpose. They considered the purpose to be eliciting Mr Lee's advice before the directors reached a decision on a specific matter.

Mr Smith asserted that he and his fellow directors made the decisions for the companies. They did not take instructions from Mr Lee. They directed Mr Lee who in his capacity as manager implemented their decisions. The directors put the companies first and the partnership second which according to Mr Smith led to frequent disagreements with Mr Lee. Mr Smith cited two examples of where he overturned Mr Lee's decisions regarding suspension of members' subscriptions. Mr Smith also referred to the improvement in the greens which arose from the directors putting pressure upon Mr Lee to purchase new machinery and the adoption of new working methods.

According to Mr Smith the companies did not aim to make money for Mr Lee. The directors' priority was to spend the money for the purpose of improving the golf course.

Mr Smith considered that the development of the club had been held back through lack of investment. He stated that Mr Lee was not prepared to reveal much information. Mr Lee promised a gradual increase in the money spent on the club but this did not happen. The directors had difficulties with Mr Lee regarding the management fees. It was always concluded that the club had to make do and mend. Mr Lee would occasionally buy new equipment but not on a consistent basis. The driving range had been clearly neglected with only three new mats added over 15 years.

Mr Smith welcomed the changes following the replacement of the partnership with Leaver. Membership had increased to 360. Leaver was prepared to take a lower management fee than Mr Lee so that the surplus could be re-invested in the golf club.

Mr Smith acknowledged that in certain years Mr Lee lowered the rent otherwise the companies would have ran out of money. However, he did not consider that Mr Lee would exercise the partnership's right to terminate the lease because it was not practical as the golf members would leave the golf club.

Mr Smith and Mr Mustard were actively involved in the running of the companies. Mr Smith was a regular attendee at the golf club as his home was only a short distance from the club. Mr Mustard maintained detailed records of directors' discussions and those with Mr Lee. According to Mr Smith, Mr Lee was not good at keeping written records of discussions and agreements. They received regular income and expenditure reports of the companies from Mrs Taylor who was employed by Mr Lee as book-keeper for his businesses. Mr Sime also provided Mr Smith with financial reports.

Mr Mustard, however, on several occasions expressed concern about the adequacy of the budget monitoring. In May 2003 he sent a note to Mr Smith regarding the forthcoming meeting with Mr Lee, in which he observed:

"Should we not be operating to annual budgets by category and measuring performance throughout the year against these. We did ask for this approach before and it was not thought necessary because of the flexibility in the funding by partnership contribution.

We have on many occasions sought to encourage an approach whereby expenditure is directly related to income without the influence of the partnership contribution but the dependency on the partnership is real and at the current membership levels provides the necessary liquidity to function. Last year it may be recalled that we suggested the provision of an identifiable sum or limit available from the partnership for budgeting purposes but this was not put into effect. Does this approach need to be reconsidered now?

Rent and management fee. Can there not be a budgeting figure set for these items at the outset and in the case of the management fee the range of duties to be performed identified and a delegated sum approved.

The companies held annual general meetings in 2002 and 2004 at which Mr Lee was in attendance. Mr Mustard was the only director to attend the 2004 meeting. Mr Merrill and Mr Smith gave apologies of absence due to personal and family reasons. According to correspondence in the bundle the Chairman and Company Secretary decided not to hold a 2003 meeting because all the necessary business had been dealt with at a prior board meeting.

The 2002 meeting reported on membership numbers, improvement works and future plans.

The 2004 meeting reported on the "trading and financial policy" under which the companies were run on a breakeven basis. The meeting noted the low income performance for Golf Ltd with the result that its rent had been reduced to a nominal amount which had adversely affected the partnership revenue. The minutes recorded that the directors instigated various improvements for the golf pay and play activities, such as a ticket purchase for a basket of balls.

The Financial Affairs of the Companies

The table below sets out the income and selected expenditure items for the companies together with their profit and loss for accounting years ending 31 January 1999 to 31 January 2003. The figures were taken from the companies' financial statements and other accounting records.

	1999 £, 000	2000 £, 000	2001 £, 000	2002 £, 000	2003 £, 000	2003 £, 000	2003 £, 000	2003 £, 000	2003 £, 000	2003 £, 000
	C ltd^[1]	G ltd^[2]	C ltd	G ltd	C ltd	G ltd	C ltd	G ltd	C ltd	G ltd
Income	131	92	92	77	91	75	103	77	97	69
Rent	22	16	23	18	12	18	25	18	22	0
Management Charges	77	11	2	18	2	18	2	18	11	8
Wages	-	61 66%	27 29%	18 23%	24 26%	16 21%	26 25%	17 22%	23 24%	33 48%
Other Expenditure	35 28%^[3]	6 7%	43 47%	26 34%	55 60%	23 31%	51 50%	24 31%	41 42%	30 43%
Net Profit/Loss	(3)	(3)	(3)	(3)	(2)	0	(1)	0	0	(2)

We conclude from the information in the above table:

(1) The companies did not declare a profit in the years 1999 – 2003. They either suffered a small loss or broke even.

