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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Bournemouth Symphony Orchestra v HM Revenue & Customs [2006] EWCA Civ 1281 (09 October 2006) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2006/1281.html Cite as: [2006] EWCA Civ 1281 |
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C3/2006/0369 |
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
CH/2004/APP/0810 and CH/2005/APP/0488
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE MAY
and
LORD JUSTICE LLOYD
____________________
| BOURNEMOUTH SYMPHONY ORCHESTRA |
Appellant |
|
| - and – |
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| COMMISSIONERS FOR H M REVENUE & CUSTOMS And between : COMMISSIONERS FOR H M REVENUE & CUSTOMS - and - LONGBOROUGH FESTIVAL OPERA |
Respondents Applicant Respondent |
____________________
WordWave International Ltd
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
For Bournemouth Symphony Orchestra
Mr Nicholas Paines QC and Miss Valentina Sloane (instructed by Solicitor for H M Revenue & Customs, Somerset House, Strand, London WC2C 1LB) for H M Revenue & Customs
Mr Robert Englehart QC and Miss Arparna Nathan (instructed by Needham & James, Compton House, Moreton-in-Marsh, GL56 0AX) for Longborough Festival Opera
____________________
Crown Copyright ©
Lord Justice Chadwick :
The cultural services exemption
"13A.2(a) Member States may make the granting to bodies other than those governed by public law of each exemption provided for in 1(b), (g), (h), (i), (l), (m) and (n) of this Article subject in each individual case to one or more of the following conditions:
- they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied,
- they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned,
- they shall charge prices approved by the public authorities . . . or . . . prices lower than those charged for similar services by commercial services subject to value added tax,
- exemption of the services concerned shall not be likely to create distortions of competition such as to place at a disadvantage commercial organisations liable to value added tax."
"(2) For the purposes of item 2 "eligible body" means any body (other than a public body) which –
(a) is precluded from distributing, and does not distribute, any profit it makes;
(b) applies any profits made from supplies of a description falling within item 2 to the continuance or improvement of the facilities made available by means of the supplies; and
(c) is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities."
In that context "public body" has the meaning given by note (1). It may be noted that paragraphs (a) and (b) of note (2) do not give effect to the whole of the condition described in the first indent: there is no requirement that an eligible body shall not "systematically aim to make a profit". Nor does note (2) incorporate the third or the fourth indents of article 13A.2(a).
"11 The Society comprises some 4,000 individual members who elect a president, secretary, treasurer and council. None of the officers or members of the Society or of its council receives any remuneration from, or has any financial interest in, the Society. Members of the council, including the officers, may receive only reimbursement of proper expenses. The council is the governing body of the Society, with general responsibility for management, control and administration of its revenue, property and affairs. It meets six times a year to deal with business, and has also appointed seven management boards or committees with responsibility for supervising specific aspects of that business; they meet between four and eight times a year and their members are again unpaid but receive reimbursement of expenses in the same way as council members.
12 In addition, the Society employs several hundred staff, including a director general and four directors, who must not be members but to whom it may pay 'reasonable and proper' remuneration. The director general and directors are involved with the Society's activities in accordance with their areas of responsibility, and attend meetings of the council and the management boards and committees as appropriate but are not members thereof. There is a finance director, a personnel director and one director for each of the Society's two zoos, the latter being responsible for the day-to-day operation of the zoos."
The question referred sought guidance as to how the words in the second indent under article 13A.2(a) were to be interpreted in relation to those facts; and, in particular, (a) what were the criteria for determining by whom a body is managed and administered for the purposes of that provision and (b) what were the criteria for determining whether management and administration of a body is conducted on an essentially voluntary basis.
"21 . . . although Member States are free to apply or not any of the discretionary conditions in Article 13(A)(2)(a), each one must be interpreted uniformly throughout the Community and not as each Member State thinks fit. Those conditions allow the Member States to confine the exemption to activities carried out on a non-commercial basis and to avoid distortion of competition with taxable commercial undertakings. The second indent reinforces the first by ensuring that a formally non-profit-making organisation does not produce private profit for those who direct its activities."
At paragraph 22 the Advocate General rejected the submission, advanced on behalf of the United Kingdom, that the overriding object of the provisions in article 13A.2(a) was to enable a Member State to maintain fiscal neutrality as between commercial and non-commercial undertakings by preventing the distortion of competition. At paragraph 25 of his opinion he observed that:
"25 . . . the wording of the condition in question [the condition described in the second indent] reflects another concern which was manifestly felt in the drafting of Article 13(A), that of ensuring that certain activities should not benefit from exemption if they are run for commercial profit."
He pointed out that two of the exemptions were expressly confined to 'non-profit-making organisations' and that each of the seven sub-paragraphs in article 13A.1 to which article 13A.2(a) applied – sub-paragraphs (b), (g), (h), (i), (l), (m) and (n) – could be subjected, under the first indent in article 13A.2(a), to the condition that any profits should not be distributed.
"26 The second indent reflects a slightly different aspect of the same concern. Rather than focusing, like the first indent, on the approach of the entity to the making and use of profit, it seeks specifically to exclude the possibility that the persons who manage and administer the entity may have any direct or indirect interest in the financial results of its activities. The condition 'on a voluntary basis' may thus be seen as reinforcing that basic prohibition."
