20840
SUPPLY Whether payment to the Appellant by its local council was for a taxable supply of services for a consideration Whether a grant s.2 and s.4 Local Government Act 2000 considered Arts Council grant also received by Appellant Appeal allowed
LONDON TRIBUNAL CENTRE
BATH FESTIVALS TRUST LTD Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: MISS J C GORT (Chairman)
MR C PERRY C.Eng., MICE
Sitting in public in Bristol on 10 and 11 September 2008
Mr Andrew Hitchmough and Miss Laura Poots of counsel, instructed by Bath Festivals Trust, for the Appellant
Mr M Barnes of counsel, instructed by the Solicitor's Office, for the Respondents
© CROWN COPYRIGHT 2008
DECISION
- There are two disputed decisions of the Respondents to refuse to treat funds received by the Appellant ("the Trust") from the Bath and North East Somerset Council ("B&NES") as consideration for a supply of services within the meaning of Section 5 of the VAT Act 1996, as opposed to a grant, and so outside the scope of VAT. The first decision is contained in a letter dated 9 November 2005, which was confirmed following a local reconsideration by a letter dated 20 March 2006. The second decision is contained in a letter dated 4 May 2007. By an earlier direction of the Tribunal the two appeals were consolidated.
Background
- The Trust is a company limited by guarantee and registered as a charity. It was acquired from the Bath Festival Society ("the Society") in 1993, from which it also acquired the intellectual rights to the Bath International Music Festival. The Society had previously promoted the music festival. The Trust was hitherto a dormant company.
- The Society was grant-aided by the Bath City Council ("the Council"), the predecessor of B&NES, and the Arts Council of Great Britain ("the Arts Council"). In the early 1990s the Society was in severe financial difficulty and the Arts Council was unwilling to continue its financial support without significant changes being made, both to the running of the music festival and the basis of the support given by the Council. At this time, the Society was receiving a grant of around £50,000 annually from the Council.
- The Council wanted to ensure that the music festival continued. At that time the Council did not have an Arts department. The Council's Director of Leisure and Tourist Services proposed that new companies should be formed to provide culture, leisure and tourists services. This proposal was accepted by the Council and, along with a Tourism Bureau, the Trust was established.
- A service agreement was signed on 5 July 1994 ("the 1994 Agreement") setting out the obligations of the Trust and the Council; it related to the period 1 October 1993 to 30 September 2000. Two further service agreements were entered into, one on 1 December 2000 ("the 2000 Agreement") and another on 23 August 2006 ("the 2006 Agreement"), which cover the periods relevant to this appeal. The first decision letter relates to the 2000 Agreement, the second decision letter relates to the 2006 Agreement. Pursuant to these Agreements, B&NES (formerly the Council) pays the Trust an agreed sum of money. The first annual payment was in 1994/1995 and was in excess of £300,000.
- The issue for the Tribunal is whether the amount paid by B&NES under the service agreement are grants or whether they are a supply of services within Section 5(2)(a) of the VAT Act 1994.
The legislation
- The Value Added Tax Act 1994 ("VATA") provides:
Section 1(1)
Value Added Tax shall be charged, in accordance with the provisions of this Act
(a) On the supply of goods or services in the United Kingdom
Section 4 (the scope of VAT on taxable supplies):
(1) VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of a business carried on by him.
(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.
Section 5(2) provides:
(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
(b) anything which is not a supply of goods but is done for a consideration
is a supply of services.
- The recast VAT Directive, 2006/112/EC at Article 2 provides:
- The following transactions shall be subject to VAT:
(c) the supply of services for consideration
Article 24 provides:
- "The supply of services" shall mean any transactions which does not constitute a supply of goods.
Article 73 provides:
In respect of the supply of goods or services
the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.
The Local Government Act 2000 provides as follows:
- Promotion of well-being
(1) Every local authority are to have power to do anything which they consider is likely to achieve any one or more of the following objectives
(a)
(b) the promotion or improvement of the social well-being of their area,
(2) The power under subsection (1) may be exercised in relation to or for the benefit of
(a) the whole or any part of a local authority's area, or
(b) all or any persons resident or present in a local authority's area.
(3) In determining whether or how to exercise the power under subsection (1), a local authority must have regard to their strategy under section 4.
4 Strategies for promoting well-being
(1) Every local authority must prepare a strategy (referred to in this section as a [sustainable community strategy]) for promoting or improving the economic, social and environmental well-being of their area and contributing to the achievement of sustainable development in the United Kingdom.
- The following cases were referred to in the course of argument:
Apple and Pear Development Council v C&E Commissioners [1998] STC 221
Hillingdon Legal Resources Centre (Decision 5210)
Tolsma v Inspecteur Der Omzetbelasting Leeuwarden [1994] STC 509
Wolverhampton Citizens Advice Bureau (Decision 16411)
C&E Commissioners v Redrow Group Plc [1999] STC 161
Edinburgh Leisure (Decision 18784)
Sociιtι Thermale D'Eugιnie-les-Bains v Ministθre de L'Economie des Finances et de L'Industrie [2008] STC 2470
The evidence
- The Tribunal heard evidence from David Lawrence, divisional director Tourism, Heritage, Libraries, Leisure and Culture of B&NES, and from Nod Knowles, chief executive Bath Festivals Ltd on behalf of the Trust. No witnesses were called on behalf of the Respondents. An agreed bundle of documents was provided.
