Factual and Procedural Background
This appeal concerns a VAT sporting exemption dispute between HM Revenue and Customs ("HMRC") as Appellants and Stoke by Nayland Golf and Leisure ("Leisure") as Respondent. Leisure operates a golf club on premises owned by Stoke by Nayland Club Limited ("Club"), a profit-making entity. Leisure was established in 1996 to separate golf operations from the commercial group including Club. Leisure pays Club an annual licence fee for use of the golf course and facilities, with the licence fee negotiated and adjusted over time. Initially, Club received green fees, but from 1 January 2009, these were transferred to Leisure. HMRC retrospectively registered Leisure for VAT from 1 January 2009, contending Leisure was not a non-profit making body and/or was subject to commercial influence, thus not qualifying for the VAT sporting exemption.
The First-tier Tribunal ("FTT") allowed Leisure's appeal against HMRC's assessment, finding Leisure to be a non-profit making body not subject to commercial influence. HMRC was granted permission to appeal the non-profit making status finding but did not appeal the commercial influence finding. The Upper Tribunal now considers HMRC's appeal against the FTT's decision.
Legal Issues Presented
- Whether the First-tier Tribunal erred in law in concluding that the Respondent was a non-profit making body for the purposes of the VAT sporting exemption under Group 10 Schedule 9 of the Value Added Tax Act 1992, Item 3.
- Whether the First-tier Tribunal correctly applied the legal principles established by the European Court of Justice in Kennemer Golf & Country Club v Staatssecretaris van Financiën and related authorities in assessing the Respondent's non-profit making status.
- Whether the First-tier Tribunal erred in law in its findings of fact related to the independence of the Respondent's directors and the arm's length nature of the licence fee and other transactions with the associated profit-making entity.
- Whether the First-tier Tribunal erred in law by failing to consider other First-tier Tribunal decisions with material similarities to the present case.
Arguments of the Parties
Appellants' Arguments (HMRC)
- The FTT made findings of fact without sufficient evidence or on an incorrect premise, amounting to errors of law.
- The FTT failed to apply correctly the legal principles from Kennemer, particularly by relying solely on the arm's length nature of the licence fee without considering possible covert profit distribution.
- The close relationship between Leisure and Club indicated that Leisure was not independent and acted as part of a single commercial enterprise benefiting Club.
- The licence fee and other charges were potentially overvalued and constituted a distribution of profits to Club's shareholders.
- The FTT failed to consider other First-tier Tribunal decisions that found similar entities not to be non-profit making bodies.
Respondent's Arguments (Leisure)
- Leisure is a company limited by guarantee with objects restricting profit distribution and operates independently with directors acting solely in its interests.
- The licence fee paid to Club was negotiated at arm's length and reflected fair and reasonable terms.
- The FTT's detailed factual findings, including the independence of directors, the absence of profit distribution, and the separation from Club's commercial operations, support the conclusion that Leisure qualifies as a non-profit making body.
- Previous cases cited by HMRC are factually distinguishable and of limited precedential value.