The "basic prohibition", in that context, is, I think, the prohibition which excludes bodies from the benefit of the exemption if they are run for commercial profit. As the Advocate General pointed out, the first indent addressed one aspect of that concern, the second indent addressed "a slightly different aspect of the same concern". His observation that the condition "on a voluntary basis" was to be seen as "reinforcing that basic prohibition" is, as it seems to me, properly understood as an indication of his view that the restriction in the second indent (as a whole) was one which could be imposed by Member States – whether in addition to the restriction in the first indent or as a "stand alone" condition – in order to secure adherence to the "basic prohibition" that the body should not be run for commercial profit. I am not persuaded that, in making the observation that he did in the final sentence of paragraph 26 of his opinion, the Advocate General intended to distinguish between "on a voluntary basis" and "by persons who have no direct or indirect interest". As I have said, I think he was referring to the condition as a whole.
"30 In line with the view that I have taken above [at paragraph 26] the second indent of Article 13(A)(2)(a) concerns those who run the organisation in question and seems clearly designed to preclude their being in a position to run it in such a way as to further their own enrichment.
31 If a Member State applies that indent alone, the aim and effect appear to be a 'separation of powers'. Certain individuals may have an interest in 'the results of the activities concerned' but must not be in a position to influence those results, whilst others, who may be in a position to influence the results, must have no interest in them, so that whatever decisions they take will be unaffected by considerations of private gain, whether direct or indirect."
Applying that test to the facts in the London Zoo case, the Advocate General thought that the "management and administration" of the Zoo might well include some of the activities of the operational directors to whom he had referred at paragraph 12 of his opinion, notwithstanding that they were not members of the council or of the management boards – see paragraph 33 of his opinion.
"1. . . . the condition requiring a body to be managed and administered on an essentially voluntary basis refers only to members of that body who are designated in accordance with its constitution to direct it at the highest level, as well as other persons who, without being designated by the constitution, do in fact direct it in that they take the decisions of last resort concerning the policy of that body, especially in the financial area, and carry out the higher supervisory tasks.
2. . . . the words 'on an essentially voluntary basis' refer to the members who compose the organs entrusted with the management and administration of a body of the kind referred to in that provision and those persons who, without being designated by the constitution, do in fact direct it, and refer also to the reward which the latter may receive, habitually or exceptionally from that body."
"[17] As for the interpretation of that extra condition, to the effect that a body availing itself of one of the exemptions in Article 13A(1) of the Sixth Directive must be managed and administered on an essentially voluntary basis, it follows from the legal context in which that condition occurs that the Community legislature wanted to make a distinction between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members (see in relation to the exemption under art 13A(1)(m) of the Sixth Directive, Case C-174/00 Kennemer Golf & Country Club [2002] ECR I-3293, paragraph 34)."
In order to understand what the Court had in mind when referring to the "legal context in which that condition occurs" it is necessary to consider its decision in the Kennemer Golf & Country Club case.
"[34] The Netherlands government argues that such an interpretation [that 'profit', in the context of 'non-profit-making organisation', is to be understood not in the sense of surpluses but in the sense of financial advantages for the members of the organisation] does not take account of the fact that the first indent of art 13A(2)(a) must, as an additional condition necessarily have a content extending beyond that of the basic provision. In response to that argument, it suffices to observe that that condition does not refer only to art 13A(1)(m) of the Sixth Directive but also to a large number of other compulsory exemptions which have a different content."
And the Court of Justice went on to answer the third question under reference in that case in these terms:
"[35] Consequently, the answer to be given to the third question must be that art 13A(1)(m) of the Sixth Directive is to be interpreted as meaning that an organisation may 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. The first part of the optional condition set out in the first indent of art 13A(2)(a) of the Sixth Directive is to be interpreted in the same way."
So the distinction which the Community legislation sought to make was not between bodies which sought to generate surpluses from their activities and those which did not: the distinction was between bodies - "commercial undertakings" – which distributed profits to their members and bodies – "non-profit-making organisations" - which did not.
"52 This provision [the first indent of article 13A.2(a)] sets out three conditions: (i) there may be no systematic aim of making a profit; (ii) any profits nevertheless arising may not be distributed; (iii) such profits must be used for the continuance and improvement of the services supplied. It seems to me clear from the language used that those conditions are cumulative and not alternative.
53 They must moreover be construed in such a way as to be coherent both among themselves and with the terms of the exceptions to which they may be applied. Therefore, taken together, they should be capable of allowing some non-profit-making organisations within the meaning of art 13A(1)(m) to benefit from the exemption whilst excluding others; put another way, it should be possible for some but not all of those organisations to fulfil the conditions . . . . The same applies, mutatis mutandis, with regard to the bodies referred to in the other sub-paragraphs of art 13A(1) to which the conditions may be applied; whilst there may be some degree of overlap between the definition of the body in question and the conditions that may be imposed, the application of the combined conditions may be expected in some way to limit the scope of that definition.
54 It is inherent in the concept of a non-profit-making organisation as I have defined it that the second condition of the first indent – prohibition of the distribution of profits – will be fulfilled. Moreover, the word 'profit' must be construed here as 'surplus of income over expenditure' rather than 'enrichment of natural or legal persons' (that is to say profit which by its very nature is distributed) or the condition would be circular and would have no meaning . . .