- Mr Knowles had been acting general administrator of the Society from 1992. During that period he dealt with the closing down of the Society, establishing the new Trust and transferring the interest of the Musical Festival from one to the other. The Arts Council review of 1992 questioned the viability of continuing its annual grant to the Society, and the Council, whilst wishing to see the Musical Festival continue, were not certain that they could continue to support the Society, given that the Society was in dire financial straits.
- At that time the Council had no specific arts promotion or development department, although it did help facilitate various cultural activities. In February 1993 its then director of Leisure and Tourist Services produced a report to the Spa and Recreation Committee setting out the Council's corporate service objectives for the 1990s, one aspect of which was its promotion of cultural and recreational opportunities in the City. The relevant part of that report is to be found at paragraph 32 under the heading 'Bath Festival Society' where it says as follows:
"The present Bath Festival, in the form of an International Music Festival held in late May/early June, has been in existence since 1948, in its latter years managed by an independent charity trust. The City Council has in the last two years grant aided the Festival Society at a level of £110,000 per annum, a significant increase on its historical level of grant effectively replacing the major sponsorship lost from Beazer plc and enabling the Festival to continue. The City Council's grant approved during the 1992/93 financial year provides the basis of the 1993 Festival which takes place this May/June.
"The Arts Council of Great Britain produced a five year appraisal of the Bath Festival Society in September 1992. This examined the Society's critical financial situation of which members of the City Council had been aware for some time. It recommended a major change in direction and management structure which would be contingent upon the City Council enabling the Society to fulfil a wider remit of activities than merely a two week music festival. Since September the Board of the Bath Festival Society has been considering its response to that appraisal together with the City Council's requirement that it produce a Business Plan by January 1993. I received that Plan on 31st January. The Society's proposals respond closely to the requirements of the Arts Council's proposal and the requirement of the City Council that the Festival become a more broadly based cultural event. It proposes many of the initiatives which I have separately arrived at in my consideration of future planning for the arts in this City. The only major difference results from my conclusion that, in order to launch such a year round programme, a new vehicle needs to be formed in the shape of a new Bath Festivals Trust. It is my hope and belief that the Bath Festival Society will see in my proposals the scope for merging their identity and interests in a vehicle which will achieve their aspirations. Should the Festival Society merge its interest in the new Festival Trust there will be residual issues relating to the Society's assets and liabilities which will need to be considered.
"
- A further report, also dated February 1993 from the director of Leisure and Tourist Services is set out the proposed new organisational structure. Under the heading 'Business Units' he proposed that ten business units should be set up, the majority of them to be managed in-house and staffed by City Council employees. However, he also recommended that some of the units should be managed by Trusts, and that whatever form the management took, the objective would be to treat the client-contractor relationship with each in the same way. One of those units under the heading 'Cultural Services' was the Bath Festivals Trust with the words "in effect the department's Arts office for the performing arts" in brackets. Under the heading 'Bath Festivals Trust", the report states inter alia: "In my policy review and in earlier papers
I had noted that the City Council has no direct service function in non-museum cultural services and that the development of a cultural strategy for the City is not achievable through the present mechanism of grants to voluntary organisations. I have recommended the form in which such a strategy might be developed and the agencies through which such a strategy might be delivered." It was proposed that the Trust would be established under an independent Board of Directors (including a small number of nominees of the City Council) to manage and promote an annual programme of festivals and live performance events in the City under a service level agreement similar to the other new Department of Leisure and Tourist services business unit. It was hoped that the Trust would assume responsibility for the present Bath Festival (its music festival), an expanded Film Festival, an October Festival and various other matters. That section concludes with stating that the City Council's financial role would be to fund its core operation and staffing expenditure, and to provide some 'programme challenge funding', leaving the Trust to finance the bulk of its programme and promotional expenditure.
- A further report in December 1993 states that the Council's decision to contract for the services with an independent trust was reached, inter alia, on the grounds of the ability of an independent trust to secure grants and sponsorship that the Council could not itself have attracted.
- The 1994 Agreement sets out at Clause 2 that the Trust undertakes to act as an independent contractor to the City Council and for the benefit of the City in providing the following operational services:-
By Clause 2(i)(d) it undertakes to act on behalf of the City Council in its relationship with the Bath Fringe Festival and the Bath Film Festival in providing such financial, managerial, programming, promotional, administrative, technical or other assistance as may further the Trust in carrying out the principal object of this agreement.
By Clause 2(ii)(b) it undertakes to represent the City Council at relevant meetings and conferences held regionally, nationally or internationally.
By Clause 4(c) it provides that any variation of the provisions of the Agreement shall be in writing signed on behalf of the parties and attached to the Agreement.
By Clause 8 it provides that the Board (the Board of Directors of the Trust) shall be required to meet on not less than four occasions in each financial year, one of such meetings to be open to the general public.
- Clause 11 of the 1994 Agreement is headed 'Pricing Policy' and states:
(a) "The City Council shall provide the Trust annually with a consideration for the delivery of services specified in this agreement. Some parts of its programme each year shall be free of charge to residents of the City."
