Mr Justice Mann :
Introduction
- This is an appeal by the taxpayer from a decision of the VAT and Duties Tribunal (Mr David Williams, Chairman, and Mrs S Edmondson SCA) given on 15th October 2004 ("the Decision") in which the Tribunal determined that the Bournemouth Symphony Orchestra ("BSO" or "the BSO") did not benefit from an exemption from VAT provided by Article 13A(1)(n) of the Sixth Directive and by the Valued Added Tax Act 1994 Schedule 9 Group 13. The essential question arising before the Tribunal was whether or not the BSO was "managed and administered on an essentially voluntary basis".
The Legislation
- Article 13 of the Directive (77/388/EC) provides that:
"1. 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…"
There then follows a list of 17 exemptions under paragraphs (a) to (q) which generally have the characteristic of being services provided for the public good and in many cases by a non-profit-making or non-commercial organisation. The relevant paragraph is (n):
"(n) Certain cultural services and goods closely linked thereto supplied by bodies governed by public law or by other cultural bodies recognised by the member state concerned…"
Some of those heads of activities, including the one just set out, are qualified further in paragraph 2 of Article 13:
"2(a) Member states may make the granting to bodies other than those governed by public law of each exemption provided for in…1(n) of this Article subject in each individual case to one or more of the following conditions:
- they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied, [which I shall call "the first indent", in line with appellations in the authorities]
- they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned, [which I shall call "the second indent"]
- they shall charge prices approved by the public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to valued added tax…
(b) The supply of services or goods shall not be granted exemption as provided for in…1(n) above if:
- it is not essential to the transactions exempted,
- its basic purpose is to obtain additional income for the organisation by carrying out transactions which are in direct competition with those of commercial enterprises liable for valued added tax."
- So far as UK legislation is concerned, the relevant legislation is contained in schedule 9 of the 1994 Act. Under group 13 ("cultural services etc") the following exemptions are listed:
"2. The supply by an eligible body of a right of admission to –
…(b) a theatrical, musical or choreographic performance of a cultural nature."
Under the Notes which follow, the expression "eligible body" is defined:
"(2) For the purposes of item 2 'eligible body' means any body (other than a public body) which –
(a) is precluded from distributing, and does not distribute, any profit it makes;
(b) applies any profits made from supplies of a description falling within item 2 to the continuance or improvement of the facilities made available by means of the supplies; and
(c) is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities."
- The appeal to the Tribunal, and the appeal to me, concern the "management and administration" provisions of the Directive and the Act. The relevant words in the Directive are in the second indent in paragraph 2:
"They shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned."
In the Act the relevant words are:
"(c) is managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities."
Although the wording of those provisions is different, the parties before me agree that since the Act is intended to implement the Directive, they should be construed together, and the debate has in fact centred around the wording of the former.
The Issues in General Terms
- The Bournemouth Symphony Orchestra is a well known orchestra based, as its name suggests, in Bournemouth. It is an orchestra of some considerable repute. Organisationally and structurally, it operates as a company limited by guarantee; the musicians are all employed by the company, as are a number of administrative staff. The detailed structure was set out in the Decision, and for present purposes it suffices to outline that structure. The Articles of Association provide for a Council, which has few significant functions other than the appointment of some of the directors to the Board. There is a Board which essentially equates to the familiar board of a commercial company. It takes the principal strategic decisions and oversees the activities of those who carry out the general administration. The membership includes a number of people, most of whom clearly participate on a voluntary basis. One of the members is the managing director, who at the present time is a Mr Michael Henson. He is remunerated; I deal below with the question of what he is remunerated for. The question which arises in this case is whether the fact that he is remunerated, against the background of all the other board members (apart from one) not being remunerated, has the effect that the BSO is not "managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest….in the results of the activities [of the BSO]" or is not "managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities" within the important provisions referred to above.
The Authority
- The essential point in the present case is the extent to which a paid board member prevents an otherwise voluntary board from being voluntary (or essentially voluntary) within the meaning of the above provisions. It is related to questions that arose in the main case that was placed before me, namely Commissioners of Customs and Excise v Zoological Society of London [2002] STC 521 ("the London Zoo case"). Since extensive reference was made to that case in submissions before me (and in the decision appealed from) it will be useful to set out relevant parts of the report of that case at this point.
- In that case there was an unpaid governing board (like a board of directors) and certain senior employees who were called directors but who were not on the board (though they attended meetings). Exemption from VAT was refused on the ground that the society was not managed and administered on an essentially voluntary basis because these people were paid. The question that arose in that case is summarised by Advocate General Jacobs in his opinion in the following terms (see page 523):
"2. The High Court of Justice of England and Wales wishes to know, essentially, how that condition is to be interpreted where the entity in question has, on the one hand, one or more governing bodies whose members are unpaid and, on the other, one or more paid directors or other management staff who are not members of those bodies."
The questions actually raised appear at paragraph 15 of his opinion. They can be summarised as follows:
i) How does one determine by whom a body is managed and administered for the purposes of the provision. In particular, do the words refer to only the members of "senior controlling organs" of the body, or do they refer to individuals involved in any managerial or administrative function.
ii) What are the criteria for determining whether management and administration is conducted on an essentially voluntary basis. Do the words refer to (a) the extent to which the managing body is conducted by remunerated and unremunerated persons respectively; or (b) to the individual financial basis on which each of those persons conducting the management and administration of the body performs that role; or (c) some other test or criterion.
- In its judgment the European Court of Justice considered the two questions referred to above. In relation to question (a) – how does one identify the management and administration for the purposes of the exemption – it observed:
"18. The aim of that condition [viz the management and administration condition] is therefore to preserve the VAT exemption for bodies which do not have a commercial purpose, by requiring that the persons who participate in the management and administration of such bodies have no financial interest of their own in their results, by means of remuneration, distribution of profits or any other financial interest, even indirect.