(2) The rent charged to the companies varied from year to year and was less than the rent stated in the Tenancy at Will and the lease between the partnership and the companies.

(3) The management charges recovered by the partnership from the companies in each of the financial years were higher than that recorded in the respective service agreements which amounted in total to £15,000 per annum.

(4) The management charges of £88,000 in year ending 1999 were considerably higher than the amount specified in the service agreements.

(5) The split of management charges between Club Limited and Golf Limited did not reflect the apportionment in the two service agreements of £10,000 for Club Limited and £5,000 for Golf Limited.

(6) From 2000 wages expenditure was apportioned between the two companies reversing the 1999 practice of allocating the wages solely to Golf Limited.

(7) In 1999 the proportion of other expenditure to total expenditure was significantly lower than in subsequent years.

(8) The headings of other expenditure was greater in 2000 and subsequent years than in 1999.

Mr Sime gave evidence that the companies were prohibited from making a profit. Equally they could not make losses as the directors would be trading insolvent.

The principal source of income for Club Limited was the annual membership fee which was due on the 1 January of each year. Following the formation of Club Limited members were required to make their cheques payable to the company, however, payment by direct debit from the members' bank account went direct into the partnership bank account. The partnership had first call on the membership fees and was used to clear the outstanding debts from the previous year. According to Mr Sime when the companies were formed on 27 December 1997, the 1998 annual membership subscription was used to discharge the partnership debts associated with the golf club from the previous year. This continuing pattern of applying the annual subscription for the forthcoming years to debts incurred the previous year had the effect of depleting the cash flow of Club Limited for its current year which confirmed the dependency of Club Limited upon the partnership for a cash flow. Mr Sime stated that the partnership operated as the bank for the companies.

The income from Golf Limited was derived from the charges for the "pay and play" facilities which should have provided a regular income throughout the year. The income performance of Golf Limited, however, was disappointing. In 2003 the low turnover for Golf Limited resulted in the company not paying rent to the partnership. Mr Smith attributed the poor performance to the lack of investment in facilities, particularly the driving mats. Mr Sime identified concerns with the collection of charges, which was the responsibility of the golf professional. Although Mr Smith and Mr Mustard voiced their concerns about the turnover generated from the "pay and play" facilities and discussed proposals for income generation, there was no evidence of specific actions taken by the directors to address the problem, other than a reference in the minutes of the 2004 Annual General Meeting.

The charges for rent and management services by the partnership recorded in the companies' accounts did not correspond with the figures cited in the Tenancy at Will, the lease and the service agreements. One of the reasons for the anomaly appeared to be that the statutory officers for the company did not know about the agreements. Mr Sime in a letter to Mr Perry dated 23 July 2002 which was copied to Mr Lee but not to the directors stated that

"When I took over company secretarial matters from Edmund Haywood he was reluctant to send me any information. I eventually received copies of some of the 228a's and the like. No Memorandum and Articles of Association and other documents. His comments were that you and the solicitors had enough of these and it was up to you or me to find them. He did not even know where the statutory documents were kept and clearly had never seen them.

I have now found the boxes of company documents in Roger's office at How Caple even though the return forms all say they are kept at registered office being the club house.

In these boxes are long memorandums and the certificate of incorporation, plus the debenture document with Lee family as freeholders. Little else.

Certainly no reference to any lease or management fees agreement or equipment hire agreement".

The solicitors Linnells, however, in their letter dated 31 December 1997 stated that Mr Perry and Mr Sime had decided the initial charges under the agreements.

It would appear from the correspondence between Mr Sime and Mr Perry dated 23 July 2002 that the rent was fixed in accordance with an agreement made by them rather than by a decision of the directors. In the July 2002 letter Mr Sime stated that

"Do you have anything on file. We agreed the rent based on a five per cent of current valuation. This eventually linked to Edmund's freehold valuations figures apparently agreed with the Revenue in Edmund's accounts, so that is at least a commercial situation and were going to review annually or at least 3 yearly".

In an earlier letter from Mr Sime to Mr Perry dated 4 July 2000 Mr Sime stated that he raised the rent in the light of inflation. He also sought Mr Perry's opinion about raising the rent further to take advantage of its exempt VAT status.

The management fees paid by Club Limited of £77,236 and £11,140 by Golf Limited to the partnership in the accounting period ending 31 January 1999 bore no relationship to the amounts agreed in the service agreement. Mr Lee denied that he authorised the payment of the management charges. Further he stated that the partnership had not received these sums of monies.

Mr Perry described the effect of these payments as "to clear out the companies". Mr Sime formed the view that Mr Hayward introduced additional membership revenue from the partnership into the 1999 companies' accounts. The 1999 income of £130,000 was considerably higher than the average membership income of £96,000 collected by Club Limited in subsequent years. According to Mr Sime, Mr Hayward then created the additional management charge to eliminate the profit in Club Limited.