(b) "In the event of that the Trust fails to perform any item within the specification of services
to the Council's satisfaction the Council shall be entitled to deduct the whole or (at the Council's discretion) a part of the cost attributable to that item from any payment or payments due to be made to the Trust by the Council in the financial year in which such failure occurred or in later financial years."
- Clause 13 is headed 'consideration' and provides as follows:
"(a) Between 1 January and 31 March of each year the City Council shall indicate
its financial consideration for the Trust's performance of this agreement for the following financial year. After consultation with the Trust, the director shall present to the committee a specification of services that the City Council requires the Trust to perform during the following financial year. That specification shall set out the number and nature of festivals, concerts, and other events, their timing and duration and the staffing and other resources required for their management and promotion
(c) The City Council recognises that the performance of elements of this agreement, and especially the promotion of events, is contingent on the ability of the Trust to raise funds from grant aiding bodies and sponsors in addition to the City Council's consideration.
"
- Clause 15 provides for termination and specifies that the Council shall have the right to terminate the agreement forthwith if without prior agreement of the City Council, the Trust fails to undertake the services for which it has received consideration under this agreement and the annual specification.
- A report concerning the presentation of a draft service agreement with the Trust was prepared for a meeting of the Community, Culture and Leisure Committee on 18 September 2000. The report sets out the currency and the proposed fee for the subsequent years. The 2000 Agreement itself in the preamble sets out the fees agreed for three years. Under the heading "Principles" it provides inter alia that: "Subject to the performance by the Trust of the terms and conditions of this Agreement, the Council shall pay to the Trust the Agreement Sum in accordance with the provisions of the Agreement documents." Clause 1 is headed 'Responsibilities of the Trust' and provides under 1.1(a) "In consideration of the funding specified in the Agreement for Services the Trust agrees to provide the service(s) on behalf of the Council in accordance and compliance with the terms and conditions of contract in Schedule 2.1 of the Schedule of Service(s) attached at document B." There are specific clauses dealing with financial management, and financial arrangements. Under a clause headed "Notifications of Changes" it is specified that the terms of the Agreement may be amended "by mutual consent". Under the clause dealing with termination, the Council is entitled to terminate the Agreement if there is a fundamental breach by the Trust, matters which might be deemed to constitute a fundamental breach are set out. Provision is made for the Council to be refunded in the event that the Agreement is terminated.
- Schedule 1 to the 2000 Agreement specifies the basis on which the Council provides funding "to the Bath Festivals Trust in order to obtain a range of services which contribute to the fulfilment of the Council's Corporate Objectives, Arts Development Strategy, and Arts Development Plan." Schedule 2 sets out the responsibilities of the Trust and the Council. Under the heading "Responsibilities of the Trust" at 1.2 is set out the user group for whom the service will be provided, which is stated to be:
"All residents and communities of Bath & North East Somerset.
Visitors to Bath & North East Somerset and the surrounding area."
The aim of the service is said to be to develop, manage and promote a year round programme of cultural and artistic events that shall meet and/or be consistent with the Council's corporate objectives which are then specified.
- At Clause 1.4 is a description of the services to be provided, which sets out the following matters under a series of bullet points, the first bullet point being
- an International Music Festival, including:
- opening and closing night celebrations
- a varied programme of high quality music events with a wide range of appeal
- a classical music programme
- a Contemporary Music programme
- events which appeal to young people
? a Literature Festival, including:
? a varied programme of high quality events with a wide range of appeal
? events which appeal to young people
? a year round Community Participation Programme of accessible, participatory events and activities that:
? provide opportunities for local people to benefit and learn from the arts
? increase understanding of the programme of the two Festivals
? build audiences for the two Festivals."
- Under Clause 2.1.4 headed "Service Values" it is stated:
"The Council believes that the arts enhance the social, economic and cultural life of the individual, the community and the area. The Council believes that they are a vital ingredient in the creation of a healthy and dynamic living environment
"
There then followed clauses on common standards of service required which include inter alia such matters as the Trust agreeing to try to get people involved or interested in the arts who have not been before, and to give local people, whatever their age, the opportunity to learn something new.
- At Clause 2.1.7 the "Targets of the Service" set out that the performance of the Trust will be assessed in relation to various targets over the duration of the Agreement. Under a sub-heading 'Quality' it is provided that a target shall be "To hold no less than 100 events annually as part of the Bath International Music Festival and to hold no less than 40 events annually as part of the Bath Literature Festival." Under a heading 'Access' it is provided that it should aim to increase the number of people age 25 and under attending events to 20% of total attendees. Various other targets are set out including under the heading 'Lifelong Learning' a target of holding no less than 300 events, including 250 workshops as part of the Community Participation Programme.
