European Tour Operators Association v Revenue & Customs [2011] UKFTT 88 (TC) (26 January 2011)

DECISION

1. This appeal concerns the VAT liability of membership subscriptions paid to a trade association.

2. The Appellant ("the Association") was founded as an unincorporated association in 1989. It registered for VAT in 1991. In 2003 the Association incorporated as a company limited by guarantee and not having a share capital. It is a non-profit making organisation.

3. Historically the Association accounted for VAT on its membership subscription income. In June 2008, on professional advice, the Association submitted a voluntary disclosure for overpaid output tax, on the basis that members' subscriptions were exempt from VAT under the provisions of Item 1 (d) of Group 9 of Schedule 9 to the Value Added Tax Act 1994 ("VATA").

4. On 22 January 2009 the Respondents ("HMRC") issued a decision letter determining that the Association's membership subscriptions are subject to VAT at the standard rate. Both parties confirmed that the Tribunal was asked to make a decision in principle, so that it would not be necessary during the appeal hearing to consider the detail of the VAT returns in dispute.

Relevant law

5. The legislation given below is that in force in 2008 when the voluntary declaration was filed; there have been no material changes in the period covered by the overpayment claims in dispute.

6. The relevant EU legislation is Article 13(A)(1)(l) of the Sixth VAT Directive which states, so far as relevant:

“Article 13

Exemptions within the territory of the country

A. Exemptions for certain activities in the public interest

1. Without prejudice to other Community provisions, Member States shall exempt the following 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: …

(l) supply of services and goods closely linked thereto for the benefit of their members in return for a subscription fixed in accordance with their rules by non-profit-making organisations with aims of a political, trade-union, religious, patriotic, philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition; …”

7. This provision was considered by the High Court in British Association for Shooting and Conservation Ltd v Revenue and Customs Commissioners [2009] STC 1421 where Lewison J stated (at para [12]):

“The general principle is that VAT is payable on all goods or services supplied for consideration by a taxable person within the relevant territory. Paragraphs (l) and (m) are exceptions to this general principle. In considering the scope of an exception to a general principle of Community law, the court should adopt a strict, but not strained, construction. A 'strict' construction is not to be equated, in this context, with a restricted construction. The court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption, so that if the court is left in doubt whether a fair interpretation of the words of the exemption covers the supplies in question, the claim to the exemption must be rejected. But the court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question: Stichting Uitvoering Financiële Acties v Staatssecretaris van Financiën (Case 348/87) [1989] ECR 1737; Expert Witness Institute v Customs and Excise Comrs [2001] EWCA Civ 1882, [2002] STC 42, [2002] 1 WLR 1674.”

8. At paras [40] to [41] Lewison J cited Institute of the Motor Industry v Customs and Excise Comrs (Case C-149/97) [1998] STC 1219, where the ECJ considered an organisation said to have aims of a trade union nature, and concluded:

“I derive two things from this extract:

(i) That the professed aims of an organisation must be tested against what happens in reality; and

(ii) Where an organisation has multiple aims, then it is its 'main object' that counts.”

9. The relevant UK domestic legislation is the exemption granted by Item 1(d) of Group 9 in Schedule 9 VATA:

“Item No 1

The supply to its members of such services and, in connection with those services, of such goods as are both referable only to its aims and available without payment other than a membership subscription by any of the following non-profit-making organisations— …

(d) an association, the primary purpose of which is to make representations to the Government on legislation and other public matters which affect the business or professional interests of its members. …”

10. Note 5 to Group 9 qualifies this:

“(5) Paragraph (d) does not apply unless the association restricts its membership wholly or mainly to individuals or corporate bodies whose business or professional interests are directly connected with the purposes of the association.”

11. The matter of “primary purpose” was considered by the VAT Tribunal in Bookmakers' Protection Association (Southern Area) Ltd v Customs and Excise Comrs [1979] VATTR 215. Although not binding on this Tribunal, we concur with and adopt the words of the chairman in that case (at 224):

"In our view, in order to determine "the primary purpose" of the [taxpayer] at the relevant time when the supplies were made, we must have regard to the objects set out in its Memorandum and its various activities to determine what its directors and members consider to be the most important matter it is seeking to achieve or doing in return for membership subscriptions. The words "primary purpose" indicate to us that the test is subjective and not purely objective."