Mr Hayward's explanation in a memorandum to Mr Lee and Mr Sime dated March 2000 was that he intended to align the partnership accounts with the same accounting year end as that for the companies which would have meant substituting 31 January 1999 instead of 30 April 1998. In January 2000 he decided to abandon that plan when it became clear that Mr Lee's income for 1998/99 was much higher than expected. Thus he kept the original year end for the partnership accounts of 30 April 1998 which produced a small "useful" loss for the partnership. However, it was too late to reverse the management charges in the companies' accounts which had been set against the companies' profits to generate a small loss.

Mr Sime mitigated the effect of the 1999 high management charge by creating loan accounts between the companies and the partnership. In 1999 there was a positive balance in the loan accounts in favour of the companies which was then offset against the loans from the partnership to the companies in subsequent years. In the years following 1999 the loan accounts revealed a negative balance which indicated that the partnership was subsidising the activities of the companies. The loan accounts had no third party worth. The companies were not in a position to pay off the loans from the partnership which was acting as the companies' banker. The Appellant produced no supporting documentation which demonstrated the transparency of the loan arrangements between the companies and the partnership. Mr Sime considered that the entry of loan accounts in the companies' statutory accounts would attract no enquiry.

The management charges in the years 2000 through to 2003 were significantly lower than those imposed in 1999 but still higher than the total amounts specified in the service agreements. The service agreements required variations from the specified amount to be agreed and documented. The Appellant produced no documentation to support the higher payments

Mr Sime adopted a commercial approach in constructing the companies' expenditure for the 2000 accounts and onwards by identifying expenditure items originally borne by the partnership which could be attributed to the companies. Mr Sime's commercial approach had the effect of eliminating inter partnership/company journal entries and central payments except for the rent and management service payments. One of the major expenditure items was wages and the fees of the golf professional. Mr Mustard and Mr Smith on several occasions requested the drawing up of proper job descriptions of staff to gain an understanding of the costs apportionment and the split of responsibilities between the partnership and the companies. The role of the golf professional was a particular cause of concern for the directors. It appeared from the documentation produced at the hearing that the directors' concerns were never satisfactorily resolved.

The companies held separate bank accounts from the partnership. Mr Lee and his book-keeper Mrs Taylor conducted the day-to-day control of the companies' accounts. Mr Lee was authorised to sign cheques for the companies and transfer monies between the partnership and the companies. Mr Sime stated that there was an open mandate for Mr Lee and Mrs Taylor to transfer monies from the companies' accounts to the partnership and vice-versa. Although the directors were signatories to the companies' cheques, Mr Smith accepted that the directors rarely signed the cheques. Mr Lee was the usual signatory. The service agreements permitted the companies and the partnership to issue credit notes. The Appellant produced no examples of actual credit notes between the partnership and the companies.

The Role of Mr Lee

Mr Lee told the Tribunal that he created the companies so that the golfing members could be more involved with the running of the golf club. He and his father only intended to build a course for golfers to use. Mr Lee had no ambition to run a golf club. Mr Lee, however, accepted that he approached Mr Perry and instructed him to secure the VAT savings associated with the running of golf club. Mr Lee acknowledged that he was reliant on Mr Perry and his team to get things done. Mr Lee anticipated that the partnership would make a profit after the companies were put in place.

Mr Lee was a director of the companies until 27 October 1998.

Mr Lee stated that he did not realise that the partnership could give notice of one month to quit to the companies. He denied that the termination clause in the lease and the service agreements gave him effective control of the companies after he resigned his directorships. Mr Lee considered that the termination clause was necessary to protect the freehold interest of the partnership which in his view constituted usual business practice.

Mr Lee told the Revenue and Customs Officers in April 2000 that he was at the golf club every day and answered members' queries about their entitlements. Mr Perry explained to the Officers that the companies set the subscription rates for membership on a commercial footing. In theory the directors of the companies could change the rates but in practise they cannot do this if the companies were to break even.

After the visit from the Officers Mr Lee continued to attend the golf club on a daily basis because he did not trust the staff and it was difficult to retain chefs to carry out the catering. Mr Lee justified his involvement on the ground that he was now managing the club on behalf of the companies. The directors directed him. Mr Lee, however, attended every annual general meeting of the companies and held regular meetings with the directors. However, his direct involvement with the golfing aspects of the club declined after the new constitution was agreed with Mr Lee agreeing to vacate his position on the handicap committee in 2002.

Findings of Fact

The findings of fact apply equally to the two companies, except where it is stated that a specific finding refers to one of the companies.

The Partnership

The partnership had the aim of making profits, albeit not a very successful one. Mr Roger Lee took the decisions on behalf of the partnership in respect of its dealings with the companies.

Before the companies were established the golf club aspect of the partnership business was a loss making enterprise. After the setting up of the companies the partnership made a small net profit in two of the three sets of annual accounts produced to the tribunal.

The Setting Up of the Companies

Mr Lee contended that he set up the companies to give the golfing members greater control of the golfing club. The evidence, however, contradicted Mr Lee's assertion. We find from the evidence that

(1) Mr Lee instructed Mr Perry and his team to set up and develop the necessary arrangements to secure savings in VAT in respect of the golfing business run by the partnership.