55 It must consequently bear the same meaning in the third condition – use for the furtherance of the services supplied – which will often, but not necessarily, be fulfilled; a non-profit-making-organisation may make a surplus which it uses otherwise than for the continuance or improvement of its services whilst none the less ensuring that third parties are not enriched."
"[18] The aim of that condition [that the body must be managed and administered on an essentially voluntary basis] is therefore to reserve the VAT exemption for bodies which do not have a commercial purpose, by requiring that the persons who participate in the management and administration of such bodies have no financial interest of their own in their results, by means of remuneration, distribution of profits or any other financial interest, even indirect."
"21 . . . The second indent reinforces the first by ensuring that a formally non-profit-making organisation does not produce private profit for those who direct its activities."
"[19] The condition that such persons should have no financial interest of their own thus refers only to persons directly associated with the management and administration of a body and not to all persons working for reward in one way or another in its administration. . . ."
So, in order to determine who are the relevant administrators and managers for the purposes of the condition which limits the exemption, the competent national authorities must identify the members of that body designated, in accordance with its constitution, to direct it at the highest level and other persons (if any) who, without being designated by the constitution, do in fact direct it. That was the sense in which the Court of Justice answered part (a) of the question under reference. For convenience, I shall refer to those persons as "the relevant managers".
"[24] . . . whether, on a proper interpretation of the second indent of Article 13A(2)(a) of the Sixth Directive, the words 'on an essentially voluntary basis' refer to the composition of the organs entrusted with the tasks of managing and administering a body, in the sense that it would be permissible for some of those who have a financial interest in the body to be involved in those tasks exceptionally and in an incidental way, or whether those words refer to the reward which those persons receive, in the sense that it would be permissible to grant them certain exceptional and symbolic financial advantages."
The response of the Court on that issue was that words "on an essentially voluntary basis" require consideration of both (i) the contribution actually made by each relevant manager to the management and administration of the body concerned and (ii) the reward (if any) each relevant manager actually receives for carrying out those tasks. That that was the Court's view appears from paragraph [26] of its judgment:
"[26] . . . The words 'on an essentially voluntary basis' . . . refer both, on the one hand, to the composition, in terms of membership, of the directing organs or, as the case may be, to the persons who actually direct without being designated by the constitution and, on the other hand, to the reward which the latter may receive habitually or by way of exception from the body concerned."
"[27] It is for the competent national authorities to determine, for each body in question, and by means of an overall assessment, whether by reason of any contribution to the management of the body, as defined in the context of the answer to part (a) of the question, by persons having a financial interest in it, and by reason of any reward given to the latter, the essentially voluntary character of the management or administration of a body can be accepted or not."
The words 'on an essentially voluntary basis' . . . refer both, [A] on the one hand, [i] to the composition, in terms of membership, of the directing organs or, [ii] as the case may be, to the persons who actually direct without being designated by the constitution and, [B] on the other hand, to the reward which the latter may receive habitually or by way of exception from the body concerned.
If the sentence is read in that way, then it may be said that the words "the latter" in the penultimate line within that sentence – and within paragraph 2 of the answer given by the Court of Justice to the question under reference – refer only to the relevant managers within the second class.
". . . .managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest . . . in the results of the activities concerned"
The judgment of the Court of Justice in the London Zoo case, read as a whole, teaches that the question for the national court is whether persons who participate in the management and administration of the body seeking exemption receive some financial reward for doing so. The object of the condition allowed by the second indent is to deny exemption to a formally non-profit-making organisation which does, in fact, produce private profit for those who direct its affairs. In that context it is pertinent, as it seems to me, to note that the first sentence of paragraph [26] of the judgment of the Court of Justice in the London Zoo case includes a reference back to paragraph [17] in that judgment:
"[26] . . . it is apparent from the purpose of the second indent of Article 13A(2)(a) of the Sixth Directive, as explained at paragraph 17 of this judgment, that the condition laid down by that provision is intended to make a distinction between the activities of commercial undertakings and those of non-profit making bodies, that is to say those that do not aim to generate profits for their members.. . . "
As I have said, the intent is to reserve the exemption for non-profit-making bodies whose activities do not lead to financial advantages for those who manage and administer their affairs. The essential requirement is that persons who participate in the management and administration of such bodies have no financial interest of their own in the results of those bodies. That requirement applies as much to relevant managers within the first class as it does to relevant managers within the second class.
The underlying facts
"The Bournemouth Symphony Orchestra is a well known orchestra based, as its name suggests, in Bournemouth. It is an orchestra of some considerable repute. Organisationally and structurally, it operates as a company limited by guarantee; the musicians are all employed by the company, as are a number of administrative staff. The detailed structure was set out in the [decision of the tribunal], and for present purposes it suffices to outline that structure. The Articles of Association provide for a Council, which has few significant functions other than the appointment of some of the directors to the Board. There is a Board which essentially equates to the familiar board of a commercial company. It takes the principal strategic decisions and oversees the activities of those who carry out the general administration. The membership includes a number of people, most of whom clearly participate on a voluntary basis. One of the members is the managing director, who at the present time is a Mr Michael Henson. . . ."