- The 2006 Agreement itself is dated 23 August 2006 and the preamble states: "The Contractor (Bath Festivals Ltd) shall perform the Services in accordance with the provisions contained in the Documents to the satisfaction of the Contract Administrator." The recitals at paragraph 1.1(a) state: "The Council has set certain strategic objectives for arts development. The Council has agreed the Organisation (which appears not to be defined) shall, in return for a contract fee, provide the services in a manner which will assist the Council in meeting with its strategic objective." At 3.3 the 2006 Agreement provides: "In consideration of the payment of the Contract Fee by the Council the Organisation agrees to provide and supply the Services to the Council upon the terms and conditions of this Agreement." The financial arrangements are set out in a schedule to the Agreement. There are provisions for default and termination. Schedule 1 to the Agreement sets out the legal and policy framework and provides the basis on which the Council pays Bath Festivals Ltd in order: "to obtain a range of services which contribute to the delivery of the Council's Corporate Objectives, Community Strategic, Cultural Strategy, and Service Strategies
" Mr Hitchmough submitted that "Community Strategy" referred to the Council's obligations under section 4 of the Local Government Act 2000.
- Schedule 2 to the 2006 Agreement is headed 'Responsibilities of the Organisation and the Council' and incorporates reference to "Service Values" and to the Council having adopted a "Cultural Strategy". That section also refers to the Council having an Arts Development Strategy 2005-2008, it then lists what the aim of the Council's Arts Development Strategy is. The standards of the service and targets for the service are set out in Appendices. The aims refer to improving the environment for learning, providing lifelong learning opportunities in the Arts for a wide spectrum of the Community, residents and visitors and various other matters. A specific target is to re-locate Bath Festivals Ltd's administration office and the Box office, the aim being that many other Art and Cultural Organisations should have access to the use of shared facilities. This was carried out and it is now an obligation on the Trust to provide such Box office facilities. In addition there is an obligation on the Trust to produce a monthly anti-clash diary which is to include information from all the festivals in B&NES' area, the aim being to assist the planning of programmes and marketing of all the festivals. There is a specific section relating to the Bath International Music Festival for which there are similarly targets set out.
- In addition to the service level agreements, we were also shown a copy of the funding agreement between the Art Council of England and the Bath Festivals Trust. That document states inter alia that the Arts Council provides support to arts organisations for various purposes and also that the grant was awarded to assist the Trust achieve its aims and priorities. Those aims and priorities are set out as being "To deliver music and literature festivals of the highest quality and a programme of community and education activities." It promises to provide the Arts Council with a detailed programme of activity agreed by its Board and any payment under the agreement is dependent on the Arts Council approval of that programme. The agreement states that there cannot be any assumed commitment of funding for future years. There are then stipulations such as that there must not be any change to the agreed programme without written approval from the Arts Council, and the Arts Council may alter or withdraw funding if any change is not considered reasonable. The Trust is obliged to send the Arts Council any information which it might need to monitor the Trust's activity and how effectively the funding is being used.
- A further relevant document produced to us was a copy of a letter which is sent out by B&NES to those applying to the Council's Arts Development Team for a grant. In order to obtain a grant the applicant has to describe the activity in respect of which the grant is to be applied, and, at the end of the project, has to complete a 'Performance Indicator'. The applicant is obliged to acknowledge the Council's funding on all project-related information, publications, publicity etc. The award is made in two parts: one on receipt of a letter of acceptance from the applicant and a final payment upon satisfactory completion of the funded activity and receipt of a completed performance indicator form.
- The final document we were taken to was a copy of the website of the Trust relating to the International Music Festival. In particular we were taken to a short sentence which reads: "Many thanks to our two core funders, Bath and North East Somerset Council and Arts Council of England South West for their financial support." Mr Barnes put to Mr Knowles that this sentence suggested that B&NES and the Arts Council were providing the same service. Mr Knowles rejected this suggestion and informed us that the website had been constructed several years before by a marketing man who had subsequently been required to leave the Trust, and the website was a publicity tool which should not properly be used to describe the Trust's sources of income.
- Mr Knowles himself had not only been employed by the Trust after its formation in 1993 as acting chief executive, having been the acting general administrator of the Bath Festivals Society from 1992, he had in between leaving that post in the late 1990s and re-joining as chief executive of the Trust in May 2005, worked as director of Music for the Scottish Arts Council in the years in between. He was therefore able to speak with authority about the difference between the Arts Council funding and the support provided by B&NES under the service level agreements. He had himself been with the Trust at the time in 1993 when the Council's director of Leisure and Tourist Services had made the proposals set out earlier as to how the Council should develop its programme of cultural and leisure provision and attendant tourist attractions, that proposal being that new companies should be formed as out-sourced providers to the local authority on a similar contractual basis to the services already provided by the private company managing the City Support Centre.
- He described the principal difference between the Arts Council grant and the finances provided by B&NES as being that to obtain an Arts Council grant the applicant had to set out his proposed programme of activities and define his own targets, whereas under the service level agreements with B&NES the Council approached the Trust and imposed specific requirements. In the present case those requirements included the provision of Box office facilities to all the various art projects in the City, the advisory service and the provision of a website which gives details of all other art events in the area. For the Arts Council grant the Trust stated that it would provide an international music festival and a literature festival, and such targets as there are are those that the Trust itself sets out in its application. It has to measure itself against its own targets, whereas with B&NES the targets, some of which are referred to above, are largely set by the Council and it is up to the Trust to decide whether to accept them or not. For example, Mr Knowles did not think that the Trust would have wanted the requirement that 20% of the total attendees should be under 25, but if it had not thought that it could meet that target, it would not have signed the 2006 Agreement. He did not accept that the Arts Council attempted to control how the money was spent beyond seeing that the funds were properly managed. This was different from the relationship with B&NES in that the Arts Council was testing the probity of the Trust itself whereas B&NES was monitoring the operation of the Trust and its ability to meet targets. Whilst both the Arts Council and B&NES specified provisions for the withdrawal of funding in certain circumstances, in circumstances where the Arts Council withdrew the funding there would be no further action the Trust could take, whereas, if B&NES withdrew its funding, the Trust could litigate against B&NES, there being a properly structured, binding, legal agreement between them. B&NES had to have a provision for withdrawal because of its reliance on government funding.