19. The condition that such persons should have no financial interest of their own thus refers only to persons directly associated with the management and administration of a body and not to all persons working for reward in one way or another in its administration.
……
21. Next, it must be determined which persons actually carry out the management and administration of the body in the sense that, like the directing members of a commercial undertaking, they take the decisions of last resort concerning the policy of the body, particularly in the financial area, and carry out the highest supervisory tasks. As the Advocate General points out in paragraph 32 of his opinion, such activities are characterised by the taking, rather than the implementation, of policy decisions and accordingly take place at the highest level. Therefore, persons carrying out purely executory tasks are not affected by the requirement for management and administration on an essentially voluntary basis…
…..
23. The answer to part (a) of the question must therefore be that on a proper construction of the second indent of Part 13A(2)(a) of the Sixth Directive, the condition requiring a body to be managed and administered on an essentially voluntary basis refers only to members of that body who are designated in accordance with its constitution to direct it at the highest level, as well as other persons who, without being designated by the constitution, in fact direct inasmuch as they take the decisions of last resort concerning the policy of that body, especially in the financial area, and carry out the higher supervisory tasks."
Thus it is necessary to identify the high-level decision makers in order to identify the relevant administrators and managers for the purposes of the exemption – this will usually be the board of directors or its equivalent.
- The Court then turned to the second part of the question. It interpreted the second part in this way (see para 24):
"24 . …The referring court is essentially asking whether…the words 'on an essentially voluntary basis' refer to the composition of the organs entrusted with the tasks of managing and administering a body, in the sense that it would be permissible, exceptionally and in a peripheral manner, for certain persons having a financial interest in the body to be involved in those tasks, or whether the words mentioned above refer to the reward which those persons receive, in the sense that it would be permissible, exceptionally and in a symbolic manner, to grant them certain financial advantages."
It has occurred to me to wonder whether in fact that is a fair paraphrase of the question actually asked by the English court, but it seems to be the question that the European Court of Justice wished to deal with. In paragraph 25 it observes that all parties before it accepted the fact that even if all the management of the body must be carried out by unpaid persons, the fact that paid staff take part "occasionally or peripherally" in certain essential decisions, and the fact that token payments are made to those staff, are not sufficient to deprive the activity of the council of its essentially voluntary character "and to justify the conclusion that the body pursues a disguised commercial purpose". In so saying the Court was recording a concession (doubtless with implicit approval), but it was one based on a hypothesis – "even if all the management of the body must be carried out by unpaid persons …". It was not, to my mind, deciding in terms that all the relevant management must be carried out by unpaid staff.
- It went on to say:
"26. In that respect, it is apparent from the purpose of [the relevant provision] as explained in para 17 of this judgment, that the condition laid down by that provision is intended to make a distinction between the activities of commercial undertakings and those of bodies having no profit-making aim, that is to say those not aiming to achieve profits for their members. The words 'on an essentially voluntary basis' thus refer both, on the one hand, to the composition, in terms of membership, of the directing organs or, as the case may be, to the persons who actually direct without being designated by the constitution and, on the other hand, to the reward which the latter may receive habitually or by way of exception from the body concerned."
The natural meaning of the closing words is to construe them as if the reward was reward for the managerial activity concerned; they do not naturally refer to all reward from the company.
Last, it said:
"27. It is for the competent national authorities to determine, for each body in question, and by means of an overall assessment, whether by reason of any contribution to the management of the body, as defined in the context of the answer to part (a) of the question, by persons having a financial interest in it, and by reason of any reward given to the latter, the essentially voluntary character of the management or administration of a body can be accepted or not."
This therefore makes it plain the assessment is one of fact and degree.
- What is apparent from that case is that the expression "management and administration" is not intended to cover all persons who participate in those activities on behalf of the body in question. The people concerned are those operating at a higher level – in a traditionally formed English company the function would normally be carried on by the board. The expression is also capable of encompassing those who take the similar high level decisions whether or not a constituted board member. Other than recording that the occasional or peripheral participation in decisions by paid staff does not deprive an otherwise voluntary board of its voluntary characteristics, the decision in the London Zoo case does not provide any particularly helpful criteria for deciding whether or not any other participation by any other remunerated person has any, and if so what, effect on the "essentially voluntary character" of the body in question. That seems to be left to national bodies to determine as a question of fact and degree.
The Decision
- The Decision starts by identifying the legislative provisions which are relevant. At paragraph 7 it records that the only point of dispute was the question as to whether or not the BSO was managed and administered on a voluntary basis by persons who have no direct or indirect financial interest in its activities and it then turns to the law. Under the heading "The Zoological Society of London case" it sets out various extracts from that case. It sets out various paragraphs which identify the body that has to be considered in the context of that question, and in particular it sets out paragraph 21 which I have quoted above, and which, as the Tribunal observes, is in line with the opinion of the Advocate General. The Decision then turns to the meaning of "essentially voluntary basis" as elaborated on by the European Court of Justice, and it sets out paragraphs 26 and 27 of the judgment, along with paragraph 36 of the opinion of the Advocate General, which records a view of the Commission, with which he agreed, to the effect that the administration should be conducted by unremunerated persons, though the fact that paid staff intervene occasionally or in a peripheral manner, or that nominal or token payments are made to those responsible for the management and administration, is not contrary to that requirement. At paragraph 14, the Tribunal indicates the approach it proposes to adopt:
"As Mr Paines QC put it to the Tribunal, it is the Tribunal's task to apply the second indent to the situation at BSO in the light of this authoritative guidance. Insofar as the guidance leaves scope for a margin of appreciation by the national authority – as in the Tribunal's view it unavoidably does – the Tribunal is to approach its task of application in the light of the considerations (including purpose) set out by the Court and "by means of an overall assessment" reflecting both the formal position and the actual position within BSO. In seeking to follow the guidance of the Court, the Tribunal takes into account the views of the Advocate General, to which the court expressly referred and which, in the Tribunal's respectful view, form the basis of the court's guidance, in particular, on the second question."