(2) The VAT savings were significant and had the potential of converting a loss making enterprise into a profitable one.

(3) A clear audit trail of documents which demonstrated that Mr Perry and his team orchestrated every step from the birth of the companies and their subsequent development in an attempt to safeguard the VAT savings achieved from the "sporting exemption".

(4) Mr Lee took no active steps to involve the membership in the running of the golf club until some three years had elapsed following the creation of the companies, and even then the powers of the reformed General Committee were restricted to the organisation of members' activities.

We are satisfied that Mr Lee's sole motivation in the setting up the companies was to secure savings in VAT payments which could then be utilised in strengthening the financial viability of the partnership in respect of its golfing business. The steps taken by Mr Lee to involve the members in the running of the club were cosmetic and carried out with the intention of deflecting Revenue and Customs' interest in how the golf club was ran.

We find that the Memoranda and Articles of Association of the companies specified that the companies were limited by guarantee and their objects were non-profit making. Further any surplus achieved by the companies could not be distributed by way of dividends or bonuses to members and that surplus assets on winding up would be distributed to non-profit making organisations. The Memoranda, however, authorised the means through rental payments and service agreements by which the partnership could extract funds from the companies.

The Agreements

Mr Lee agreed the terms of the transfer and service agreements and the Tenancy at Will on behalf of the partnership in his capacity as partner and on behalf of the companies in his capacity as director. The lease was signed by Mr Sedgeley, a director, for the companies.

The goodwill paid by the companies to the partnership was a nominal amount of £200 each.

Under the agreements the book debts of the partnership were not transferred to the companies. However, that particular term of the transfer agreements was of no effect because the companies in their first year of operation applied their income to debts of the partnership incurred the previous year.

The terms of the service agreement remained in force until the partnership sold its interests in the golf club to Leaver in May 2005. Mr Smith, director of the companies from 2001, did not see the need to obtain an independent assessment of the terms of the service agreements.

The service agreements specified that the companies would pay the partnership £15,000 per annum. Mr Smith did not appear to be aware of the charges because he believed that Mr Lee was entitled to £25,000 per annum. The actual payments made by the companies to the partnership from 1997 to 2003 for management services were higher than the charges specified in the agreements. The Appellant produced no documents authorising variation of the specified amount which was a requirement of the service agreements.

Either party on giving six months notice could terminate the service agreements. Under its agreement with Club Limited the partnership on termination retained the right to keep membership information in its possession and to use that information for any purpose.

The Tenancy at Will and the subsequent lease gave the companies no security of tenure in respect of their occupation of the golf course. The partnership was able to terminate the companies' tenancy by giving one months notice. The partnership obtained authorisation from Oxford County Court on 14 April 2000 to exclude the protections for business tenancies under the Landlord and Tenant Act from the lease.

The rent charged under the Tenancy at Will and the lease was not supported by an independent valuation. The rent collected by the partnership in 1997 to 2003 was lower than the rent specified in the various agreements.

Mr Smith had not seen a copy of the lease. He accepted the views of Mr Lee and Mr Perry that the rent mechanism was fair to the companies.

We are satisfied that the making of the agreements, Tenancy at Will and the lease and their terms did not have the hall-mark of arms length agreements. The processes for making and reviewing them did not allow for independent scrutiny on behalf of the companies with the result that the interests of the companies were secondary to those of the partnership which were protected by the various agreements. We also find that the parties did not adhere to the financial clauses of the various agreements which included the partnership book debts, service charges and rents. We conclude that the partnership viewed the agreements as the means through which it could extract funds from the companies rather than regulating its business relationship with the companies.

The Role of the Directors and Mr Lee

Mr Lee and his mother resigned as directors of the companies on 27 October 1998. We decided on balance that Mr Lee and his mother ceased to be members of the companies following their resignation as directors.

Mr Lee and his mother appointed their replacements, Mr Bates and Mr Sedgeley. Mr Bates was Mr Lee's brother-in-law. Mr Sedgeley was a relatively new member of the golf club. On 1 May 1999 Mr Merrell replaced Mr Bates as director after Mr Perry advised Mr Lee that Mr Bates did not fit the description of an "independent director". Mr Merrell was not a regular attendee at the golf club, playing golf only on a Sunday. We accept Mr Smith's evidence that Mr Merrell did not take an active part in the running of the companies.

The Appellant produced no documentary evidence of directors' meetings or decisions taken by directors from 27 October 1998 to 15 May 2001. During that period Mr Lee ran the first golfers' general committee, which was not informed of the new arrangements for running the club until Mr Smith's announcement at the 26 March 2001 meeting, more than three years after the incorporation of the companies.

Until 2002 Mr Lee, not the directors, notified the membership of the annual subscriptions.

The companies' accounts for year ending 31 January 1999 were not submitted on time to Companies' House, which demonstrated that the directors were not fulfilling their responsibilities.