"The role of the Managing Director is such that he is salaried to manage and administer the Company. He is also a member of the Board that is constitutionally responsible for running the BSO. He has voting rights on that Board with the only restriction being section 59.2 of their constitution and that does not preclude him from a fully active role within the highest levels of management and administration of the body.
This relationship does not comply with article 13(a) of the EC Sixth Directive . . . "
Article 59.2 of the articles of association of the BSO had the effect that, at any meeting of the board of directors of the BSO, the non-employee directors would have a greater number of votes than the employee directors.
The tribunal's decision
"38 That formal structure puts the managing director on both the Board and the Council of BSO and places few limits, aside from voting limits, on the managing director's role on those bodies."
And it went on, in the same paragraph, to say this:
"That being so, and given the remuneration paid to the managing director constitutes a financial interest, the formal position suggests that BSO fails the test of being essentially voluntary".
That conclusion was not displaced by consideration of "the actual position". In practice "the managing director has and performs a significant role in the central decision making of BSO".
"23. . . . Nor does the . . . position of the musician director [alter] this. He or she receives nothing of substance from being a director, and in particular receives no additional salary or any fee for taking such part in BSO's management as he or she does."
It is pertinent to note that there was no finding that the musician director did not take a full part in the deliberations of the board at board meetings. And the tribunal did not explain why – on the test which it applied (receipt of salary) - the musician director was not also to be treated as having a financial interest in the BSO.
The decision in the High Court
"[22] . . . the Tribunal considered, firstly, that the relevant decision-making body to be considered for the purpose of determining who has 'management and administration' of the BSO was the Board. It then considered that Mr Henson's salary gave him a 'financial interest' in the BSO, and that his role on the Board and in the running of the company meant that the management was not 'essentially voluntary'."
"[29] . . . The provision has to be read in context. The opening words of paragraph 1 of Article 13 require Member States to exempt certain services and goods 'under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse'. The relevant condition in the present case (in the second indent) is in my view intended to further that objective. There might be such abuse, for example, if a managing employee was on a bonus related to the financial performance of the entity, because that would or might be a way of taking out something that might otherwise be a profit. The condition provides that those with such an interest should not take part in the high-level management of the entity, presumably so that their activities are not motivated by an element of personal gain. . . .
[30] The question therefore arises: On which side of the line do employees fall, where those employees do not have a salary which is in terms related to the results of the activities (or enterprise)? It seems to me that most such employees fall outside the category of interested persons as described in the Directive. Their rights are not sufficiently closely linked to the results of the entity's activities to give them an interest in those results. While a proprietary interest in the results would certainly qualify, such an interest is not necessary. Results-related bonuses would also be likely to qualify. However, a normal salary would not, or at least not without more. It may be (I do not decide it) that an apparently 'straight' salary could be seen to be so high as to amount to some attempt to extract profit by a salary so as to fall within the condition, but even if that is the case then that would not affect the position of a normal employee.
[31] Accordingly, on my view of the Directive, unaffected by authority, a person who receives a salary does not have a 'direct or indirect interest … in the results of the activities' of the body concerned. . . ."
"[18] . . . the persons who participate in the management and administration of such bodies [are to] have no financial interest of their own in their results, by means of remuneration, distribution of profits or any other financial interest, even indirect."
He concluded that the Court of Justice was not, there, suggesting that receipt of remuneration would, necessarily and in all circumstances, give the recipient employee a financial interest in the results of his employer's activities. Rather, when paragraph [18] of the Court's judgment was read with paragraph [17], it was clear that the Court was doing no more than point out that remuneration could be a means by which profits were distributed, contrary to the underlying objective of article 13A.2(a) of the directive that there should be a distinction "between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members". He said this, at paragraph [34] of his judgment:
"[34] Paragraph 18 [of the judgment in the London Zoo case] then illustrates the achievement of this objective further. In its attempts to make sure that there is no element of disguised profit extraction it equates those who administer and manage with the 'members' that it has referred to in the previous paragraph, and requires that they have no financial interest in 'their' results ('their' must be a reference back to 'bodies'). The short catalogue which follows is a list of devices which might be used to give (but do not necessarily give) an interest in the results. The emphasis is on 'no financial interest of their own'; the paragraph is not, in my view, intending to say that all remuneration will give such an interest. It might, and it might not, depending on how it is structured. If the Court had intended to say that all remuneration was a financial interest I think that there are more straightforward ways in which it could have expressed that conclusion than this one sentence in a part of the judgment which deals with a different point. "
"[42] [The tribunal's] conclusion was that the managing director had a relevant financial interest because he was salaried; he performed a significant role in the management; and therefore the management was not essentially voluntary. But it seems to have considered that the position of the musician director was different. . . . . His position did not alter the 'essentially voluntary' nature of the board because:
'he or she receives nothing of substance from being a director, and in particular receives no additional salary or any fee for taking such part in BSO's management as he or she does.'
Here it adopted a different approach, looking to what identifiable pay the individual musician got for the management function. It did not consider the question whether the musician director had a financial interest in the results of BSO's activities. If it had applied the same reasoning as it applied to the managing director it ought to have concluded that he did, at which point it would presumably have had to consider whether the musician director's role was significant. But the Tribunal did not approach the matter in that way . . ."