The "second question" is the meaning of "essentially voluntary basis".
- The Decision then embarks on a consideration of the facts. It records the constitution of the BSO during the relevant period. Since it is a useful summary, and since it is uncontentious, I can usefully quote the decision in full:
"16. The objects of the BSO and its musical, educational and other activities fall fully within the scope of the exemption in article 13A(1)(n). It is also clear that the income and property of BSO can be and are applied only in the furtherance of its objects. It is not a profit-making body. The governing requirement on its income and expenditure pattern is to break even. This arises not only from its own constitution and charitable status but also in accordance with its commitments to the Arts Council. It receives a major part of its funding from the Arts Council and the Arts Council clearly also has an important role in the governance of BSO. As Mr Parker QC (who appeared for the BSO here and below) put it to the tribunal, the Orchestra's activities are squarely within the rationale of the cultural exemption. However, article 5 of BSO's memorandum permits BSO to pay 'reasonable and proper remuneration to any officer or servant of the company, or to any member of the company, in return for any services actually rendered to the company'.
17. The question is whether BSO is managed and administered in achieving those objects in a way that falls within or without the second indent.
18. The formal decision-making structure of BSO consists of its members acting through general meetings, a Council and a Board. In the tribunal's view, nothing turns on the powers given to members and annual meetings, and that aspect is not considered further. Article 38 of the articles of association of BSO provides that:
'The management of the Company shall be undertaken by the Board, the Council's powers and duties being limited as set out in Article 45.'
19. Article 45 of the Articles provides:
'45.1 The powers and duties of the Council shall be limited to the election of the President in accordance with Article 45.2 and to the election of Directors in accordance with Article 48.1. The Council shall not have any executive powers or duties.
…..
45.3 The Council shall have the right to receive annual budgets and financial and other reports of the Board and to express opinions to the Board on such budgets and reports.'
Article 45.2 states how a President is to be elected and for how long the office is held. It says nothing else about the office of President. The tribunal notes however that a President can, and the current President David Mellor does, play an influential part in the strategic development of BSO. But he is not a director nor a member of, and does not attend, Board meetings.
20. Article 71 provides the general position that:
'The affairs of the company shall be managed by the Board who may exercise all such powers of the Company as are not by the Statutes or by the Articles required to be exercised by the Company in General Meeting.'
Articles 48 to 76 set out the necessary details of membership, procedures and other provisions relating to the Board. Article 48 limits its membership to a maximum of 10 directors. Of these:
- four are appointed by the Council,
- one is a musician director (a salaried member of the Orchestra, chosen by the musicians),
- one is the managing director (currently Mr Henson),
- one may be a further senior executive employee or member (currently vacant),
- three may be co-opted by the Board itself.
In March 2002 Mr Patrick was (and is) a director and the chairman of the Board, Mr Henson, was (and is) the managing director. There was (and is) a musician director. There was (and is) no other executive or employee of BSO on the Board. There were (and are) five other directors. Mr Minns was (and is) Secretary to the Board and attends its meetings, but is not a director."
- The Tribunal considered what was meant by "an essentially voluntary basis". In paragraph 21 it set itself the test from the European Court London Zoo case:
"To repeat the test set out from the European Court, the issue is whether 'the persons who participate in the management and administration of such bodies have no financial interest of their own in the results, by means of remuneration, distribution of profits or other financial interests, even indirect'."
At paragraph 22 it noted that the BSO had wide powers to pay its officers (contained in the Memorandum of Association) and said that the European Court had emphasised that:
"Someone receiving financial remuneration from BSO is, for the purposes of the test, someone who has a financial interest in BSO."
The Tribunal rejected an argument that a salary without a performance-related element and which was purely flat rate did not in substance constitute a financial interest in the employer.
"Remuneration is an obvious way of extracting value from a body whether it is overtly profit-making or not, and the recipient of the remuneration has an obvious financial interest in the body paying it."
- The Tribunal then went on to note that with two exceptions the Board was unremunerated. The two exceptions were the musician director (currently a Mr Preston, from the cello section) and Mr Henson himself. Apart from them:
"The Tribunal accepts that there is no question but that the management and administration of BSO is not only 'essentially of a voluntary nature' but is entirely of such a nature."
Having observed that, apart from those two the other officers were actually net financial contributors to the funds of BSO, it then observed:
"Nor does the Tribunal consider that the position of the musician director alters this. He or she receives nothing of substance from being a director, and in particular receives no additional salary or any fee for taking such part in BSO's management as he or she does."
- Paragraph 24 contains findings by the Tribunal that the managing director received "reasonable and proper" remuneration and no specific element of that directly reflected Mr Henson's position as a board member or was in any way linked to profit or surplus of the BSO. However, such remuneration was not "nominal or token". It therefore found that Mr Henson had a financial interest in BSO.
