18784
Supply – Whether payment made to Appellants was for a taxable supply of services by way of subsidy or grant – Appellants specially formed to provide services otherwise the responsibility of their respective local authorities – Local Government and Planning (Scotland) Act 1982 Sections 14, 15 & 16 – EC Sixth Directive 11A(1), 13A(1(m)) – VATA Schedule 9, Group 10 Item, 3.
EDINBURGH TRIBUNAL CENTRE
- EDINBURGH LEISURE
- SOUTH LANARKSHIRE LEISURE
- RENFREWSHIRE LEISUREAppellants
- and -
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
Tribunal: (Chairman): T Gordon Coutts, QC
(Members): James D Crerar, WS., NP
I R Welch, CA., JP
Sitting in Edinburgh on Monday 6th – Thursday 9th September 2004
for the AppellantsMr Colin Tyre, QC
for the RespondentsMr Andrew Young, Counsel
© CROWN COPYRIGHT 2004.
1
DECISION
Introductory
Each of the Appellants Edinburgh Leisure Ltd (ELL), South Lanarkshire Leisure Ltd (SLL) and Renfrewshire Leisure Ltd (RLL) were formed in order to fulfil an obligation incumbent upon their respective Local Authorities (LA) in terms of the Local Government and Planning (Scotland) Act 1982. The appeals were all heard together. The underlying issue was the same in each appeal. The issue for the Tribunal was whether payments made by LA to the Appellants, each Not for Profit Leisure Trusts, are consideration for supplies of services to them by the Appellants. It was not disputed that if the Appellants are making supplies of services to their respective LA these are taxable supplies. The importance of the matter lies in relation to the deductibility of input tax by the Appellants and the extent to which that is recoverable. The Tribunal heard evidence from an official from each of the Appellants and from each of the Appellants’ Local Authority officials and the matter can be set out by recording the common features of each arrangement and thereafter noting any relevant differences.
Common Features
Each Appellant is a Leisure Trust and a registered charity. In each case various sport centres owned by the respective Local Authorities which were operated by them are now leased to the Appellants for a nominal rent. The former employees of the Authorities who work at the leased sports facilities were also transferred to the Leisure Trust. Each Appellant receives negotiated payments in advance in recognition that the Appellants cannot meet their service agreement with the Local Authorities out of income they can generate themselves from participants. Some of the activities carried out by the Appellants are profitable in that they produce a surplus, others are not. Accordingly in the course of the business of each Appellant payment would have to be made in order to maintain the operation.
Each LA has directors on the management board of the respective trusts, but no control over the board.
By setting up Not For Profit Leisure Trusts the LA was able to benefit by a saving which can arise in relation to non-domestic rates. The sums were substantial and in themselves would have justified setting up the arrangement irrespective of VAT considerations. Nonetheless the Appellants and Local Authorities seek, if they can, to achieve VAT savings. The matter has taken some time to come to an issue which could be decided by the Tribunal in the case of ELL but the Tribunal did not consider that circumstance to have any relevance to the question they required to answer. No tax invoices for any Company were created, but that fact was agreed by Counsel as of no significance for the purposes of these appeals.
The Statutory Provisions
These are:
The Local Government and Planning (Scotland) Act 1982 which provides:
14. (1) Subject to subsection (2) below and to section 19 of this Act, a local authority shall ensure that there is adequate provision of facilities for the inhabitants of their area for recreational, sporting ….activities.
15. (2) A local authority may provide or do, or arrange for the provision of or doing of, or contribute towards the expense of providing or doing anything necessary or expedient for the purpose of ensuring that there are available, whether inside or outside their area, such facilities for recreational, sporting …activities as they consider appropriate.
16. (1) Without prejudice to the generality of their powers under section 15 of this Act, a local authority may, for the purposes of their functions under subsection (2) of that section –
(b) maintain a body for the promotion of a recreational, sporting ….activity
(c) permit any facility provided by the authority under the said section 14 to be run by another person on such conditions (including conditions as to the charges if any)-
(i) to be imposed on the person in respect of the rights thereby enjoyed by him; or
(ii) which may be imposed by the person on members of the public for admission to, or use of enjoyment of, that facility,
as the authority thinks fit.