12. Mr Puzey for HMRC also cited the case of Committee of Directors of Polytechnics v Customs and Excise Commissioners [1992] STC 873. Both counsel drew to our attention the VAT Tribunal case of Allied Dancing Association Ltd v CCE [1993] VATTR 405, but agreed that the conclusions in that case were erroneous and should not concern the current Tribunal.

HMRC's interpretation of the legislation

13. The Tribunal was referred to extracts from HMRC Notice 701/05, which in section 11 gives HMRC's interpretation of the VAT exemption available to representative bodies under Item 1 of Group 9.

14. Paragraph 11.15 addresses "representational trade associations "and states:

"This means that representational trade associations must satisfy all the following criteria for exemption to apply:

· the association's primary purpose is "to make representations "...

· representations "to the Government" are to the UK Government;

· the representations must relate to legislation or public matters affecting the members' "business or professional interests"; and

· the members are "wholly or mainly individuals or corporate bodies whose business or professional interests are directly connected with the purposes of the Association" -- you should use the 75% criterion ... in applying the "wholly or mainly" criterion."

15. Given the European context of Article 13, which requires the exemption granted by Item 1 of Group 9, the Tribunal finds surprising HMRC's interpretation that only representations to the UK Government qualify. At the hearing both parties invited the Tribunal to adopt an interpretation agreed between the parties, that the words "make representations to the Government on legislation and other public matters" in item 1 (d) should:

(1) Include representations to the UK government on UK issues;

(2) Include representations to the UK government on EU issues;

(3) Include representations to EU institutions in relation to matters that will have effect in the UK; but

(4) Exclude representations to EU institutions in relation to matters that will have effect in countries outside the UK but not the UK; and

(5) Exclude representations to non-UK national governments.

16. We consider that we are able to determine the dispute in this matter fairly and justly by adopting that definition, but we do express reservations as to whether it is sufficiently wide given the European origins of the domestic legislation.

Evidence

17. For the Association Mr Thomas Jenkins, executive director of the Association, adopted a witness statement dated 18 March 2010 and gave oral evidence. For HMRC a witness statement dated 4 January 2010 by Ms Penelope Martin (HMRC VAT Officer) was admitted without objection. A joint bundle of documents was submitted.

The Association’s constitutional documents

18. The original constitution and rules of the Association gave its objectives as follows:

“The specific and primary objectives for which the Association is formed are:

(i) To establish relations with the European Institutions (The Commission, the Parliament and the Committees).

(ii) To act as a forum for the international inbound Tour Operators based in Europe.

(iii) To maintain good relations with the suppliers to the industry.

(iv) To act as a self regulatory body.

(v) To monitor the operating standards of its members to ensure the highest standard of service.

(vi) To establish good relations with other trade associations and government regulatory bodies.

(vii) To promote Europe as a tourist destination in all the non-European markets.

(viii) To be aware of the impact of tourism on the environment and to encourage members to focus on improving environmental practices.”

19. When the Association was incorporated in November 2003 the Memorandum of Association of the incorporated body set out the objects for which it was established as being as stated above, but also including:

"(h) To co-ordinate, represent and promote both nationally and internationally and locally, the interests of members with those of other interested parties, to Government, national and regional bodies, and others concerned with any aspect of members' businesses."

20. The Association has always had two classes of member, as set out in clause three of the Association's original constitution and rules:

“Membership

(a) The Tour Operator members ... of the Association will consist of Tour Operators who rely primarily on the international marketplace for their passenger base, and those who operate intra-European tours to more than one European country.

(b) The Associate members of the Association will consist of suppliers to the industry in the following categories:

(i) Shops and stores, tourist attractions and services and restaurants.

(ii) Airlines, coach operators, cruise lines, ground handlers and hotels.

(iii) Tourism related organisations such as national inbound Tour Operators associations, and persons and organisations to whom Honorary membership is granted.

Each of these membership categories are entitled to be represented by an elected representative who will be invited to attend Meetings the Steering Committee and other Committees by invitation."