- Having found that, the Tribunal set itself the task of evaluating "both in form and in substance" whether the office of managing director, and the role actually played by Mr Henson in that office, is such that his position removes the "essentially voluntary nature of BSO". It acknowledged the submissions of Mr Parker that, under the Articles of Association, the managing director's right to vote was qualified by provisions which made sure that employee directors (of whom the managing director was one) could not outvote the others. It then identified the letter governing the terms of his employment (which did not contain a job description), and also a job description. It noted that:
"It sets out under the heading 'main function' the general function of achieving the company's objective, and then eight more specific functions that together, in the view of the Tribunal, put the managing director at the heart of the BSO organisation. In summary, these require the managing director to deal with internal co-ordination between all the company's managers, conductors, and musicians, with external relations with the bodies including funding bodies and those arranging concerts, with oversight of financial control and financial management, with oversight of staffing levels and direct involvement in salary and linked negotiations with the Musicians' Union, with the formulation of key programmes for all aspects of the BSO's activities, and with regular reports to the Board and its sub-committees." (Paragraph 32)
In paragraph 34, having noted that it heard oral evidence from Mr Patrick, Mr Henson and Mr Minns, and noting that various departmental heads reported to the managing director, it found:
"In formal structure and in practice, the managing director links all aspects of BSO management and administration and does so at all levels."
- At paragraph 38 it embarked on its final consideration of the questions posed, and observed:
"That formal structure puts the managing director on both the Board and Council of BSO and places few limits, aside from voting limits, on the managing director's role on those bodies. That being so, and given the remuneration paid to the managing director constitutes a financial interest, the formal position suggests that BSO fails the test of being essentially voluntary. But the Court emphasised that the Tribunal should also look at the actual position."
- Then the Tribunal considered the role of the Board, and found that the picture they had was of an active board, meeting regularly and taking the key decisions itself. The managing director was apparently at all Board meetings of which minutes were produced, and a major item on every Board agenda was the report of the managing director to the Board. This was often preceded by discussions between the chairman and the managing director. The Board, as the Tribunal found, generally worked on the basis of consensus rather than votes. Having referred to the fact that there were many influences in play on the formation of central decision-making at the BSO and Board consensus, and having noted a troubled time a few years before when one of the two orchestras had to be closed down:
"The Tribunal notes that throughout the managing director was centrally involved in all those important discussions and the decisions that arose from them. More generally, the influences on BSO include all its officers, and to a lesser extent its managers and employees, but also on a continuing basis the sponsoring local authorities and the arts council and its regional groupings. And the Tribunal is of the overall view that one of those influences, and not the least of them, is the managing director."
- In paragraph 39 it had held:
"It is clear that both in form and in practice the key decision-making body of the BSO is the Board."
Then paragraph 43, the final paragraph of the decision, contains the Tribunal's conclusions:
"The Tribunal is not concerned with the nature of the input to decision-making by BSO or its outcomes. In particular, it has taken care to avoid evaluating in any way the substantive aspects of the input of the managing director to central decision-making. It is concerned only whether, on an overall assessment, the process of central decision-making by BSO is carried out on an essentially voluntary basis when the position of the managing director is taken into account. That position must be taken into account because the managing director is fully remunerated by BSO and therefore has a financial interest in BSO. The Tribunal concludes, based on its consideration both of the formal position and of the actual position, that the managing director has and performs a significant role in the central decision-making of BSO. That position is such that, overall, it cannot be said that BSO is run on an essentially voluntary basis. The appeal must therefore fail."
- There is one potentially important feature of the status of the managing director under the BSO Articles, and which is not emphasised in the Decision though it follows from the structure as outlined in the Decision. In a conventional board a managing director is elected to be a director and then is made managing director by decision of the board, and often acquires a contract of employment as well. The position in BSO operates the other way round. A person is engaged to be the managing director as a matter of contract, and that having happened the Articles then make him a board member.
The appeal generally
- It will be apparent from the above that the Tribunal considered, firstly, that the relevant decision-making body to be considered for the purpose of determining who has "management and administration" of the BSO was the Board. It then considered that Mr Henson's salary gave him a "financial interest" in the BSO, and that his role on the Board and in the running of the company meant that the management was not "essentially voluntary".
- The BSO does not dispute the first of those findings and no issue arises in relation to it. In the present case the focus was on people who were members of the board. From now on in this judgment, unless the contrary appears, any reference to management and administration, or to managers and administrators, should be taken to refer to people at this high level in the entity concerned.
- The BSO does dispute the second and third findings. Its argument advanced by Mr. Parker QC is that the relevant exemption has to be construed in the light of what it says is the underlying basis of the exemption, which is said to be to ensure that the body in question has no commercial purpose. It claims to extract this proposition from the London Zoo case referred to below. If one construes the position with those principles in mind, then it becomes apparent, first, that an employee who is being paid no more than a reasonable remuneration for his job does not have a "financial interest in the results of" the company in question, and the presence of one or more paid persons at the key decision-making level does not necessarily mean that the management is not "essentially voluntary". The key to the matter, said Mr Parker, is to appreciate that the provision is designed to make sure that commercial bodies are deprived of the exemption, and conversely that non-commercial bodies can benefit from it. If one appreciates this, one finds that the managing director does not have an interest in the results of the BSO, so the tribunal erred in finding that he did. The real question, he said, is whether his payment and participation meant that the BSO was no longer non-commercial, and since the answer to that question was No then it followed that the BSO fulfilled the requirement of the second indent (or of the parallel provision in the Act).
The detailed arguments on this appeal and their resolution
- One point which Mr Parker made from time to time, which seemed to underpin his whole case, was that very many worthy voluntary bodies organise themselves in the same way as the BSO; that is to say, they had a full time fully paid chief executive without whom it would not be possible to run the organisation. In the modern world that is the only way in which a body of any substance can be run. If the Commissioners of Customs and Excise were right in this case then it would follow that very many such organisations would not be able to attract the exemption, and that cannot be right. He seeks to say that his case gains strength from this. For my part I consider that this factor has little or no weight. The words of the legislation are what they are, and have to be construed as such. I cannot draw any conclusions from the unproved facts of other organisations, and in any event the details of their respective setups (on which the point will ultimately turn) will vary from entity to entity. If the BSO are not entitled to their exemption in this case then it does not follow that every voluntary organisation to whom the second indent of the Article applies would not be able to attract an exemption. Their own individual structures would have to be considered. One must be careful about generalising – and that applies too to the Commissioners' publicly expressed view that any single paid administrator/manager would fall foul of the provision.