- Mr Lawrence's evidence was that B&NES regarded the provision of tourism and cultural services as essential to its role as a local authority in a locality where these elements are critical for the local economy. B&NES outsourced the single largest portion of its cultural provision to the Trust because the Trust could create services that were more effective, more competitive, more creative and more responsive to the market and more efficient than B&NES itself could provide. Section 2 of the Local Government Act 2000 permitted it to discharge its cultural responsibilities via a third party. He described the service agreements, which were agreed by the department under his control, as being three or four year agreements regarding the provision of services in return for a fee. He further described the service level agreements with which we are concerned as "complex, performance- related, contractual documents, that are monitored closely (on a monthly basis) and can result in action being taken against poor performance."
- Mr. Lawrence described the grants provided by B&NES as being 'applicant led'. B&NES advertised the grants which were available and applicants then replied. B&NES assessed the scheme and offered funding which an applicant might decide to take or not; B&NES had to assess whether the applicant's project fitted in with its Arts Development Strategy priorities. The annual level of grant was about £1,000. With regard to the fact that the predecessor to the Trust had received an annual grant of some £50,000, it was Mr Lawrence's evidence that there was now no possibility of B&NES awarding a grant at that level. At that time the Festival had come forward and asked for the funding it wanted, the circumstances were now very different in that B&NES defined what it wanted and negotiated specific outcomes in line with its strategies. He did not agree with Mr Barnes' suggestion that the reality was that there had been a long-standing arrangement between B&NES and the Trust, and the 2000 and 2006 Agreements were in effect the maintenance of a long-standing agreement in the same terms.
- B&NES regarded the targets in the 2006 Agreement as matters of obligation, for example there had to be one hundred events annually and either fewer events or more would impact on the money provided and would affect the long-term viability of the arrangement. There was no specific apportionment of the money from B&NES because it was not considered possible to separate out the literary events from the musical ones in that some literary events had musical elements, and some musical events had literary elements, such as poetry reading. B&NES was always subject to the budget provided by the central government, but Mr Lawrence did not accept that what was provided was a general grant that B&NES might recover, a proposition which he described as being 'anathema to the spirit of the agreement'. He also would not accept that if the Arts Council grant increased then the amount of finance provided by B&NES would be reduced proportionately. In his witness statement Mr Lawrence had listed the role of the Trust as being to 'drive visitor numbers to the City, deliver increased uptake of hotel rooms, have a positive impact on the visitor spend and assist the renaissance of the City' in addition to providing 'an international, national and local expression of musical and literary excellence'. The Arts Council grants which the Trust received would not have been available to B&NES had it established an in-house Arts department to carry out the work which the Trust was doing.
The Appellant's case
- It was submitted by Mr Hitchmough that a supply of services for consideration required a "direct link between the services provided and the consideration received", authority for this being the Apple and Pear Development Council case. We were also referred to the case of Tolsma for an illustration of the necessary direct link. That case concerned a Dutch musician who played music on the street and in other public places. He was given money by passers-by. Where he sometimes solicited donations, there was no agreement that passers-by or those who stop to listen to the music would pay the musician. The European Court of Justice ("the ECJ") found that the necessary 'direct link' between the sums given to the musician and the music played by him was absent. It based its opinion on the fact that there was no agreement between the parties, and thus no necessary link between the music and the payments which gave rise to it. Passers-by did not request that music be played, and the sum paid did not depend on the music, but on subjective motives, such as sympathy. At paragraph 14 the ECJ stated:
"14.
A supply of services is effected 'for consideration' within the meaning of Art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service of supply to the recipient."
- Although there is a contract between the provider of the service (the Trust) and the recipient (B&NES) in the present appeal, the legal relationship mentioned in Tolsma did not need to amount to an enforceable contract. An agreement binding in honour alone will suffice see Town and Country Factors Ltd. It followed that a 'direct link' will be established for a service provided if 'requested' by the recipient (see Tolsma), and where the amount paid by the recipient is dependent upon the service or benefit being provided and there is a reciprocal relationship between the parties. All of these are features were said by Mr Hitchmough to be present in this appeal.
- Mr Hitchmough submitted that in section 5 of the VATA the concept of 'supply' was very broad, and that anything which was done for a consideration which was not a supply of goods was a supply of services. To identify the supply the only requirement was that the service should have been provided 'for consideration'. There was no requirement to define the services in question. The requirement 'for consideration' required a direct link between the services and the price, if there were none, then there was no supply, there being a reciprocal obligation. In the present case, B&NES considered the services provided by the draft essential to its strategy. It did not have the resources or the expertise to provide the services and therefore bought them in.