21. Similarly, the Articles of Association of the incorporated Association state:

"3. Membership of the Association shall consist of Tour Operator Members, and Associate Members ...

5. Tour Operator Membership shall be open to tour operators who rely primarily upon the international marketplace of their passenger base, and those who operate intra-European tours to more than one European country and those intermediaries who market European travel products.

6. Associate Membership shall be open to suppliers to the tour operator industry and are included in one of the following categories:

(a) shops and stores, tourist attractions and services and restaurants;

(b) airlines, coach operators, cruise lines, ground handlers and hotels,

7. Associate Membership shall be open to any business that satisfies the directors that it has sufficient connection with the objects of the Association or is otherwise connected with the interests of Tour Operator Members of the Association."

Witness evidence

22. Mr Jenkins’ evidence was that the Association was formed in 1989 as a small body, with eight tour operator members and one or two other members. Its purpose was to give the tour operator trade sector a unified voice in Brussels. By 2008 its membership was much larger. There were then around 112 full (ie tour operator) members - half based in the UK, one quarter based in the EU and one quarter outside the EU (including USA, India and Japan). Also, around 330 associate members - approximately 100 UK-based, 200 EU based and the remainder outside the UK (mostly Switzerland).

23. Over that period of time the Association had extended the services it provided to members. For example, before 1997 the Association introduced a "tax hotline" to assist members in relation to the VAT rules governing the tour operators margin scheme.

24. As well as the detailed evidence of Mr Jenkins, the Tribunal was provided with extracts from the Yearbooks which the Association published until 2005, and extracts from the Association's website for subsequent years. In cross examination Mr Puzey put it to Mr Jenkins that the extracts of material were highly selective; did not give a representative picture of the activities of the Association; and had in large part been provided only shortly before the hearing. Mr Jenkins accepted the materials provided were selected to illustrate the political aims of the Association because he understood that to be the point in dispute, but denied that these had been made on an unrepresentative basis. Copies of the Yearbooks for several years were handed up so that the Tribunal could consider those documents in full.

25. Mr Jenkins gave several examples of the Association lobbying for change in the legislation governing tour operators in Europe. In July 2005 the Association released a discussion paper on the Olympic games and its effect on tourism in the host nation. The study stated its primary purpose was to generate debate, and purported to show there is no strong link between hosting sporting events and increased tourism. Mr Jenkins stated the aim was to influence the UK government and to try to persuade the UK government that it was wrong to represent the 2012 games as favourable to UK tourism when, in the view of the Association, the opposite was true. Also in evidence was a press interview with Mr Jenkins on the same topic. Another example was a report produced in 2010 concerning visa policy. Mr Puzey for HMRC accepted that this document was for the purpose of lobbying the EU on matters affecting the UK government. A further example was another report in 2010 concerning Olympic hotel demand, which updated an earlier report. Mr Jenkins explained this had been sent to the relevant UK Minister and a copy had later been sent to the Chancellor of the Exchequer. Mr Puzey for HMRC accepted that the report was evidence of representations to the EU which may have an effect on the UK government.

26. Some activities were referable to issues of direct importance to the UK; for example, representations on vehicle emission regulations - Central London has a low emissions zone and the Association had talked to the Mayor of London about that. Another example was the driving time regulations, which affected coach operators and others in the UK.

27. Mr Jenkins accepted that some activities of the Association were directed to attempting to influence the legislation of non-UK EU countries - for example lobbying the Italian government concerning Italian domestic legislative provisions restricting tour guide qualifications - but emphasised that this would be a matter which affected the European tour operators industry generally. Similarly, issues relating to the Schengen agreement, to which the UK was not a party.

28. Mr Puzey for HMRC stated that HMRC accepted that making legislative representations to the EU was one purpose of the Association, but that it was only one purpose and not the primary purpose of the Association.

29. The website of the Association invites interested persons to become members and states the Association offers its members numerous benefits aimed at the four key areas of (i) representation; (ii) intelligence and information; (iii) events; and (iv) publicity. Mr Jenkins stated that the areas of activity were not ranked in any particular order of importance, and the order was probably determined by marketing considerations. His aim as executive director was primarily achieving a better regulatory environment for the tour operator business, and that reflected the aims of the Association. He found it difficult to distinguish between advice to members and influencing government as this was a two-way process.