- I therefore turn to Mr Parker's substantive submissions. The first is that it was not correct for the Tribunal to hold that any person taking remuneration from an entity has an interest in the results of its activities, or a financial interest in its activities. He submitted that the Tribunal erred in finding that the salary paid to the managing director gave that person a financial interest for the purposes of the provisions. The payment of a salary to someone, without any element which was related to the success of the activities of the body in question, did not give that person a financial interest in the activities of the body (within the wording of the English provision) or in the results of the activities of the entity (within the wording of the Directive). Mr Paines QC, who appeared for the Commissioners, submitted to the contrary, and submitted that that was concluded by the London Zoo case.
- The second aspect of Mr Parker's submissions was that he criticised the Tribunal for not posing the correct question, which he said was whether the remuneration of the managing director gave the body a commercial character. He said that the London Zoo case held that the exemption was in essence a different aspect of the requirement that the entity be non-commercial, so that what one had to do was to use it as a further way of testing the non-commercial nature of the organisation. It was a "replication by way of emphasis".
- I shall deal with his second criticism first. I do not think that he suggests the correct test. It is manifestly not the correct test on the apparent wording of the provision. The non-commercial (non-profit-making) nature of the body is covered by the provision in the first indent; there is no reason to suppose that the Directive is intending to say the same thing again. (In fact, in relation to some types of body it would be saying it for a third time if Mr Parker were right, because the requirement to be non-commercial is expressly built into the definition of some of the entities under paragraph 1 – see eg para (m), to which the further conditions in paragraph 2 are capable of being applied). It may be that in part at least the second indent is intended to reflect some features that one would expect to find in some such bodies, but it must be taken to have its own independent effect. Nor does the London Zoo case support Mr Parker's submissions in this respect. It is true that certain paragraphs of the Advocate General's Opinion in that case, and of the judgment, refer to non-commercial organisations as being the target (see eg para 25 of the Opinion, and paragraph 26 of the judgment) but that is mentioned by way of establishing the context rather than by way of paraphrase. These references do not require one to test the position of the remunerated participant in the manner suggested by Mr Parker. One applies the test as it stands and on its terms. As will appear below, the fact that he was paid remuneration might go to the question of whether he has a financial interest in the results of the entity (but is not determinative of that matter – that depends on the basis of the remuneration) and it will go to the question of whether and the extent to which the management of the entity remains "essentially voluntary". However, to use his remuneration to test whether the BSO has acquired a commercial character, and by that route to decide whether or not the management is essentially voluntary, is to apply the wrong test and chain of reasoning, and I do not think that the London Zoo case, or the other authority relied on by Mr Parker (Kennemer Golf & Country Club v Staatssecretaris vn Financiën [2002] STC 502) require the provision to be applied in this way. In a way the logical conclusion of Mr Parker's submissions in this respect, which was conceded by him as a logical conclusion, gives the game away. He accepted that if he were right one could have a board all of whose members were significantly remunerated for their services and still be within the condition if it could be shown that those payments did not compromise the non-commerciality of the organisation. A construction which requires me to conclude that a wholly remunerated board is "essentially voluntary" is one which would require compelling authority, and no such authority exists.
- I therefore return to Mr Parker's first criticism. Looking at the legislation without authority for the moment, there is much to be said for this one. In one sense any employee has an interest in the results of the activities of his employer, because if those results are bad enough he or she stands to lose his or her job. There is also an interest in that salary levels may be linked in some way to the overall success of the entity (even without an express link in terms of something like bonuses) because an employer which is more prosperous might be able to afford higher salaries (or better perks) than one which is not. But by the same token, the dependants of those employees would have an interest; so do the suppliers to that entity – the less prosperous it is, the fewer supplies it will purchase; so does the landlord of the entity. The interests of those categories of people are clearly not intended to fall within the wording of the condition. Those persons are interested in the results in a general way, and they are affected by those results, but in my view they do not have the sort of interest in the results that the Directive requires. The provision has to be read in context. The opening words of paragraph 1 of Article 13 require Member States to exempt certain services and goods "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". The relevant condition in the present case (in the second indent) is in my view intended to further that objective. There might be such abuse, for example, if a managing employee was on a bonus related to the financial performance of the entity, because that would or might be a way of taking out something that might otherwise be a profit. The condition provides that those with such an interest should not take part in the high-level management of the entity, presumably so that their activities are not motivated by an element of personal gain. Similarly a shareholder would be likely to have an interest in the results; again, the presence of such rights would be inimical to the essentially public benefit nature of the organisation concerned.
- The question therefore arises: On which side of the line do employees fall, where those employees do not have a salary which is in terms related to the results of the activities (or enterprise)? It seems to me that most such employees fall outside the category of interested persons as described in the Directive. Their rights are not sufficiently closely linked to the results of the entity's activities to give them an interest in those results. While a proprietary interest in the results would certainly qualify, such an interest is not necessary. Results-related bonuses would also be likely to qualify. However, a normal salary would not, or at least not without more. It may be (I do not decide it) that an apparently "straight" salary could be seen to be so high as to amount
to some attempt to extract profit by a salary so as to fall within the condition, but even if that is the case then that would not affect the position of a normal employee.
