Can a proprietary club set up as a not-for-profit and become VAT-exempt?

Currently going through tribunals is a case in which a proprietary golf club converted to a ‘not-for-profit’ venue, which would make it VAT exempt. Adrian Houstoun explains the legal situation behind this

Under European Law, services offered by non-profit making sports clubs are exempt from VAT. The UK illegally tried to restrict this by specifying that it only applied to fees from members, but this was successfully challenged by Bridport and West Dorset Golf Club. However, there is a further condition to exemption – the club has to be a non-profit making entity. The issue of what constitutes ‘non-profit making’ has been progressing through the courts in a case called Hilden Park LLP (HP LLP).

Hilden Park Golf club is near Tonbridge in Kent and prides itself on its tree-lined fairways, as well as a very extensive gym. The supplies in question had been made by two companies but the assessments in the first appeal to the First Tier Tribunal were on the landlords of the site, J Massey and his mother, B Massey, who traded as Hilden Park Partnership (HPP), and then on HP LLP, to whom the interest of the original partnership in the land had been transferred.

The Masseys accepted that the arrangements were entered into by HPP with the aim of converting the golf club from a proprietary club (where VAT was chargeable on its supplies) to one owned by a ‘not-for-profit’ organisation whose supplies would be exempt from VAT.

HMRC raised assessments for £550,000 on the grounds that this amounted to an attempt by HPP to avoid paying VAT and that the doctrine of abuse of rights applied. The Masseys claimed that, as with a criminal matter, the burden of proof should rest with HMRC because abuse is tantamount to fraud. The tribunal rejected this, stating that abuse is connected to avoidance, not evasion, and that the Masseys would have to prove that the structure was not abusive.

The tribunal then looked at the abuse issue. The Masseys’ status had changed from being proprietor of the golf club to landlord of the golf course, with the aim of converting the golf club to being owned by a ‘not-for-profit’ organisation and exempt from VAT. There were two operating companies: one for members and one for visitors (‘members’ and ‘visitors’), the structure having been set up before the Bridport decision. HMRC raised assessments against both companies – but they were not pursued because they became insolvent.

The Masseys argued that the arrangements were not abusive because they resulted in less profit, but the tribunal held that it is no part of the abuse test that the taxpayer must be better off with the tax advantage than without it. The Masseys claimed that they were entitled to split their business so that, instead of an owner-occupier supplying golfing services, the owner supplied the right to occupy to a non-profit making company which supplied the golfing services. The tribunal found that the structure itself was not abusive, but that if the two non-profit making companies, ‘members’ and ‘visitors’, covertly distributed profits to the Masseys, the gaining of the exemption could be abusive. In evidence was a lease, from a different period, of the golf course to a third party. Despite members and visitors leasing a smaller amount of land, the rent payable under the lease was four times higher. The tribunal also found that the terms of trading were not at arms’ length and were very much to the disadvantage of members and visitors, and that the payment of rent to the Masseys was a covert payment of profit. As the Masseys exercise control over members and visitors, the tribunal found that the prime motive was tax avoidance. The supplies were redefined to re-establish the situation as it would have been without abusive practice, that is they were taxable.

On appeal, the Upper Tribunal agreed with the decision of the First Tier Tribunal. The Masseys made a complaint to the European Commission that the First Tier Tribunal, Upper Tribunal and Court of Appeal have misapplied or misunderstood the Court of Justice of the European Union’s (CJEU) previous ruling. They have asked the commission to bring infringement proceedings against the UK but, as yet, have had no decision.

But the case has returned to the First Tier Tribunal on several issues, the key one being that, in a VAT abuse case such as this, does the burden of proof fall on HMRC to prove abuse or on the trader to prove that it was not abusive? The tribunal decided that the burden of proof lay with HMRC. The tribunal also decided not to refer the matter to the CJEU. It would not be a surprise to see HMRC try and appeal the burden of proof decision, but the time limit for that has not yet expired.

In my view, HMRC is very likely to appeal the decision as it not only impacts on the golf industry, but also has implications on abuse cases generally. In the meantime, the case at least demonstrates HMRC’s thoughts on structures set up to facilitate VAT exemption, and shows the importance for any club considering structural changes to seek professional advice. TGB

Adrian Houstoun is VAT partner at top 20 accountant Kingston Smith LLP. Contact him on 020 7566 3802