30. In relation to the associate members of the Association, Mr Jenkins explained these are people who sell services to tour operators, and so identify with the commercial interests of the tour operators. Associate members cover a wide range of businesses connected to that of tour operators; for example, hoteliers and professional services firms.

31. In response to a question from the Tribunal Mr Jenkins identified the activities of the Association apart from its representational work as mainly holding events which permitted networking and business discussion, and providing information and advice to members. Those were discrete from the representational activities and the Association charged most people for participation in those events. Also the Association held seminars on regulatory problems. Press campaigns formed part of the lobbying activities.

Conclusions and findings

32. We have approached our consideration and conclusions on the following bases:

(1) We must ascertain the "primary purpose" of the Association. If it has multiple aims then it is its main object that counts (see Lewison J in BASC - paragraph 8 above). Its primary purpose is what its directors and members consider to be the most important matter it is seeking to achieve or doing in return for membership subscriptions (Bookmakers’ Protection Association – paragraph 11 above). The Association’s professed purposes must be tested against what happens in reality (see Lewison J in BASC - paragraph 8 above).

(2) The burden of proof lies on the Association (see Lewison J in BASC - paragraph 7 above) and the standard of proof is the normal civil standard of balance of probabilities.

(3) We must be satisfied that the primary purpose of the Association satisfies Item 1(d) of Group 9.

(4) We must be satisfied that Note 5 does not disapply the exemption otherwise available under Item 1(d).

The primary purpose of the Association

33. The constitutional documents of the Association set out a number of aims of the Association. These include and give prominence to that of making political representations on behalf of the tour operators industry.

34. In practice the Association clearly has a number of activities. Having carefully considered all the evidence presented to us, our conclusion is that, like any membership organisation, the Association is eager to access funds to enable it to undertake its activities. It runs networking and marketing events and charges fees to some for attendance at those events in order to raise such funds. We do not consider that such ancillary activities have overtaken or supplanted the original, primary aim of the Association: “to establish relations with the European Institutions”. Thus we find that is the primary purpose of the Association.

35. Turning to the geographical limitation on Item 1(d) as agreed between the parties (paragraph 15 above), the tour operator industry is one which by its very nature crosses national borders. It is unsurprising that the representational activities of the Association extend beyond UK domestic concerns to those of other European countries; also, that the members concerned with such issues are not restricted to the UK or even other EU countries. We accept the evidence of several examples of representational work involving lobbying or influencing the UK government and/or EU institutions in relation to matters affecting the tour operator industry in the UK (for example, that concerning tourism and the Olympic games). Adopting the parties’ interpretation of “the Government” in Item 1(d) we conclude the representational activities of the Association do satisfy that part of the test in Item 1(d).

36. Accordingly, we find that the primary purpose of the Association meets the test in Item 1(d) of Group 9.

Note 5

37. We take particular note of the specific wording of Note 5, which requires membership to be restricted wholly or mainly to persons whose business interests are directly connected with "the purposes" of the Association. The reference is to “the purposes” rather than "the primary purpose" as used in Item 1(d). Both counsel agreed that there was a distinction to be drawn in the wording used in Item 1(d) and that in Note 5. We observe that this distinction is not confined to Item 1(d) because the draftsman has followed the same formula in relation to Item 1(c) and Note 4 relating to learned bodies.

38. Had Note 5 followed the wording of Item 1(d) and required direct connection with the primary purpose of the Association then the Association would not have passed that test. We find that most of the members of the Association are associate members who join the Association not because of the lobbying activities of the Association but instead for the networking and marketing opportunities it provides to the associate members. However, taking the purposes of the Association as a whole, we find all the members, both full and associate, do have business interests that are directly connected with the purposes (albeit not the primary purpose) of the Association.

39. Accordingly we find that Note 5 does not operate to exclude the exemption provided by Item 1 (d).

Decision

40. For the reasons set out at paragraphs 32-39 above, we allow the appeal.

41. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents