Key court cases dealing with anti-avoidance issues: De Vere Golf and Leisure Ltd (Lon/01/055 and 058)
The principles of Kennemer were first applied in the UK tribunal case De Vere Golf and Leisure Ltd. The supplies under appeal took place before the implementation of the Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999 (the ‘Sports Order’) in 2000, and it was accepted that De Vere’s subsequent supplies were caught by the Sports Order.
De Vere concerned a group of companies (the De Vere Group) which operated a number of hotels, some of which included leisure facilities. It transferred the operation of these facilities to a newly formed subsidiary company. The appellant argued that it was possible for a commercial group of companies to create and own a non-profit making entity within its own structure to carry out the sporting activities and benefit from the exemption. The appellant also said that the dealings between the group and the subsidiary company, including the transfer of the goodwill and business, the assignments of the leases of the premises and the granting of the loans were all at full open market value. If an intra-group transaction involved the exchange of an asset for money it would only constitute a covert distribution of profit it was at an undervalue or an over value.
Dismissing the appeal, the Tribunal Chairman said:
We conclude that, in our view, the compelling commercial logic of the arrangements must be that if the leisure enterprises were contributing to group profit before the leases and transfers then they continued to do so after the leases and transfers. Nothing on the ground changed. The group is a commercial entity and the parent company has an ultimate responsibility to its shareholders to maximise profit. The real question is: has the overall value of the leisure enterprises in their totality changed to become non-profit-making where they were previously profitable, or have their components been reconfigured artificially to re-allocate the financial flows to create an illusion of break-even? The answer is that the leisure enterprises in their totality remain as profitable as ever, from which we infer that the changes designed to reduce the profits to zero cannot have been at arm’s length. The whole commercial enterprise of the group is clearly profitable and the leisure enterprises are firmly embedded in it.
It is therefore clear from this ruling that sports clubs which make covert distribution of profits were never entitled to the exemption for sporting services.
The Tribunal chairman carefully outlined the principles that are to be derived from Kennemer on the nature of a non-profit making body as follows.
- The exemption applies to non-profit making organisations and not to non-profit making services (Advocate General, paragraph 23).
- The exemption should not apply to commercial sports undertakings as, given the opportunities for shrewd cross-subsidising, that would lead to distortion of competition (Advocate General, paragraph 23).
- The question is whether natural or legal persons (in particular, those having a financial interest in the organisation such as shareholders) are enriched (Advocate General, paragraph 45).
- 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 (Advocate General, paragraph 45).
- It is necessary, but not sufficient, to look at the organisation’s express objects as set out in its constitution (Advocate General, paragraph 47).
- 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 (Advocate General, paragraph 47).
- 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 (Advocate General, paragraph 47).
- The purpose of the exemption is for organisations acting in the public interest whose activities are directed to non-commercial purposes (Court of Justice, paragraph 19).
- A non-profit-making organisation must not have the aim of achieving profits for its members (Court of Justice, paragraph 26).
- 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 (Court of Justice, paragraph 26).
- 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 (Court of Justice, paragraph 26).
- 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 (Court of Justice, paragraph 33).