"[43] . . . First, the Tribunal should have considered whether Mr Henson had a direct or indirect financial interest in the results of the activities of BSO. If all that he had was a salary which was not performance related, and was not a disguised way of removing what would otherwise have been profits, and nothing similar was true in relation to it, then he should have been found not to have had a financial interest. That would have dealt with that requirement. If he did not have such an interest, it should then have gone on to consider separately whether the management of the BSO was 'essentially voluntary'. The answer to that question does not necessarily lie in the simple fact that Mr Henson received remuneration. It depends on looking at how and by whom the management was conducted and placing his participation in that context. On the facts of this case the Tribunal had found that none of those engaged at board level were paid anything in respect of their BSO activities, other than the musician director and Mr Henson. It was doubtless correct to find that, absent the participation of those two gentlemen, the management was conducted on an essentially voluntary basis. The question then is what difference does their participation make, and that involves considering such things as their respective formal positions, what part they played in practice, what parts the other board members played, what their functions otherwise were, and whether they were paid any sum explicitly in respect of their board activities (to which the answer is No).
[44] The conduct of such an inquiry would reveal whether the management is "essentially voluntary". Voluntary must mean not remunerated or rewarded for the function. I have stressed the word "essentially" because it is important. What is important is the essence of the structure and practice. It is not an absolute test. It does not have to be absolutely or purely voluntary. That is doubtless why the ECJ in the London Zoo case accepted that occasional participation by paid employees did not compromise what was otherwise the voluntary nature of the management. Nor did token payments to the managers. Those are examples of what will not cause the line to be crossed. They demonstrate that an otherwise apparently voluntary management structure remains essentially voluntary despite the fact that it might be said to have become not purely voluntary. They are not, in my view, an exhaustive classification. Whether the line is crossed is a question of judgment in each case."
"[47] . . . The . . . picture . . . is of a board of people who are clearly volunteers, and two people who come from the employment side. The first is the musician director. He is paid to be a cellist, and receives nothing extra for being a board member. His prime function is to be a cellist, and it is not part of his job to be a board member. I do not think that his position would affect the otherwise voluntary character of the management body. He is a cellist who happens to be a board member, but the latter function is very much subsidiary to his musical functions. "
[48] The managing director appears to me to be different. He is not paid any identifiable separate sum in respect of his board membership, but his job as a whole (for which he is paid as a whole) involves his carrying out managerial functions (in the high-level sense required by the London Zoo case) as a board member (and, so far as is relevant, other than as a board member). His membership of the board is not incidental to another function; it is part of his overall function. As a board member he has real input. . . . [The] Tribunal found that his functions put him 'at the heart of the BSO organisation' (paragraph 33) . . . The board was an active board that took the key decisions (paragraph 39). The managing director was at all board meetings at which minutes were produced, and a major item on every board agenda was his report to the board. This was preceded as standard by discussions between him and the chairman. Other directors were not always present, though looking at their identities they can certainly not be said to be mere ciphers . . . Historically speaking the managing director had been centrally involved in important discussions some years previously when funding requirements led to the disbandment of one of BSO's two orchestras. One of the influences on the BSO, 'and not the least of them' is the managing director. For all these functions Mr Henson is paid a sum which exceeds £80,000 (though this figure did not appear in the Tribunal's decision). It was these factors that led the Tribunal to determine that the managing director 'performs a significant role in the central decision making of BSO'.
"[49] Looking at this evidence realistically, the position of the BSO is that its board contains a number of volunteers and one significant person who is a full-time employee and who is not a volunteer. He contributes to a significant extent in the decision-making process, and it is clear enough that he is intended to. It is clear enough to me from the findings of the Tribunal that his contribution at board level is not de minimis, slight, occasional or any other adjective which enables one to ignore it in assessing the voluntary quality of the board. It is apparent that when the Tribunal held it to be 'significant' it meant significant in the sense that it was real, substantial, wide-ranging and constant. It is not the sort of participation that one can ignore in the same way that one can ignore occasional contributions. He is paid to do this - it is part of his job. That means that he is not a volunteer; and it also means that overall the managerial body is not 'essentially voluntary' - it is not of the essence of the board that it is voluntary. It contains a number of volunteers, but it contains one significant non-volunteer whose participation is built in as a matter of formality (via the articles) and as a matter of substance. One might go so far as to describe it as 'largely' voluntary, but that would leave a significant element that is non-voluntary and which prevents the extra step required to make it 'essentially voluntary'."
It was on the basis of that reasoning – which, as he recognised, differed from the reasoning of the tribunal – that the judge dismissed the appeal.
This appeal
"16 . . . It is plain from the terms of paragraph 27 of London Zoo that it is only the contribution to the management of, and the rewards received by, persons having a financial interest in a body which are at all relevant to the "overall assessment" which the national authority must carry out. If a person has no financial interest, as was the position with Mr Henson, his contribution to management and his reward do not enter into the assessment."
It is said that, having decided that Mr Henson had no financial interest in the results of the BSO's activities, the judge was wrong to adopt an independent test of his own by asking, as a separate question whether the management of the BSO was "essentially voluntary". The BSO submits that the judge's error is to be found in paragraph [43] of his judgment:
"If Mr Henson did not have [a financial interest in the results of the activities of the BSO], [the tribunal] should then have gone on to consider separately whether the management of the BSO was 'essentially voluntary'."
"Whether the Managing Director's remuneration is properly regarded as a financial interest or as making him a 'non-volunteer', once it is concluded that he 'has and performs a significant role in the central decision making of BSO' (as per the tribunal) or that 'he contributes to a significant extent in the decision making process' (as per Mann J), the conclusion that the BSO is not managed and administered on an essentially voluntary basis is inevitable."
"He or she receives nothing of substance from being a director, and in particular receives no additional salary or any fee for taking such part in BSO's management as he or she does."
On a proper analysis, the tribunal's decision that the essentially voluntary nature of the board was not affected by the position of the musician director – a decision with which the Commissioners do not quarrel – is plainly based on a finding that there was not a sufficient nexus between the remuneration which he (or she) received as an employed member of the orchestra and his (or her) participation in the direction of the BSO's activities as a member of the board.
The underlying facts in the LFO case
"[3] Mr Graham lives at New Banks Fee, Longborough, in Gloucestershire ('Longborough'). Mr Graham built a large barn at Longborough which he originally intended to house cattle but instead used as an opera house. He added a 'Palladian-style' front, added a stage, and installed seating. He later installed a proper stage with an orchestra pit, proper seating and boxes.
[4] At first the opera performances at Longborough were produced and managed by Longborough Developments Ltd ('LDL'), a property and development company incorporated in 1965 of which Mr Graham and his wife are directors and in which Mr Graham holds the majority of the shares and his wife the remainder. LDL produced the operas on a commercial basis with a view to profit. This business venture was only a small part of its overall business activity.
[5] By 1999 Mr Graham considered that the opera at Longborough had reached a stage at which it would benefit from the support of patrons who might not be so likely to support a commercial venture. The support of patrons would also have the effect of improving the standard and quality of performances. To this end in 2000 Mr Graham incorporated LFO. LFO is a company limited by guarantee and is registered as a charity. The 2002 opera season at Longborough was the first season of operas produced and managed by LFO and in October 2001 LFO first received income in respect of Longborough paid by way of advanced bookings for that season. Since 2002 LFO has produced and managed most of the operas at Longborough. LFO has at all times fixed prices for admission, not to make a profit, but to cover the costs of production.
. . .
[8] Clause 5 of the Memorandum governs the application of LFO's income and property, and includes the following:
'5 The income and property of the Company shall be applied solely towards the promotion of the Objects, and no part thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit, to the members of the Company, and no Director shall receive any salary or fees or remuneration or other benefit in money or money's worth from the Company
Provided that nothing herein shall prevent the payment in good faith by the Company of: . . .
5.3 interest at a proper and reasonable and proper rate on money lent to the Company by any member of the Company or by a Director, or
5.4 reasonable and proper rent for premises demised or let to the Company by any member of the Company or by any Director . . .
. . .
[10] Article 31 of the Articles of Association of LFO ('the Articles') provides that the Board shall consist of not less than two persons. LFO has four directors on the Board, of whom two are Mr and Mrs Graham. Mr Graham is the Chairman. The other two directors are Mr Crombie and Mr de Navarro. The four directors are referred to as 'the Trustees' . . .
[11] Trustees meetings have taken place three or four times a year. There has never been a Trustees meeting without all four Trustees being present. Every matter on the agenda has always been discussed until agreement has been reached and so there has never been any dissent. The Trustees have at all times been aware of their duties and have taken those duties seriously. . . .
. . .
[14] Mr Graham provided two "letters of comfort" of the 12th January 2002 and the 9th November 2002 ("the Letters") to the Trustees. The letter of the 12th January 2002 said:
'Further to the minutes of the Trustees' meeting of 13th October 2001 I am writing to confirm that Longborough Developments Ltd and I will provide the appropriate funds to cover any deficit arising from LFO's 2002 season'.
The letter of the 9th November 2002 was slightly different:
'As requested I am writing in my capacities as Director of Longborough Developments and personally to confirm that LDL or I will make good any financial deficiency which may arise from next year's performances and operations.'
There was no mention whether such support, if it were necessary, would have been a gift or a loan, or, if the latter, whether interest would have been charged. . . .
. . .
[20] In 2003 the VAT Consultancy wrote to the Commissioners on behalf of LFO stating that LDL intended to charge a rent in respect of the use of the opera house in 2002. They had made inquiries as to what it would cost to hire a similar facility on the open market and had established that LFO would expect to pay a minimum of £20-30,000 for a comparable theatre bearing in mind the benefit accruing to LDL for programme and other sales. . . ."
"From correspondence and discussions it has been established that Mr and Mrs Graham, two of the four trustees, are directors of Longborough Developments Ltd, which is considering charging a rent to the Charity for the lease of the Opera building. It has also been confirmed that Mr Graham has agreed to personally guarantee any losses of the charity."
The Commissioners took the view that Mr Graham, as guarantor of potential losses, was a person with a financial interest in the LFO. As they put it: "If a person who is responsible for directing the activities of the charity also has a direct financial interest in it – in that they personally stand to lose money – the conditions for exemption are not met." They went on to say: "If Longborough Developments Ltd charge a rent, as is proposed, to the charity, Mr and Mrs Graham will have a further financial interest, as they are directors of this company". So, in the view of the Commissioners, the condition described in the second indent under article 13A.2(a) of the Sixth Directive was not met.