We are satisfied that Mr Lee identified Mr Bates, Mr Sedgeley and Mr Merrell as directors of the companies because they were compliant to his wishes in respect of the running of the companies. We place no weight on Mr Lee's assertion that they were appointed to enable the membership to become involved in the running of the golf club. We find that Mr Lee arranged the appointments of Mr Bates, Mr Sedgeley and Mr Merrell in accordance with Mr Perry's advice for the purpose of trying to preserve the VAT exempt status of the "golfing services". We are satisfied that the Mr Lee made the decisions for the companies, not the directors, prior to the appointments of Mr Mustard and Mr Smith on 15 May 2001.

Mr Lee was not involved in the appointments of Mr Mustard and Mr Smith as directors. Mr Smith was a longstanding member of the golf club and a former Club Captain. Mr Mustard and Mr Smith took their responsibilities as directors seriously endeavouring to put the interests of the companies first. From 2002 Mr Smith issued the subscription letters to members and dealt with membership issues. He was instrumental in bringing about the new constitution for the golf club enabling the members to gain control of "pure" golfing matters, which led to the removal of Mr Lee from involvement with these matters. Mr Mustard and Mr Smith contributed to the improvement in golfing facilities, such as better greens.

Mr Mustard and Mr Smith, however, were prevented from fulfilling their responsibilities as directors by the way the finances of the companies were structured. The income collected by the companies, particularly the subscriptions, was applied first to the debts incurred the previous year to the partnership. Further they had no effective control over the income collected from the pay and play facilities. These circumstances resulted in the companies being financially dependent upon the partnership.

Mr Mustard and Mr Smith were unable to break the relationship of financial dependency because they did not receive independent advice and the necessary information to make financial decisions on behalf of the company. They were reliant on the advisers brought together by Mr Perry to bring about the VAT savings for the benefit of the partnership. The divided loyalties of the advisers were evident from the correspondence between Mr Sime and Mr Perry dealing with the companies, which was copied to Mr Lee but not to the directors. Mr Smith was not aware of the precise terms of the lease and the service agreements. Mr Mustard despite frequent requests did not obtain the financial information for the companies in the form in which the directors could make realistic expenditure decisions on behalf of the companies.

Mr Smith was adamant that Mr Lee in his capacity as manager took instructions from the directors and that the directors made the decisions for the companies. However, we prefer the evidence of Mr Pinnell which we consider to be a more accurate description of the relationship between the company directors and Mr Lee post 15 May 2001. Mr Pinnell described a situation where the directors would discuss proposals of the Golfers' General Committee and other matters affecting the companies. The directors would then have a meeting with Mr Lee to make joint decisions. We would, however, go one step further than Mr Pinnell and find that Mr Lee decided the major income and expenditure issues affecting the companies. Our conclusion is supported by:

(1) the relationship of financial dependency between the companies and the partnership;

(2) Mr Lee's control of the day-to-day companies' income and expenditure;

(3) the divided loyalties of the advisors to the companies;

(4) the documentary evidence, in particular minutes of the directors meetings in September and November 2001 and the meeting between Mr Lee and the directors in November 2001 which fixed the 2002 subscriptions.

The Golfers' General Committee had no powers to determine the supply of golfing services to members. The General Committee operated under delegated authority from the companies and was confined to the organisation of members' activities.

We are satisfied from our findings of fact that during the period from 15 May 2001 to 17 May 2005 when Leavers took over the partnership responsibilities that Mr Lee was effectively making the major decisions on behalf of the companies despite the best efforts of Mr Mustard and Mr Smith in trying to assert the independence of the companies.

The Financial Position

The companies did not declare a profit in their accounts for 1999 to 2003. They either suffered small losses or broke even.

The evidence, however, casts doubt on the accuracy of the accounts and challenged the break even position for the companies. A file note between Mr Perry and Mr Lee dated 8 February 2001 revealed that members were aware of the surplus and wished to have a say on the proposed expenditure (see paragraph 110). On 8 February 2002 Mr Sime was happy to report in a letter to Mr Perry that this would result in a final profit for the joint limited companies which would then ultimately benefit the partnership. Mr Sime copied the letter to Mr Lee but not to the directors (see paragraph 118).

The companies' expenditure on service charges and rent did not correspond with the amounts specified in the relevant agreements. The service charges were higher than those specified, whilst the rent collected was generally lower than the rent specified in the Tenancy at Will and the lease.

In the year ending 31 January 1999 the service charges amounted to £88,000 which had the effect of clearing out the companies and eliminating any profits. Although Mr Lee denied receiving the £88,000, we are satisfied from Mr Hayward's memorandum dated March 2000 that the £88,000 was transferred to the partnership.

Mr Sime mitigated the impact of the £88,000 service charge by creating a loan account between the companies and the partnership which started off as a positive balance in favour of the companies but became a negative balance in subsequent years. Mr Sime adopted this approach because it reflected the dependence of the companies upon the partnership for funding.

In the companies' accounts following the year ending 31 January 1999 Mr Sime allocated other items of expenditure from the partnership to the companies, whilst at the same time reducing the amount payable to the partnership in service charges. He also re-apportioned the wages expenditure between the two companies. In the 1999 accounts only Golf Limited incurred expenditure on wages.