- Mr Hitchmough did not accept the Respondents' argument that the supplies made by the Trust were made to the general public as evidenced by the clause in the Service Level Agreements saying that they were to benefit the general public and to be consumed by them, therefore the Trust could not be making a supply to the Council. HMRC had run the same argument in the case of Redrow and it had been rejected by the House of Lords. We were referred to the speech of Lord Millett in that case at page 171 where under the heading 'identifying the recipient of the services' he continued:
"The Commissioners begin by describing the services in question as the ordinary services of an estate agent instructed to market and sell his client's house. They then ask: to whom were those services supplied? Inevitably they answer: to the householder. They concede Redrow derived a benefit from the services supplied by the agent and was accordingly prepared to pay for them; but they insist that this is irrelevant. The question is: to whom did the agent supply his services, not who derived a benefit from them?
"But this approach begs the question to be decided. The way in which the Commissioners describe the services dictates the answer. But it is equally possible to begin with the services which Redrow instructed the agents to perform. This would lead to a different definition of the services in question. They would not be the ordinary services of an agent instructed to market and sell his client's house, but the services of an agent instructed to market and sell a third party's house. The fact is that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of each other, for each defines the other. Where, then, should one begin?
"The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay for it as part of a consideration payable by him for a supply of goods or services.
"In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Whilst the taxpayer has identified the payment the question to be asked is: did he obtain anything anything at all used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services."
- This approach was also adopted by Lord Hope in his speech at page 166 where he said:
"The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted VAT? The fact that someone else, in this case, the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction."
In the present case the question to be asked is: has B&NES received anything in return for payment? Mr Hitchmough's answer being yes, it received services.
- Mr Hitchmough referred us to the 2000 Agreement where it is stated that the Trust has "to perform the services in accordance and compliance with the provisions contained in the Agreement document." The services are said to be provided "on behalf of the Council", and "contribute to the fulfilment of the Council's Corporate Objectives, Arts Development Strategy and Arts Development Plan", in return for which B&NES shall pay to the Trust the "Agreement Sum"
In addition the Trust agreed to carry out "preparatory work" in consultation with B&NES on a number of other projects. We were referred to various sections of both the 2000 and the 2006 Agreement as set out above.
- In respect of the service level agreement it was submitted that the aims can be identified as being:
(a) Increased participation in festival and cultural events in the area
(b) Increased attendance in these events from residents and visitors
(c) Development of new festivals and cultural events
(d) Development of educational programmes and agreed participation
(e) Provision of support to other organisations managing similar events in the area.
Through the success of the events (whether managed or supported by the Trust) and increased participation and attendance, the service agreements further aimed to achieve the matters referred to by Mr Lawrence in his witness statement in terms of the local area.
- It was the Trust's case that there was a direct link between the services supplied to B&NES and the consideration received from it. The agreements were reciprocal and the consideration received is value given in return for the services. By contracting with the Trust, B&NES was exercising the power conferred by section 2 of the local Government Act 2000 and was giving effect to the community strategy prepared by it in accordance with the statutory duty imposed on it by section 4 of that Act. To this end the Council (and subsequently B&NES) has specifically requested that the Trust provide those services. We were referred to the Community, Culture and Leisure Committee Minutes of 18 September 2000 which show that "arts organisations funded by the Council
make a direct impact on the local economy of £7.4m. The Bath Festivals Trust accounts for a significant proportion of this sum". In the 'Arts Development Strategy 2001 to 2004' the arts sector is described as generating "economic activity worth nearly £30m in 1998/99".
- The Tribunal was referred to the case of Edinburgh Leisure in which it was submitted there were obvious parallels. In that case a number of Scottish councils had established Leisure Trusts Sports centres owned by those authorities, which were previously operated by them, were leased to the Trusts. The Trusts then entered into service agreements with the councils for the provision of leisure facilities, in return for which the Trusts received advance payment. The detail of the leisure service to be provided was left to the Trusts. Without funding from the councils the Trusts would have been unable to meet their commitments to the Councils, as their anticipated expenditure exceeded the income that it was anticipated they would generate from participants (such as swimming tickets and court booking fees). The payments made to the Trusts were described in the service agreements and council documents as subsidies or grants. The Tribunal noted that the councils were under a statutory duty to provide leisure facilities for the local population. In addition, the Tribunal found that the councils had a general duty to provide for the local population's well-being.
- The Tribunal held that it was "inescapable" that the Trusts were providing services to the councils for consideration. It was irrelevant that the consideration was calculated in advance on the basis that the Trusts should not suffer losses. It was equally irrelevant how the payments were described. Moreover, although it was "superficially legalistically maintainable" that the only supplies made by the Trusts were in fact made to those individuals participating in sport, this analysis "takes no account of the reality which is that but for the councils' payment the facilities could not be operated in the way the councils desire".