(2) Without prejudice to the generality of their powers under section 15 of this Act, a local authority may contribute –
(a)by way of grant or loan towards expenses incurred, or to be incurred, as regards recreational, sporting ….facilities or activities by a voluntary organisation or other person, not being a local authority, in providing or maintaining such facilities (or, as the case may be, in providing or promoting such activities) if the authority have powers themselves, under the said section 15 or under the foregoing provisions of this section, to provide such facilities or activities.
The EC Sixth Directive (77/388/EEC) provides that:-
11A(1) – “The taxable amount shall be:
(a)in respect of supplies of ….services other than those referred to in (b), (c) or (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies”.
13A(1) (m) – “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:
(m) certain services closely linked to sport or physical education supplied by non-profit making organisations to persons taking part in sport or physical education”.
The exemption from article 13A(1)(m) is given effect to in VATA, schedule 9, group 10, item 3.
Some discussion took place about the enforceability by an interested person or body against the authority of the provisions of said Section 14. The Tribunal having analysed the statutory provisions as best they can is of opinion that the wide ranging duty imposed would be capable of enforcement if the local authority failed to ensure not only adequate provision of facilities in the sense of structures and equipment, but also failed to ensure that the inhabitants of their area were provided adequately with facilities. The inhabitants of a local authority area consist not only of the fit and able bodied, they also consist of persons who are subject to disadvantages whether physical, mental, social or economic. Adequate provision requires to be made for such people. Accordingly a local authority cannot for example point to private provision of leisure centres as satisfying the requirements of the statute when only provided by the private sector at an economic charge, they must do more and ensure that there are adequate facilities for people who cannot for social or economic reason make use of facilities supplied for profit which as a result are costly. A local authority may include such facilities as fulfilling part of their overall duty but require to fulfil the further duty of ensuring availability to the inhabitants of their area. This duty they could perform by running loss making social and leisure departments and funding these by way of direct grant or subsidy. It was with a view to overcoming some of the disadvantages of a local authority being involved in the minutiae of such service that the leisure trusts were created as well as securing the financial advantage in rating. It is necessary to look in some detail at the arrangements and this may best be done having regard first to ELL.
The Creation and Operation of ELL
ELL was, or at all events before the Tribunal claimed to be, the first of the leisure trusts to be created and operate. The LA was minded to create such a body and for a time prior to its incorporation a shadow company was run and accounts made up with a view to establishing the financial implications of the creation of the trust for the Council. The Council sought to derive a figure which would require to be paid in order to ensure the continuity of and also the expansion of leisure services. Previously there had been a direct labour organisation which had been tested by competitive tendering and the costs of management by the LA required to be added to that in order to produce a figure for expenditure by ELL.
In order to formalise the matter various contracts were entered into. The Council following upon a report by the Director of Recreation resolved on 6 March 1997 to approve the establishment of a not for profit trust at the earliest possible date to deliver various services. Some of those had been subject at that time to compulsory competitive tendering and some might have become so subject, together with services managed by the Direct Service Organisation’s new Recreation Department but not subject to compulsory competitive tendering and also additional sports facilities owned by the Council such as a sports centre and swimming pool. The creation of the not for profit trust proceeded apace and from the reports to the Council, approved by them, it is apparent that there was at that time some thought that what was described as “the subsidy” could be treated as a taxable supply. It should be noted that in the Council documents the annual payment which was eventually agreed to be made was variously described as a subsidy or a grant, a feature which was founded upon by the Respondents.
Ultimately the Memorandum and Articles of Association of Edinburgh Leisure Company was formulated and presented to Companies House on 21 January 1998. The objects of the company were described as follows:
(One)To provide, or assist in the provision of, facilities for recreation or other leisure-time occupation in the interests of social welfare for the general public and in particular in connection with the local 'authority area of The City of Edinburgh as defined in the Local: Government etc. (Scotland). Act 1994 (hereinafter referred to as "the Community”.) with the object of. improving the conditions of life for the Community; and
(Two)To provide, whilst providing or assisting in the provision of such facilities for the Community, special facilities for persons who by reason of their youth,. infirmity or disability, poverty or social and economic circumstances may need special. facilities; and
(Three)To promote good health among the Community through health education directed to the part which healthy eating and standards of nutrition together with exercise play in the maintenance of good health
The Company was registered for VAT with effect from 1February 1998.