- Accordingly, on my view of the Directive, unaffected by authority, a person who receives a salary does not have a "direct or indirect interest … in the results of the activities" of the body concerned. My view is the same on the wording of the English statute; indeed, I think the position is even clearer. Here the question is whether that person has a "direct or indirect financial interest in its activities". The expression "financial interest" connotes some sort of real link between the value of whatever it is the person has and the effect of the activities of the entity. Income-sharing and shareholdings are obvious examples of such links; performance-related pay (where the performance is the performance of the entity) may be another. But saying that all employees have a "financial interest" in the activities is going too far. It would, in my view, be a misuse of language and concepts so to hold, and it is not required by the context of the words in the statute.
- It is, however, necessary to consider whether those views are sustainable in the light of authority, because Mr Paines says they are not, and points to the London Zoo case. He puts particular reliance on paragraph 18 of the judgment:
"by requiring that the persons who participate in the management and administration of such bodies have no financial interest of their own in their results, by means of remuneration, distribution of profits or any other financial interest, even indirect".
He emphasises the words that I have underlined, and says that the reference to remuneration makes it clear that the European Court considered that remuneration, without more, gave a person a financial interest in the results.
- I do not read that paragraph in that way. This part of the decision is not directed to the question of what the expression means. It is dealing with the first of the two questions referred to the court, which was (in essence) which people fall into the category of those who manage and administer the entity for the purposes of the provision in question - are they just the "senior controlling organ" or are they anyone who performs any managerial or administrative function? In the course of answering that question the Court considered the purpose of the exemption. In paragraph 17 it points out that the legal context of the condition was:
"that the Community legislature wanted to make a distinction between the activities of commercial undertakings and those of bodies not aiming to achieve profits for their members …"
Note the concept of profits for members. It illustrates the objective – to identify those who might be thought to be members, or in a similar position, and to prevent them taking something in the nature of profits. It does not follow from this that all straightforward remuneration falls to be treated as an interest in the results of the activities. Such remuneration is not necessarily a way of getting profits into the hands of "members".
- Paragraph 18 then illustrates the achievement of this objective further. In its attempts to make sure that there is no element of disguised profit extraction it equates those who administer and manage with the "members" that it has referred to in the previous paragraph, and requires that they have no financial interest in "their" results ("their" must be a reference back to "bodies"). The short catalogue which follows is a list of devices which might be used to give (but do not necessarily give) an interest in the results. The emphasis is on "no financial interest of their own"; the paragraph is not, in my view, intending to say that all remuneration will give such an interest. It might, and it might not, depending on how it is structured. If the Court had intended to say that all remuneration was a financial interest I think that there are more straightforward ways in which it could have expressed that conclusion than this one sentence in a part of the judgment which deals with a different point.
- Nor is there anything in the answer to the second question which demonstrates that the ECJ should be taken as deciding that any remuneration is a relevant interest. This second question dealt with the "essentially voluntary" requirement and, as paraphrased by the Court, involved considering the extent to which participation by someone with a financial interest would contravene the requirements of the condition, and whether it would be permissible for those involved in the management to receive "certain financial advantages" … "exceptionally and in a symbolic manner." As I have pointed out above, in paragraph 25 the Court records a position which was accepted by all parties:
"25. The zoological society, the United Kingdom government and the Commission are agreed that, on a proper construction of the words "on an essentially voluntary basis", even if all the management of the body must be carried out by unpaid persons, the fact that paid staff take part occasionally or peripherally in the adoption of essential decisions, or that small or token payments are made to those staff, is not sufficient to deprive their activity of its essentially voluntary character and to justify the conclusion that the body pursues a disguised commercial purpose."
This is an acceptance of a position on an agreed but non-exhaustive hypothesis ("even if …"). It suggests some doubt about the question which is not resolved. If it were the case that any remuneration disqualified because it gave a financial interest, then this would not be a hypothesis expressed in this way; it would be a given. Accordingly it does not in my view involve a necessary implication that anyone who is paid has a financial interest in the results of the body. Nor is there anything in paragraph 26 (quoted above) which implies that. The European Court clearly regarded the provision as backing up the separation out of commercial undertakings. I do not see that that analysis requires one to conclude that all remuneration amounts to a financial interest. The reference to "reward" is not designed to say anything about the financial interest of the people concerned; it is designed to go to the voluntariness of the management basis (which it obviously does).
- Paragraph 27 poses the test to be applied by the national authorities. It seems to be proposing the test that the national authorities should apply. If one breaks it up one first has to identify those participating in the management, and identify any of those who have a financial interest. Having identified this "latter" class, one then considers what reward they (ie those people) get (though the judgment in terms does not identify for what the reward is paid) and one then considers whether the combination of the participation and the reward one can determine that management or administration is voluntary or not. This would be consistent with any payment of remuneration being an interest in the results (or a financial interest in the activities) but I do not think it establishes that position sufficiently clearly. I have difficulty in accepting that the Court intended that to be the test if applied literally. Suppose there is a shareholder who is not paid for sitting on the board - his actual participation is unpaid and voluntary. He has a financial interest but no reward for being a board member. Surely such a person would fall foul of the condition, and of the objective of the condition? The entity has an element of commerciality because of the financial interest, not because of any non-voluntariness of this board member. If I can respectfully say so, I think that what the Court is suggesting is that one has to test the voluntariness of the management by assessing two things, not one: the extent of participation by those with a financial interest (if it is too great it will compromise voluntariness); and by assessing the amount of the rewards given for administration to those who administer (if it is token it will not compromise voluntariness; if it is more than token it might). None of this compels a conclusion that a salaried employee, without more, has a financial interest in the activities of the entity, or an interest in the results of the activities.