- In the present case B&NES was under a comparable statutory duty by the provisions of section 4 of the Local Government Act 2000 to promote the well-being of the residents. Section 2 of the Act gave the Local Authority power to incur expenditure and there was specific reference in the service level agreement to a sustainable community strategy. The absence of a statutory duty did not make any difference in fact. Following the ECJ decision in Redrow referred to above the only requirement was a direct link between the services and the consideration. Whilst there are restrictions on the Trust's use of the money in both the 2000 and 2006 Service Agreements, the Trust was said to be a "vital ingredient in creation
" . In order to incur expenditure the Local Government Act 1972 required that the local authority had to be satisfied that there would be a direct benefit. Therefore if the local authority received a direct benefit, there must be a direct link between the payment and the benefit received, i.e. a supply. The Trust contended that the Commissioners are mistaken in their argument that there was no such obligation on B&NES to provide the services supplied by the Trust, and Mr Hitchmough submitted that an equivalent duty does exist in the present case. B&NES is under a statutory duty to develop a community strategy designed to promote the well-being of local inhabitants. Secondly, it considered the Festivals and other services provided by the Trust as necessary to the local community. Finally B&NES viewed itself as under a duty to provide an Art and Culture programme for the general benefit of its residents and to make available the educational aspect of the services to all inhabitants of the area. The Tribunal in the Edinburgh Leisure case did not identify the statutory duty as conclusive. The Tribunal merely referred to that duty in order to contrast the situation before it with that of the councils "making a grant to the companies to enable them to operate for their own purposes". Had the Trust not assumed the key role in the provision and development of B&NES cultural strategy, the onus would have fallen on B&NES itself to do so.
- Mr Hitchmough drew a distinction between those situations where a grant is made (invariably following an application for financial support), and those where services are provided in return for consideration following a contractual negotiation initiated by the recipient of the services (as here). Moreover, payments should only be viewed as grants rather than consideration for supplies where the benefit to the grant-provider is merely incidental and not a benefit which they would actively seek. This was not the case here. B&NES was not making a grant to the Trust to enable it to operate for its own purposes, as it might do to a worthy event (the organisation of which would be of no more than incidental benefit to B&NES). The services supplied by the Trust are considered by B&NES to be necessary for the local community, they are determined in accordance with B&NES' strategies and aims and are moulded to seek B&NES' wishes.
- The difference between a local authority grant, and funding which amounts to consideration for services, was further illustrated by the significant changes which occurred within Bath in 1994 upon the formation of the Trust. The documents dating from that period demonstrated a new approach adopted by the Council to the provision of arts and culture, very much tailored to its own specific requirements, strategies and policies. The existence of a supply of services was further corroborated by the act of monitoring the relationship on B&NES' part. The monitoring amounted to more than simply ensuring that the payments were spent properly, it was also to ensure that the Council received the services it expected and to the standard it required.
- Mr Hitchmough distinguished two cases relied on by the Commissioners, Hillingdon Legal Resources Centre and Wolverhampton Citizens Advice Bureau. In the case of Hillingdon, the tribunal held that, despite monitoring of the use of grants, there was no direct link between the services provided by the Legal Resources Centre and the grants. The grants had been provided by an application process which was designed by the grant awarding bodies, but the application was initiated by the Legal Resources Centre, the recipient of the grant. The grant awarding bodies did not request or actively seek the provision of the services carried out by the Legal Resources Centre, unlike B&NES.
- In the Wolverhampton case, the council invited the Citizens Advice Bureau ("the CAB") to consider providing free legal advice to Wolverhampton residents. CAB agreed to do so, and the council provided significant funding. The tribunal held that the CAB was not making supplies to the Council. It was submitted that the reasoning in Wolverhampton was so sparse it was impossible to identify the applicable principles and in any event the tribunal relied on the case of Hillingdon, which had been dealing with a different question.
The Respondents' case
- Mr Barnes similarly relied on the Apple and Pear Development Council case and Tolsma, and submitted that the sums paid by B&NES to the Trust were not consideration with a direct link to an identifiable service supplied in the context of a legal relationship in which performance is reciprocal, but are a grant, the management of which B&NES has some control over through the provisions of the service level agreement, as was the case in Hillingdon and Wolverhampton.
- It was submitted that the documentary evidence suggested that the supply made by the Trust was to the local community. We were referred to the Schedule of Services in the 2006 Agreement cited above where it says that the user group from the services will be provided to "all residents and communities of Bath and North East Somerset, visitors to Bath and North East Somerset and the surrounding areas". We were also referred to the website where the overall mission is said to be "to enrich people's life through participation in the Arts".
- It was accepted that there was a benefit to B&NES from the Trust's work in the local community but it was submitted that:
(a) This benefit is incidental, not a direct result of the funding, and the arrangement is not reciprocal:
(i) B&NES only provide a quarter of the funding and accordingly it is likely that the Trust would continue to operate, albeit in name or in a limited capacity, without that funding. Accordingly, the benefit is not dependent on or the result of, the funding.
(ii) The service level agreements are lacking in particularity, they strongly suggest that this is not a reciprocal arrangement with services supplied by the Trust to B&NES for consideration.
(iii) B&NES have little control on how the funds they provide are spent, save that the Trust is monitored to check that the funds are being well spent, and where the services specified have not been provided, the Trust: " is to return such part of any funding as the Council may determine having regard to the Trust's continuing commitments during a period of reduced service provision
". This suggests that this is not a reciprocal arrangement with services supplied by the Trust to B&NES for consideration.