The transparency of Mr Sime's accounting was brought into question by:

(1) Mr Mustard's concerns about the derivation of some of the companies' costs, particularly the salary of the golf professional.

(2) Mr Sime's statement to Mr Perry in his letter dated 4 January 2002 that his commercial approach had eliminated inter partnership/company journal entries and central payments except the rent and management service charges and that the loan accounts should attract no enquiry.

We conclude that the accounting treatment of the companies' accounts lacked transparency which undermined the accuracy of the expenditure entries in the companies' accounts. The amounts paid by the companies for rent and management service charges were arbitrary. We find that Mr Hayward and Mr Sime contrived the resultant break even position of the companies in the accounts to preserve their non-profit making status. We are satisfied that the companies made surpluses which were transferred to the partnership through expenditure adjustments, rent and management service charges.

Reasons for Our Decision

The central issue in this Appeal was whether the companies were eligible bodies within the meaning of Note 2(A), Group 10 of Schedule 9 of the 1994 Act to qualify for the sporting services exemption.

The specific questions to be decided:

(1) Were the companies non-profit making bodies?

(2) Were the companies under the commercial influence of Roger Lee?

Kennemer is the leading authority on the definition of non-profit making bodies. The European Court of Justice ruled that a non-profit making organisation must not have the aim of achieving profits for its members. The fact that an organisation subsequently achieves profits, even if it seeks to make them, or makes them systematically, would not affect the original categorisation of the organisation as long as those profits were not distributed to its members as profits. The Court interpreted the term "profit" as financial advantages for the organisations' members rather than as surpluses at the end of the accounting year. The Advocate General described financial advantages as the enrichment of natural or legal persons, in particular those having a financial interest in the organisation. Financial advantage would include not only overt distribution of profits but also covert distributions, such as unusually high remuneration for employees, redeemable rights to increasingly valuable assets and the award of supply contracts to members.

The Court of Appeal in Messenger Leisure Developments Ltd elaborated upon the judgment in Kennemer by pointing out that Kennemer was not authority for the very different proposition that an organisation which has no power to make and which does not make distributions to its members is necessarily a non-profit making organisation. Further the Court of Appeal saw no basis to restrict financial advantages for organisation members to a particular category of advantage, such as a distribution of surplus funds to members.

The facts of Kennemer and Messenger Leisure Developments Ltd concerned companies and their subsidiaries, which were not the same as the facts of this Appeal, involving a partnership and two companies. We are satisfied that the reference in Kennemer and Messenger to members deriving financial advantages is fact specific. We consider that the Advocate General's interpretation of financial advantage, namely, "the enrichment of natural or legal persons, in particular those having a financial interest in the organisation" is sufficiently wide depending upon the facts to include natural or legal persons who are not technically members of the companies.

Thus in relation to the first question we are required to decide whether the companies had the aim of achieving profits with profits referring to the enrichment of natural or legal persons, in particular those having a financial interest in the companies. In order to make this decision it is necessary to examine not only the companies' express objects as set out in their Memoranda but also how the companies operated in practice.

We found the following facts that supported the Appellant's contention that the companies were non-profit making bodies:

(1) The Memoranda and Articles of Association of the companies specified that the companies were limited by guarantee and their objects were non-profit making. Further any surplus achieved by the companies could not be distributed by way of dividends or bonuses to members and that surplus assets on winding up would be distributed to non-profit making organisations.

(2) The companies did not declare profits in their accounts from 1999 to 2003. They either made small losses or broke even.

(3) Mr Lee and his mother were not members of the companies after they resigned their directorships in October 1998.

(4) The relationship between the partnership and the companies in respect of rent and management services was regulated by a lease and written agreements.

(5) The directors of the companies appointed on or after 15 May 2001 were conscientious and took their responsibilities seriously endeavouring to put the interests of the companies first.

(6) In 2002 a constitution for the Golf Club was agreed which enabled the golfing members to organise their own activities and distanced Mr Lee from involvement with "pure" golfing matters, such as the handicap committee.

The above findings of fact, however, have to be weighed against the following findings of fact which supported the Respondents' contention that the companies were not non-profit making bodies:

(1) The partnership had the aim of making profits, albeit not a very successful one.

(2) Mr Roger Lee took the decisions on behalf of the partnership in respect of its dealings with the companies.

(3) Before the companies were established the golf club aspect of the partnership business was a loss making enterprise. After the setting up of the companies the partnership made a small net profit in two of the three sets of annual accounts produced to the tribunal.

(4) The companies' Memoranda authorised the means through rental payments and service agreements by which the partnership could extract monies from the companies.

(5) The making of the agreements, Tenancy at Will and the lease and their terms did not have the hall-mark of arms length agreements. The processes for making and reviewing them did not allow for independent scrutiny on behalf of the companies with the result that the interests of the companies were secondary to those of the partnership which were protected by the various agreements.

(6) The parties did not adhere to the financial clauses in the agreements, namely, the partnership book debts, service charges and rents. The partnership viewed the agreements as the means through which it could extract funds from the companies rather than regulating its business relationship with the companies.

