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In the drink
Following a House of Lords ruling refusing the taxpayer leave to appeal in Messenger Leisure Developments Ltd, HMRC have restated their position on a tax avoidance scheme used by some golf and other sporting clubs.
Such clubs have used tax schemes, with the aim of not having to pay VAT, by shadowing the not-for-profit status available to non-commercial sports clubs when they are actually being run as a profitable business. Membership subscriptions and entrance fees are collected through a not-for-profit company which then transfers most of the money to the actual club, usually in the form of rent.
Messenger Leisure Developments Ltd, a wholly owned subsidiary within a commercial group of companies, owns and operates a number of golf clubs from which sporting services were supplied to the public. It claimed that these supplies were exempt from VAT under VAT Act 1994, Sch 9 group 10 item 3 on the basis that it was a non-profit making body because its memorandum of association restricted its ability to distribute profit. The other members of the corporate group had no such restriction and did not claim to be non-profit making bodies.
The Court of Appeal decided on 25 May 2005, see [2005] STC 1078, that Messenger was not to be regarded as a non-profit making body. The House of Lords' subsequent refusal to grant leave to appeal means that the Court of Appeal's decision is the final determination of the issues in the Messenger case. HMRC consider that the Messenger precedent is also highly relevant to a number of other cases. The EC law, as set out in Kennemer Golf and Country Club, is that companies which are set up in a commercial context, with the aim of benefiting from the VAT exemption, do not qualify as non-profit-making bodies, even if their constitution precludes them from distributing profit. It is normally clear that a company is operating in a commercial context if it is a subsidiary within a commercial group. However, there are many examples where a purported non-profit making company operates in a commercial context, without being a subsidiary of another company.
In HMRC's view, it is now clear that any company which is precluded from distributing profit, but whose function is nevertheless to create VAT exemption in the context of a wider commercial undertaking, is not a non-profit making body for VAT purposes. It follows that such a company is not entitled to claim the VAT exemption which is directed at such bodies.
Any such company, which HMRC has already decided is not a non-profit making body, should now consider its position in light of the Messenger case.