- I was also taken to the Opinion of the Advocate General, appearing earlier in the same report, on this point. I do not find anything there which inevitably leads to the conclusion that he viewed a salary as inevitably being a financial interest. If anything it points the other way:
"30. In line with the view I have taken above … the second indent of art 13A(2)(a) concerns those who run the organisation in question and seems clearly designed to preclude their being in a position to run it in such a way as to further their own enrichment." (my emphasis)
The emphasised words do not seem to me to be particularly apt to describe those on a straight salary. They are more apt to describe those whose interests are more directly affected by the prosperity or affairs of the entity – via a shareholding, perhaps, or by way of a performance-related bonus. They may even catch others who can be seen to have a remuneration package which one way or another is a way of extracting the fruits of the enterprise as opposed to being normal pay for a normal job, but the essence is still the same. Previously, in paragraph 26 of his Opinion, the Advocate General had reflected the view that the second indent reflected "a slightly different aspect of the same concern". That "same concern" is not making a commercial profit. He went on:
"Rather than focusing, like the first indent, on the approach of the entity to the making and use of profit, it seeks specifically to exclude the possibility that the persons who manage or administer that entity may have any direct or indirect interest in the financial results of its activities."
It seems likely to me that he had in mind a situation in which the concern was not itself run for commercial profit, but was run for the profit of one or more of the
managers so that they had an interest in the results of its activities. The word "results" seems to be important. The Advocate General then went on:
"The condition 'on an essentially voluntary basis' may thus be seen as reinforcing that basic prohibition."
There is nothing in this which necessarily reflects an assumption that those on a straight salary, not in any way linked to "results" of the activities of the entity, have an interest in those results.
- In the circumstances I do not think that the mere payment of remuneration to a person gives him or her a financial interest in the activities of the entity concerned or an interest in its results for the purposes of the provision in question. It is apparent that the Tribunal took the contrary view, but before turning to the effect of my conclusion about this on the Decision it is necessary to elaborate a little more on how the exemption works.
- It seems to me that the condition in the second indent poses two hurdles for the entity to overcome if it is to qualify for the exemption. The first is that no person with an interest in the results of the activities shall participate in management or administration of the entity (other than on an occasional or peripheral basis). If such a person does participate then the condition is not fulfilled and the exemption is not available. The second is that the management be essentially voluntary. This involves assessing the extent to which the relevant individuals are rewarded for their management activities, and an overall assessment as to whether that means that the management is essentially voluntary or not. If the first hurdle is overcome there is no need to consider the second; the entity has already failed to fulfil the condition.
- I therefore turn to consider the decision of the Tribunal in the light of my conclusions as to the meaning and effect of the relevant condition. In the present case it is clear that the Tribunal found that remuneration by itself constituted an interest in the results of the activities of the BSO (or a financial interest in its activities), and since that was a material part of its reasoning, it follows that the Tribunal erred. In paragraph 24 it found that his remuneration was "reasonable and proper" and not token, and despite the fact that it was not directly linked to any profit or surplus in BSO:
"It is therefore, following the guidance of the Court, a financial interest of BSO."
That is, on my findings, an error. It then applies this in reaching its conclusion in paragraph 43.
"The tribunal is concerned only whether, on an overall assessment, the process of central decision-making by BSO is carried out on an essentially voluntary basis when the position of the managing director is taken into account. That position must be taken into account because the managing director is fully remunerated by BSO and therefore has a financial interest in BSO. The Tribunal concludes, based on its consideration both of the formal position and of the actual position, that the managing director has and performs a significant role in the central decision-making of BSO. That position is such that, overall, it cannot be said that BSO is run on an essentially voluntary basis."
It therefore concluded (1) that the managing director played a significant role in the central decision making (which is not subject to appeal), (2) he had a financial interest via his remuneration, and therefore (3) the management was not carried out on an essentially voluntary basis.
- That reasoning is incorrect for two reasons. First, it is based on the false conclusion that the managing director had a financial interest. Second, it fails to apply the right test, which seems to me to be that which I have sought to outline above.
- Furthermore, its reasoning was illogical. Its conclusion was that the managing director had a relevant financial interest because he was salaried; he performed a significant role in the management; and therefore the management was not essentially voluntary. But it seems to have considered that the position of the musician director was different. I have set out above what they said about him in paragraph 23 of the Decision. His position did not alter the "essentially voluntary" nature of the board because:
"he or she receives nothing of substance from being a director, and in particular receives no additional salary or any fee for taking such part in BSO's management as he or she does."
Here it adopted a different approach, looking to what identifiable pay the individual musician got for the management function. It did not consider the question whether the musician director had a financial interest in the results of BSO's activities. If it had applied the same reasoning as it applied to the managing director it ought to have concluded that he did, at which point it would presumably have had to consider whether the musician director's role was significant. But the Tribunal did not approach the matter in that way, and was therefore guilty of illogicality.
- The correct approach would in my view have been as follows. First, the Tribunal should have considered whether Mr Henson had a direct or indirect financial interest in the results of the activities of BSO. If all that he had was a salary which was not performance related, and was not a disguised way of removing what would otherwise have been profits, and nothing similar was true in relation to it, then he should have been found not to have had a financial interest. That would have dealt with that requirement. If he did not have such an interest, it should then have gone on to consider separately whether the management of the BSO was "essentially voluntary". The answer to that question does not necessarily lie in the simple fact that Mr Henson received remuneration. It depends on looking at how and by whom the management was conducted and placing his participation in that context. On the facts of this case the Tribunal had found that none of those engaged at board level were paid anything in respect of their BSO activities, other than the musician director and Mr Henson. It was doubtless correct to find that, absent the participation of those two gentlemen, the management was conducted on an essentially voluntary basis. The question then is what difference does their participation make, and that involves considering such things as their respective formal positions, what part they played in practice, what parts the other board members played, what their functions otherwise were, and whether they
were paid any sum explicitly in respect of their board activities (to which the answer is No).