(7) The first directors of the companies Mr Bates, Mr Sedgeley and Mr Merrell were nominees of Mr Lee and allowed him to make the decisions on behalf of the companies.

(8) Mr Mustard and Mr Smith were prevented from exerting effective control of the companies' affairs because Mr Lee had ensured that the companies were financially dependent upon the partnership and he retained day-to-day control of the companies' income and expenditure. The divided loyalties of the companies' advisors also impeded their roles as directors. As a result Mr Lee was effectively making the major decisions on behalf of the companies despite the best efforts of Mr Mustard and Mr Smith in asserting the independence of the companies.

(9) The Golfers' General Committee had no powers to determine the supply of golfing services to members. The General Committee operated under delegated authority from the companies and was confined to the organisation of members' activities.

(10) The accounting treatment of the companies' accounts lacked transparency which casts doubt on the accuracy of the expenditure entries in the companies' accounts.

(11) The amounts paid by way of rent and management service charges were arbitrary.

(12) Mr Hayward and Mr Sime contrived the resultant break-even position of the companies in the accounts to preserve their non-profit making status.

(13) We are satisfied that the companies made surpluses which were transferred to the partnership through expenditure adjustments, rent and management service charges.

(14) Mr Lee's sole motivation in setting up the companies was to secure savings in VAT payments which could then be utilised in strengthening the financial viability of the partnership in respect of its golfing business.

(15) The steps taken by Mr Lee to involve the members were cosmetic.

(16) Mr Perry and his team orchestrated every step from the birth of the companies and their subsequent development in an attempt to safeguard the VAT savings achieved from the "sporting exemption".

When the facts found are examined as a whole we conclude that the companies in practice had the aim of achieving profits for the benefit of the partnership. The non-profit making status of the companies as described in their Memoranda was a matter of form rather than substance. The Memoranda allowed the partnership to extract funds from the companies by way of rent and management service charges. The actual payments of rent and service charges made by the companies to the partnership varied from the amounts specified in lease and the service agreements. Thus they were not bona fide payments for services received, instead they represented distributions from the companies to the partnership. The terms of the lease and the agreements promoted the interests of the partnership. They were not made at arms length and independently reviewed by the companies.

The first set of independent directors of the companies did not participate in the management of the companies. They were chosen by Mr Lee and allowed him to run the companies for the benefit of the partnership. The influence of Mr Mustard and Mr Smith upon the operations of the companies was at the margins in giving the golfers a greater say in the running of members' activities. They were prevented from realising the non-profit making status for the companies because of their financial dependency upon the partnership and the divided loyalties of the companies' advisers. From the outset the companies were set up in such a way as to be in a permanent state of indebtedness to the partnership which meant that the companies could not make a financial decision without the approval of Mr Lee. The lack of transparency in the companies' accounts reinforced the powerlessness of Mr Mustard and Mr Smith as independent directors and also provided other channels for conferring a financial advantage to the partnership, such as the allocation of partnership expenses to the companies. The outcome of these arrangements was that the partnership declared profits in 2001 and 2002 compared with the trading loss recorded in the 1993 to 1997 accounts when the partnership supplied the golfing services direct.

Mr Hayward and Mr Sime contrived the break even position for the companies as recorded in the statutory accounts. We found that the companies did make a surplus which was distributed to the partnership by hiding it within the service charges, rent and the allocation of partnership expenses to the companies. The distribution of the companies' surplus enriched the partnership.

Mr Lee set up the companies with the sole intention of securing the potential VAT savings for the benefit of the partnership. He enlisted Mr Perry and his team to make this happen and orchestrate the companies' development to obscure his true purpose of making a profit for the partnership from the arrangements. Mr Lee, however, was entitled to make a commercial decision to arrange his affairs in such a way as to bring the supply of golfing services within the terms of the statutory exemption. Unfortunately for Mr Lee, we find that the arrangements he made were a matter of form rather than of substance and did not meet the requirements of the statutory exemption.

We are, therefore, satisfied for the reasons set out above that the companies from 1 January 2000 to 17 May 2005 were not non-profit making bodies. Mr Lee set up the companies with the specific aim of achieving profits for the partnership. He ensured that the companies fulfilled that aim by severely restricting the influence of the directors and by retaining financial control of the companies. The companies had the aim of making profits for the partnership.

The second disputed ground about the qualification of the companies as eligible bodies was whether the companies were under the commercial influence of Mr Lee. The dispute was whether Mr Roger Lee was a shadow officer of the companies, in that its officers and members habitually acted in accordance with Mr Lee's instructions or directions. The issue of commercial influence, however, only comes into play if the companies fall within the category of non-profit making bodies. In view of our finding that the companies were not non-profit making bodies, it is not strictly necessary for us to determine the dispute about commercial influence. Also we have found that the companies have distributed their surpluses to the partnership which means that the requirements of a) and b) of Note (2A) of Group 10 of Schedule 9 of the 1994 Act have not been met.

If the Appellant had satisfied us on the balance of probabilities that the companies had been non-profit making bodies and had not distributed their surpluses to the partnership, we would have found that the companies were under the commercial influence of Mr Lee.