- HMRC's challenges amount to impermissible attacks on the credibility assessments made by the FTT.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Kennemer Golf & Country Club v Staatssecretaris van Financiën [2002] STC 502 (ECJ) |
Definition and interpretation of "non-profit making body" under VAT sporting exemption; multifactorial assessment of an organisation's aims and conduct to determine non-profit status. |
The Tribunal applied Kennemer principles to assess whether Leisure had the aim of enriching persons with a financial interest, concluding Leisure was non-profit making as it did not seek to enrich Club or its members. |
| Longborough Festival Opera v HMRC [2006] EWHC 40 (Ch) |
Interpretation of "profits" in the cultural services exemption; contracts must not be a method of profit distribution to parties with financial interest. |
Used to assist in understanding profit distribution but noted limited assistance for the sporting exemption; confirmed that contracts must be bona fide and not a covert distribution. |
| Ridge Securities Ltd v Inland Revenue Commissioners [1964] 1 WLR 479 |
Company law principle that a company cannot make unlawful distributions of assets; sales at undervalue may amount to unlawful distribution. |
Supported the approach that transactions must be assessed for genuine arm's length nature to exclude covert profit distribution. |
| Progress Property Company Limited v Moorgarth Group Limited [2010] UKSC 55 |
Assessment of whether a sale at undervalue constitutes unlawful distribution of assets; importance of directors' intentions and arm's length nature of transaction. |
Confirmed that a transaction may be arm's length even if not at market value; applied in assessing whether transactions between Leisure and Club were genuine. |
| Messenger Leisure Developments v HMRC [2005] EWCA Civ 648 |
Multifactorial assessment of non-profit status; importance of independence and separation from commercial group control. |
Distinguished from present case; confirmed that being part of a commercial group negates non-profit status, which the FTT found not to be the case here. |
| Georgiou v Customs and Excise Commissioners [1996] STC 463 |
Standards for appellate review of findings of fact and law; high threshold for overturning factual findings as errors of law. |
Applied to caution against undermining FTT's factual findings absent no evidence or unreasonable conclusions. |
| FAGE UK Limited v Chobani UK Limited [2014] EWCA Civ 5 |
Appellate caution in interfering with trial judge's factual findings and evaluations. |
Reinforced the principle that appellate courts should not lightly overturn factual findings based on credibility and multifactorial assessments. |
| Alexander Langsam v Beachcroft LLP [2012] EWCA Civ 1230 |
Appellate deference to trial judge's credibility assessments. |
Supported the acceptance of FTT's assessment of witness credibility regarding management and financial control of Leisure. |
| CEC v Ferrero UK Limited [1997] STC 881 |
Decisions of tribunals have no precedent value and must be considered on their own facts. |
Supported the FTT's approach to giving limited weight to other First-tier Tribunal decisions cited by HMRC. |
| Seven Individuals v HMRC [2017] UKUT 132 |
Requirement for adequate cross-examination to allow witnesses to address issues put to them. |
Applied in considering whether witnesses were properly cross-examined on valuation issues. |
Court's Reasoning and Analysis
The Upper Tribunal commenced by reaffirming the high threshold for overturning factual findings of the First-tier Tribunal ("FTT"), emphasizing that errors of law arise only where findings are unsupported by evidence or based on incorrect legal principles. The Tribunal reviewed the detailed factual findings of the FTT, including the independence and qualifications of Leisure's directors, the arm's length nature of the licence fee and other transactions with Club, and the absence of profit distribution or commercial influence.
The Tribunal noted that the FTT correctly applied the legal test from Kennemer, which requires a multifactorial assessment of whether the organisation's aim was to enrich persons with a financial interest. The Tribunal rejected HMRC's argument that the FTT failed to consider covert profit distribution despite arm's length pricing, explaining that the FTT implicitly found no such aim existed based on extensive evidence and the directors' independent conduct.
The Tribunal addressed HMRC's challenges to individual findings, including the motivation behind Leisure's establishment, the appointment and independence of directors, and the negotiation and valuation of the licence fee. It found HMRC's challenges largely amounted to impermissible attacks on witness credibility or disagreements with the FTT's weighing of evidence, none of which justified overturning the findings.
Regarding HMRC's submission that the FTT failed to consider other First-tier Tribunal decisions, the Tribunal held that such decisions have no binding precedent value and must be considered on their own facts. The FTT was entitled to focus on the specific circumstances of this case.
Overall, the Tribunal concluded that the FTT had properly applied the relevant legal principles to a fully reasoned and evidence-supported factual matrix, justifying its conclusion that Leisure was a non-profit making body entitled to the VAT sporting exemption.
Holding and Implications
The Upper Tribunal DISMISSED the appeal by HM Revenue and Customs.
The direct effect of this decision is that the First-tier Tribunal's ruling that Stoke by Nayland Golf and Leisure qualifies as a non-profit making body under the VAT sporting exemption stands, and the VAT assessments imposed by HMRC are set aside. The Tribunal did not establish any new legal precedent but reaffirmed the application of established principles from Kennemer and related authorities to the facts of this case. The decision underscores the importance of multifactorial factual assessments in determining non-profit status and the deference appellate courts must afford to findings of fact and credibility made by the First-tier Tribunal.