The tribunal's decision
"77(1) The first issue that we have to decide is the construction to be put on the expressions 'interest' in Article 13A.2(a) and 'financial interest' in Note (2) to Group 13 of Schedule 9. Do those expressions necessarily mean enrichment of the person with such an interest, or is the meaning wide enough to encompass any interest whether involving gain or loss?
(2) Having decided that, we should then go on to decide whether a body, to be eligible under Group 13, must be incapable of distributing profits or surplus or granting financial advantage to a person concerned in its management and administration, or, whether it is enough if that body, though not prevented by law from so doing, in fact never does so?
(3) If a person who is involved in the management and administration of a body, making decisions at the highest level, is in receipt of any of the payments permitted to be made to a director by clause 5 of the Memorandum, or is in a position to receive such payments, is that an interest in the results of the activities of that body?
(4) If such a person guarantees the debts of a body, whether or not he becomes obliged to honour that guarantee, is that a financial interest in the sense that he might wish so to order the affairs of the body that his guarantee will never have to be met?
(5) Was either of the 'guarantees' enforceable? (There was no consideration for either, and neither was a deed.) Or was each simply a promise to make a gift to a charity if a particular need arose? What, if any, difference does it make whether it was enforceable or not?"
"87 It appears to us, therefore, that the conditions [in article 13.2A(a) of the Sixth Directive] require that it shall not be possible for any person who is concerned in the management and administration of such a body to derive a financial advantage from that body. . . . If it is possible for those who manage it to manipulate it so as to derive personal benefit from it, then the body is not eligible for the exemption."
"93 What emerges plainly is that either Mr Graham or LDL was in a position to charge rent for the use of the theatre, which was in fact contemplated; LDL was in a position to make charges for the use of the equipment in the theatre; Mr Graham was at liberty to make a loan, with interest if he chose, under either of his letters of comfort, and did make loans for other purposes, to the Appellant, as did LDL. Mr Graham was in control of LDL, and he and Mrs Graham exercised actual control over the Trustees: in the case of any disagreement between them and the other two Trustees, Mr Graham's casting vote would prevail. There would also be nothing to prevent Mr Graham charging rent under a lease of the opera house to LDL, and LDL, which is already a commercial company, charging a licence fee to the Appellant."
The decision in the High Court
"[50] . . . (iii) the mere fact that a director is not legally prohibited from receiving a payment for which provision is made under clauses 5.2 to 5.5 of the Memorandum, and indeed in fact receives such a payment, does not disqualify him from eligibility. Whether a body is disqualified turns upon the terms of any contract made and the terms of the body's constitution and applicable law regarding the director's participation in any decision-making regarding contracts which might confer a financial interest in the body's results upon him. Mr Graham has not entered into any relevant contract and is excluded from any participation in the decision-making whether LFO should enter into any contract with him or LDL; . . ."
The judge's reference, there, to Mr Graham being excluded from any participation in the decision whether the LFO should enter into a contract with him or with LDL was founded on article 94 in Table A to the Companies Act 1985.
"[32] I turn now to the first condition in the First Indent that the cultural bodies to be exempted shall not systematically aim to make a profit. In this condition "profit" means the enrichment of, or conferment of financial advantages on, natural or legal persons and in particular those who control or have a financial interest in or are members of it. The focus is on the aims of the body, and not the results of its activities."
In support of that proposition the judge referred to the opinion of Advocate General Jacobs in the Kennemer Golf & Country Club case. He went on:
"[33] The Commissioners do not and cannot allege the existence of any such aim. There can accordingly be no question of any non-compliance with this condition. . . .
[34] I turn to the second condition in the First Indent that any profits arising shall not be distributed but shall be assigned to the continuance or improvement of the services provided. Note 2 [to group 13, schedule 9 VATA 1994] requires that the body is legally precluded from distributing its profits and is required to apply them as there set out. . . . In my judgment this restriction is implicit in the First Indent . . .
[35] It is in my judgment quite plain that the First Indent creates no obstacle to the eligibility of LFO, for the necessary constraint is implicit in the Memorandum and Articles of LFO and the fiduciary duties of the Directors. In this condition the word 'profits' means surplus or profit on the bodies' activities. The condition precludes any dilution of such surplus or profit by the entry into contracts not in the best interests of the body or on terms other than the best reasonably obtainable, but does not preclude the entry into contracts by the cultural body with members, staff or third parties provided that by their true character or terms they are not a method of distribution of profit to another party. If the contract is for goods or services (or in this case the use of the opera house or equipment) needed by the body at the best price reasonably obtainable and is not made with the member, employee or third party because he is such and for his benefit, the provisions of the First Indent are complied with. Accordingly the potential for the making of contracts between LFO and Mr Graham or LDL as contemplated in the Memorandum and as set out in the recited facts does not involve any dilution of the profits of LFO nor will the conclusion of such contracts do so if the Trustees comply with their fiduciary duties to LFO. In full accordance with the condition in the First Indent and Note 2(a) and (b) any contracts on the part of LFO (and in particular the contracts contemplated by clause 5.2-5 of the Memorandum and any contract with LDL) can and should only be entered into if it is in the interests of LFO to do so and if they are entered into on the best terms available and with no aim of benefiting any other party. The Directors (and accordingly LFO) are legally precluded from acting otherwise.