We consider that our findings of fact overwhelmingly support our conclusion that Mr Lee operated as a shadow officer of the companies from 1 January 2000 to 17 May 2005, namely:

(1) Mr Roger Lee took the decisions on behalf of the partnership in respect of its dealings with the companies.

(2) Mr Lee chose the "independent" directors who were responsible for the companies up to 15 May 2001.

(3) The Appellant produced no evidence of any decisions taken by the directors or minutes of directors' and companies' meetings during this period.

(4) The directors failed to approve the 2000 companies' accounts by the specified time limit which resulted in the imposition of late filing penalties on the companies.

(5) The directors did not challenge the amounts paid in rent and service charges to the partnership despite those amounts not complying with the terms of the agreements.

(6) When interviewed by the Customs Officers, Mr Lee accepted that members would look to him to resolve their problems.

(7) Mr Lee sent the subscription letters to members up to 2002.

(8) The independent directors up to 15 May 2001 allowed Mr Lee to make the decisions for the companies.

(9) Mr Lee was present at the golf club on a daily basis. He attended companies' meetings with his advisers even though he was not a director or a member of the companies.

(10) Mr Lee retained control of the day-to-day income and expenditure of the companies.

(11) From the outset the finances of the companies were structured in such a way as to make them financially dependent upon the partnership which reinforced Mr Lee's control of the companies.

(12) The treatment of the companies' accounts was not transparent. The directors appointed after 15 May 2001 were not made aware of the details of originating documents for the rent and the service charges, and the basis for the derivation of other expenses charged to the companies.

(13) The companies were dependent upon the advice of Mr Perry and his team who were enlisted by Mr Lee to protect the interests of the partnership. Mr Sime, the company secretary from 2001, corresponded with Mr Perry about the companies' finances with a copy to Mr Lee but not to the directors.

(14) The independent directors in place from 15 May 2001 to 17 May 2005 were only able to influence the direction of the companies at the margins, such as the organisation of members' activities, which did not directly impact on the supply of golfing services. The financial structuring of the companies, the divided loyalties of the advisers and the non-transparent nature of the accounts conspired together to prevent the directors from making decisions on behalf of the companies without the prior approval of Mr Lee.

(15) The reliance of the directors upon Mr Lee was demonstrated by the minutes of the directors' meetings and subsequent meetings held with Mr Lee. The requirement to hold meetings with Mr Lee after meetings of the directors provided further confirmation of the directors' need to seek Mr Lee's approval before a decision was made.

We are, therefore, satisfied that that the companies' directors habitually acted in accordance with Mr Lee's instructions or directions and that he was a shadow officer of the companies.

Decisions

We decide that the companies were not eligible bodies within the meaning of Group 10 of Schedule 9 of the 1994 Act for the period from 1 January 2000 to 17 May 2005. We, therefore, hold that Club Limited and Golf Limited should be compulsorily registered for value added tax from 1 September 2000 and 1 November 2000 respectively. We dismiss the Appellant's appeal on the disputed issue of compulsory registration.

During the hearing the parties reached an agreement in respect of the disputed assessment in the sum of £13,477 against the partnership for undeclared supplies of services, namely the supply of staff, to the companies.

We, therefore, hold that the Appeal against the disputed assessment is settled by consent on the following terms:

"That the partnership is liable to pay to the Respondents the sum (inclusive of interest) of £4,100 in full and final settlement of the amount due to the Respondents pursuant to the Assessment.

It is further agreed that so long as the said sum is received by the Respondents before 30 June 2006 there shall be no further liability to interest, otherwise the partnership will be liable to interest on that sum at the rate applicable to section 74 of the 1994 Act under section 197 of the Finance Act 1996 from 1 July 2006 until the date on which it is paid".

The Respondents applied for costs in the event of the dismissal of the substantive Appeal. The general rule is that the Respondents will not apply for costs against an unsuccessful Appellant except in a limited number of circumstances which include an Appellant misusing tribunal procedure. Respondents' Counsel contended that the Appellant failed to comply with the directions of the Tribunal in respect of disclosure of documents referring specifically to the directions of Tribunal Chairman, John Clark, released on 19 January 2006. Mr Clark ordered a penalty of £1,000 in the event of non-compliance. Further Counsel complained that the Appellant had carried out "a document dump" just before the hearing.

The Appellant was unable to respond in full to the Respondents' representations on costs due to time constraints at the end of the hearing. We do not have sufficient information to make a decision about the costs order and the imposition of the penalty in the sum of £1,000. We direct the Appellant to submit its written representations to the Tribunal Office with a copy served on the Respondents within 28 days from release of the decision. We will determine the question of costs and penalty without a hearing unless either party requests one.

MICHAEL TILDESLEY OBE

CHAIRMAN

RELEASE DATE: 13 July 2006

LON/02/131

Note 1   C ltd =Club Limited    [Back]

Note 2   G ltd =Golf Ltd    [Back]

Note 3   % of income for the specific year    [Back]