The Company was one limited by guarantee and its Directors and members of its board were 13 in number. These comprised 5Councillors, a Union Representative, 5 members of the Business Community, a member of the public appointed by selection together with another independent person (which post is currently vacant). It can be seen therefore that the Local Authority do not control the Board and cannot dictate the activities of the Board by way of Board Decisions.
A funding agreement required to be entered into annually the first of which was dated 31 March 1998. On that date the Policy and Resources Committee agreed to pay the sum of £7,023,466.00 for the first 12 months operation as one sum for the first financial year and thereafter quarterly in advance. In the preamble to the funding agreement the Council reserved their position to select a sum to be paid for the following 2years and at that time made no representation or commitment about the sum to be paid between April 1999 and April 2001. They also excluded liability on the Council for any liabilities entered into by the Company during that period.
The purpose of the fund was specifically set out. It provided “that in consideration of the Council paying the fund” the Company bound itself to use it exclusively for the purpose of providing a service detailed in a specification of service and business plan and complying with the terms of missives of let to be entered into in relation to premises and golf courses. The Company was also obliged to provide the Council with audited accounts and, without need for request, true and complete quarterly financial and monitoring reports detailing its income and expenditure as well as annual reports on all aspects of the company. Their specific obligations included a requirement to permit the Council’s Directors of Recreation and Finance to investigate the arrangements relating to the purpose of the Company, maximise recovery of Value Added Tax, minimise its commitments by using its best endeavours to obtain funds, capital sponsorship grants and the like from third parties and to make all necessary approaches to appropriate private and public sources of funding.
The Tribunal was provided with copies of the business plans from 1998 to 2004 created on the basis that there required to be taken into account that Edinburgh Leisure had to remain service focussed while being commercially aware and also comply with the requirements of the “major funder” the City of Edinburgh Council in meeting stated standards of service and in contributing to the Councils commitment to “Best Value”. Each leisure facility had also its own business plan. The stated aim was to reduce, if not eliminate, the need for the Council to make payment for the provision of the leisure facilities it was statutorily required to provide. No witness thought that elimination was possible.
In the event the sum paid to ELL has not been revised upwards except in relation to the provision of new facilities and ELL has required to achieve various economies as well as providing new services if for any reason the provision of facilities at any particular place required to cease. In other words the Council were not to provide and have not provided any additional money beyond the agreed payment for the composite supply of services the Company has undertaken to provide. On occasion the Company has achieved a surplus which the Council has not sought to have repaid. These surpluses are modest and have been utilised by ELL to build up a reserve and improve services generally.
Originally it was envisaged that services would be provided to ELL by LA but that position has been departed from and the current situation is that ELL gets no services from the LA except refuse collection and participation in a Central Purchasing Unit which provides ELL with the ability to achieve cheaper supplies.
ELL employs 600 full-time and 300 part-time staff and have participated in coaching facilities and other enterprises which could not be described as other than a social service. Such advertising potential for ELL as those services might have had would not justify their cost to the company, and would not be undertaken but for the Councils payment package.
The leases have not, even now reached final form. In the main they are in a form suitable for LA leasing tenants, but may be none the worse for that. By contrast the finalised golf course leases are such that the reader may well feel bunkered by over meticulous detail. They attempt to regulate maintenance in what seems to be an inappropriate way for such a document. However that may be they do impose detailed obligations upon ELL.
The political aim of the LA is to provide not only facilities for participation but a general enhancement of the health and wellbeing of the inhabitants of the area and an encouragement to young and old persons more fully to participate in sporting and leisure activities. They described this as “social inclusion”.
Although the calculation of the payment to ELL is capable of being varied in detail this has not in fact happened. The original calculations have been adopted but an overall reduction may be and has been applied from year to year. No effort has been made to cost out the individual items and relate that directly to any form of deficit funding or subsidy, although the amounts of shortfall or surplus in each of ELL’s activities are ascertainable and are in fact disclosed to LA.
The factual position would therefore appear to be capable of the analysis that the Local Authority provides an overall sum for leisure provision and ELL are left to make the detail of the provision within the sum paid.
South Lanarkshire Leisure Limited
This Company is a Company limited by guarantee and was formed in November 2001 and took over the leisure facilities then provided by LA. Business plans, leases and service agreements were drawn up as in the case of Edinburgh Leisure. However SLL also managed properties which were not transferred and have a separate agreement with LA about that and they also often have a dual use of facilities with local schools taking over usage after the school day and at weekends. Links and parks maintenance is done by LA.