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HMRC internal manual

VAT Sport Manual

Key court cases dealing with the sporting exemption: Messenger Leisure Developments Ltd (Lon/02/59)

Messenger Leisure Developments Ltd (LON/02/59) did not qualify as a non-profit making body under the tests outlined in Kennemer.

In Messenger, the appellant was a wholly owned subsidiary of a commercial group. The parent company (Leisure) made the land for running golf courses available to the appellant for no consideration.

However, the appellant’s profits were distributed by an inter-company loan agreement to the parent company. The chairman of the VAT Tribunal found that the loans although charged at a commercial rate were not the subject of any restrictions such as might be found in a normal commercial situation. He concluded that the appellant’s profits were in fact covertly distributed: the appellant had failed to bring himself within the provisions of Article 13A.2(a) of the Sixth Directive (now Article 133(a) of Directive 2006/112).

The High Court and Court of Appeal ([2005] EWCA Civ 648) confirmed this decision.

The Court of Appeal explained that the test for whether or not an organisation was ‘non-profit-making’ for the purposes of Art. 13(A)(1)(m) depended on the aim which it pursued. The fact that an organisation systematically achieved surpluses which it retained for its own purposes, rather than distributing profits to its members, could demonstrate an ‘aim’ that was not a ‘non-profit-making’ one in certain contexts.

The Court of Appeal said the relative fragility of the arrangements should also be taken into account because the parent company could remove the restrictions set out in Messenger’s Memorandum of Association on the distribution of profits by special resolution without any formality.

It was clear on the undisputed facts in Messenger that the appellant represented an integral part of the commercial operation of the Messenger group which acquired and ran golf and country clubs (proprietary clubs), and, from time to time, sold them on. 

The appellant accumulated surpluses from its free use of the facilities made available to it by other members of the group thereby building reserves for the group, a clear financial advantage for them.

 Messenger Leisure Developments Ltd shows that the term “commercial influence” under the Sports Order does not catch all forms of covert distributions of profit, and that Kennemer offers a wider scope for preventing tax avoidance schemes.

If you are in any doubt or difficulty about the application of the tests for commercial influence and non–profit-making body, you should contact your TAPE team.