The application for permission to appeal
Lord Justice May:
"… 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."
The context is that exemption is to be available to bodies who do not distribute profits, but use any they make to continue or improve their services.
Lord Justice Lloyd:
"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."
i) Who are the persons by whom the body is managed and administered, for these purposes? That is a question with which the European Court of Justice's decision in the London Zoo case was concerned.ii) Are they persons who have no direct or indirect interest in the results of the activities of the body?
iii) Do they manage and administer the body on an essentially voluntary basis? The London Zoo case was also concerned with this issue.
Chadwick LJ considers that there are not three but only two questions. I will explain later why I feel unable to agree with him on that point.
The London Zoo case
"38. The requirement in the same indent that management and administration be conducted on an essentially voluntary basis is to be interpreted as meaning that substantially all the management and administration, thus defined, of the body in question must be conducted by unremunerated persons. However, the fact that paid staff intervene in such activities occasionally or in a peripheral manner, or that nominal or token payments are made to the persons responsible for management and administration, is not contrary to that requirement."
"17. As for the interpretation of that additional condition, namely that a body availing itself of one of the exemptions in Article 13A(1) of the Sixth Directive must be managed and administered on an essentially voluntary basis, it follows from the legal context in which that condition occurs that the Community legislature wanted to make a distinction between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members …
18. The aim of that condition is therefore to reserve the VAT exemption for bodies which do not have a commercial purpose, by requiring that the persons who participate in the management and administration of such bodies have no financial interest of their own in their results, by means of remuneration, distribution of profits or any other financial interest, even indirect.
19. The condition that such persons should have no financial interest of their own thus refers only to persons directly associated with the management and administration of a body and not to all persons working for reward in one way or another in its administration. …"
"21. … Therefore, persons carrying out purely executory tasks are not affected by the requirement that management and administration be on an essentially voluntary basis.
22. … it is for the competent national authorities to determine, in respect of each body concerned, which are the persons who fall within the scope of the additional condition laid down in the second indent of Article 13A(2)(a) of the Sixth Directive and who must therefore fulfil the requirement of not having a financial interest in the body's results."
"23. The answer to part (a) of the question must therefore be that, on a proper construction of the second indent of Article 13A(2)(a) of the Sixth Directive, the condition requiring a body to be managed and administered on an essentially voluntary basis refers only to members of that body who are designated in accordance with its constitution to direct it at the highest level, as well as other persons who, without being designated by the constitution, do in fact direct it in that they take the decisions of last resort concerning the policy of that body, especially in the financial area, and carry out the higher supervisory tasks."
"24. By part (b) of its question, the referring court is asking essentially whether, on a proper interpretation of the second indent of Article 13A(2)(a) of the Sixth Directive, the words 'on an essentially voluntary basis' refer to the composition of the organs entrusted with the tasks of managing and administering a body, in the sense that it would be permissible for some of those who have a financial interest in the body to be involved in those tasks exceptionally and in an incidental way, or whether those words refer to the reward which those persons receive, in the sense that it would be permissible to grant them certain exceptional and symbolic financial advantages."
"25. The Zoological Society, the United Kingdom Government and the Commission are agreed that, on a proper construction of the words 'on an essentially voluntary basis', even if all the management of the body must be carried out by unpaid persons, the fact that paid staff take part occasionally or incidentally in the adoption of essential decisions, or that small or token payments are made to those staff, is not sufficient to deprive their activity of its essentially voluntary character and to justify the conclusion that the body pursues a disguised commercial purpose."
"26. In that respect, it is apparent from the purpose of the second indent of Article 13A(2)(a) of the Sixth Directive, as explained in paragraph 17 of this judgment, that the condition laid down by that provision is intended to make a distinction between the activities of commercial undertakings and those of non-profit-making bodies, that is to say those that do not aim to generate profits for their members. The words 'on an essentially voluntary basis' thus refer to the members who compose the directing organs and those persons who, without being designated by the constitution, do in fact direct the body concerned, and refer also to the reward which the latter may receive, habitually or exceptionally, from that body."
This makes a similar point, though not in the same terms, as Advocate-General Jacobs did in his paragraph 26, quoted by Chadwick LJ at paragraph [9].
"27. It is for the competent national authorities to determine, for each body in question and by means of an overall assessment, whether, by reason of any contribution to the management of the body, as defined in the context of the answer to part (a) of the question, by persons having a financial interest in it, and by reason of any reward given to them, the essentially voluntary character of the management or administration of a body can be accepted or not."
"28. The answer to part (b) of the question must therefore be that, on a proper interpretation of the second indent of Article 13A(2)(a) of the Sixth Directive, the words 'on an essentially voluntary basis' refer to the members who compose the organs entrusted with the management and administration of a body of the kind referred to in that provision and those persons who, without being designated by the constitution, do in fact direct it, and refer also to the reward which the latter may receive, habitually or exceptionally, from that body."
The application of the London Zoo case to the facts of the present case
"43. … The answer to that question [i.e