- The conduct of such an inquiry would reveal whether the management is "essentially voluntary". Voluntary must mean not remunerated or rewarded for the function. I have stressed the word "essentially" because it is important. What is important is the essence of the structure and practice. It is not an absolute test. It does not have to be absolutely or purely voluntary. That is doubtless why the ECJ in the London Zoo case accepted that occasional participation by paid employees did not compromise what was otherwise the voluntary nature of the management. Nor did token payments to the managers. Those are examples of what will not cause the line to be crossed. They demonstrate that an otherwise apparently voluntary management structure remains essentially voluntary despite the fact that it might be said to have become not purely voluntary. They are not, in my view, an exhaustive classification. Whether the line is crossed is a question of judgment in each case.
- This exercise of deciding in an overall sense whether the management remained voluntary was not one which the Tribunal conducted, or at least not apparently, and not in terms. It acknowledged it was required to form "an overall assessment of the actual position in BSO" (see paragraph 36 of the Decision), and it embarked on a consideration of the formal (technical) position of Mr Henson, and the position that he (and the managing director generally) occupied in practice in the actual decision making process. However, when considering whether that position compromised what the Tribunal accepted was otherwise a wholly voluntary management it did not assess how those factors interacted and whether the management remained essentially voluntary or had lost that character. It reached its conclusions on the footing of significant involvement by someone who was a paid employee, because that employee had a financial interest, holding that significant involvement by such a person disqualified. It was a somewhat mechanical test, rather than an evaluative one. That is not the correct exercise (though it contains elements of the correct exercise).
The decision on this appeal
- The function of the Tribunal in a case such as this is an evaluative one. That means that where it has applied the wrong test it would be quite likely that the correct decision on appeal would be to send the matter back the Tribunal so that it can apply the right one on the basis of all the evidence that it had. I was tempted to adopt that approach in this case, but the fullness of the reasoning and evidential summary of the Decision presents me with a clear enough picture to allow me to take the decision myself. When I asked Mr Parker whether I should decide the point for myself or remit it he did not say that the Tribunal was better placed than I am to make the decision; he left the question of what to do to me. He also stated that he did not dispute any of the primary facts found by the Decision; he did not suggest that any others might be relevant. Accordingly, having considered the position carefully, I have decided that I can properly decide on the applicability of the condition myself. I have the full facts as set out in the Decision, supplemented by the witness statements and some documentation (it is not clear whether I have it all, but nobody suggested I was lacking anything significant). I did not have a note of the cross-examination which took place, but again no-one suggested I was lacking anything material.
- I have already summarised, and to some extent set out verbatim, the findings and reasoning of the Tribunal. Mr Parker does not dispute that the managing director "performs a significant role in the central decision-making of BSO". The clear picture which emerges from those facts is of a board of people who are clearly volunteers, and two people who come from the employment side. The first is the musician director. He is paid to be a cellist, and receives nothing extra for being a board member. His prime function is to be a cellist, and it is not part of his job to be a board member. I do not think that his position would affect the otherwise voluntary character of the management body. He is a cellist who happens to be a board member, but the latter function is very much subsidiary to his musical functions.
- The managing director appears to me to be different. He is not paid any identifiable separate sum in respect of his board membership, but his job as a whole (for which he is paid as a whole) involves his carrying out managerial functions (in the high-level sense required by the London Zoo case) as a board member (and, so far as is relevant, other than as a board member). His membership of the board is not incidental to another function; it is part of his overall function. As a board member he has real input. To summarise what appears above, the Tribunal found that his functions put him "at the heart of the BSO organisation" (paragraph 33), and described the functions that put him there - see above. The board was an active board that took the key decisions (paragraph 39). The managing director was at all board meetings at which minutes were produced, and a major item on every board agenda was his report to the board. This was preceded as standard by discussions between him and the chairman. Other directors were not always present, though looking at their identities they can certainly not be said to be mere ciphers (or Christmas tree decorations, to use a phrase which Mr Parker borrowed from previous authority). Historically speaking the managing director had been centrally involved in important discussions some years previously when funding requirements led to the disbandment of one of BSO's two orchestras. One of the influences on the BSO, "and not the least of them" is the managing director. For all these functions Mr Henson is paid a sum which exceeds £80,000 (though this figure did not appear in the Tribunal's decision). It was these factors that led the Tribunal to determine that the managing director "performs a significant role in the central decision making of BSO".
- Looking at this evidence realistically, the position of the BSO is that its board contains a number of volunteers and one significant person who is a full-time employee and who is not a volunteer. He contributes to a significant extent in the decision-making process, and it is clear enough that he is intended to. It is clear enough to me from the findings of the Tribunal that his contribution at board level is not de minimis, slight, occasional or any other adjective which enables one to ignore it in assessing the voluntary quality of the board. It is apparent that when the Tribunal held it to be "significant" it meant significant in the sense that it was real, substantial, wide-ranging and constant. It is not the sort of participation that one can ignore in the same way that one can ignore occasional contributions. He is paid to do this - it is part of his job. That means that he is not a volunteer; and it also means that overall the managerial body is not "essentially voluntary" - it is not of the essence of the board that it is voluntary. It contains a number of volunteers, but it contains one significant non-volunteer whose participation is built in as a matter of formality (via the articles) and as a matter of substance. One might go so far as to describe it as "largely" voluntary, but
that would leave a significant element that is non-voluntary and which prevents the extra step required to make it "essentially voluntary".
Conclusion
- It follows, therefore, that the Tribunal reached the right decision albeit via the wrong line of reasoning. In the circumstances I therefore dismiss this appeal.