(iv) The Trust is not subject to any exclusivity provisions in the contract. It is able to carry out whatever work it chooses, and spend the funds available to it in doing so, so long as it satisfies the provisions of the service level agreement. This suggests this is not a reciprocal arrangement with services supplied by the Trust to B&NES for consideration.
(b) It is not necessary for B&NES to receive this benefit in order to satisfy a statutory duty, given that the duty found in section 4 is limited (see para 23 above)
(c) It is putting it too high to describe this benefit as necessary for B&NES to fulfil a core obligation of establishing and maintaining high quality cultural provision within the local authority area, or if necessary to the local community. The funding by B&NES of the Trust is simply a more focussed version of the system in place prior to the first service level agreement dated July 1994 of providing grants to voluntary organisations.
- Mr Barnes pointed to wording in the 2000 Agreement which uses the word "grant". There is a lack of particularity in what the service agreements require the Trust to do, and the lack of control B&NES has over how the money is spent.
- Mr Barnes distinguished the Edinburgh Leisure case on its facts on the basis that there the councils were not providing the Appellant with a grant in order to enable it to operate for their own purposes, but were making a payment for the provision of leisure facilities that would not be available without that funding, in satisfaction of the statutory duty. In the present case the sums in question are a grant to be managed by the Trust with no restriction on the use they are put to, and with no question of the payments being required to satisfy a statutory duty.
Reasons for decision
- Both parties accept that the critical issue in the present case is whether the Trust is providing any services to B&NES in consideration for the monies it receives. Whilst we accept Mr Barnes' submission that the funds are not hypothecated, there being no direct provision for a specific sum in relation to the specific activities carried out by the Trust, we do not consider that this is relevant to the issue of whether in fact the Trust is providing a service to B&NES. The wording of the legislation gives the concept of "supply" broad meaning. It was certainly the view of B&NES, as set out by Mr Lawrence in his evidence, that it was receiving consideration for the supply it made in the form of a supply of the core components of a cultural strategy, comprising (inter alia) the organisation of several internationally renowned art festivals and the provision of co-ordination, promotion, and advice to other local cultural organisations. These were matters which were imposed on the Trust by B&NES, rather than being matters which the Trust had itself wished to provide. and were considered to be of direct benefit to B&NES in attracting tourism and improving the local economy. It can be seen from the Council's reports (cited above) that the continuation of the Bath Festival in an amended form was considered to be a matter of some importance to the council and therefore subsequently to B&NES. If the Trust was not providing these services, B&NES would itself be required to provide them in some form through its in-house arts department, it would be unable to attract the Arts Council grant which the Trust receives, and therefore it must be assumed that it would be limited in what it provided. We have set out lengthy extracts from the two relevant agreements because they show the extent to which B&NES imposed its own requirements upon the Trust.
- We accept Mr Knowles' informed evidence about the distinction between grants paid out by the Arts Council and the money supplied by B&NES. The Arts Council reacts to the proposals of the applicant, whereas in respect of both the 2000 and 2006 Agreements which we have looked at, B&NES approached the Trust on the basis of the original proposals set out by its director of services. At that time it was acknowledged that the Council could not itself provide in-house the same level of cultural performance as could be provided by the Trust.
- We do not accept that the necessary link which the authorities say there must be means that the funds provided by B&NES must be specifically related to an identifiable part of either the music festival or the literary festival. B&NES imposes on the Trust specific requirements as to the content of the international music festival, and has also imposed the requirement of the provision of Box office and website facilities to other organisations as well as other specific obligations as set out above. Whilst we accept, as Mr Barnes submits, that the Trust is able to carry out the work it chooses to, and spend funds available to it in doing so, so long as it satisfies the provisions of the service level agreements, in our view the key issue is the satisfaction of the provisions in the service level agreements which do not permit the Trust a completely free hand. It would not, if it were simply in receipt of a grant, be under an obligation, for example, to attract 20% of under 25 year olds to its performances. Nor would it have to incur the expense of providing Box office facilities to all other cultural events in the area.
- We do not see any merit in Mr Barnes' point that without the funding from B&NES the Trust would still be able to continue operating. This in any event was in conflict with the evidence of Mr Knowles who, whilst accepting that it might continue in some form nonetheless considered that that form would be substantially different from its present form. There are cases of contractors who work for local authorities but who also undertake private work who would be substantially handicapped were they not to continue to receive council funding, but who could nonetheless carry on in their private capacity, but this fact makes no difference to the fact that when they do receive work from the council, they are making a supply to council
- We accept Mr Hitchmough's argument that this case falls into line with the decision in Edinburgh Leisure and that that case is not to be distinguished on the basis of the presence of a statutory duty. We accept that the presence or absence of a statutory duty is irrelevant as to the question whether the requisite "direct link" between the "thing done" and the "consideration received" can be said to exist. We were referred by Mr Hitchmough to a passage in the Business Brief 01/05 of 19 January 2005 which provides that:
"
Customs' interpretation of the relevant legislation is that it does not impose an obligation on local authorities to provide leisure facilities themselves, only that they must ensure that there is adequate provision within their area.
"Additionally in Customs' view the relevant legislation does not require local authorities to enter into contracts with the parties to discharge this duty. The legislation gives local authorities flexibility in how they meet the obligation to ensure the adequate provision of leisure, including the award of grants or loans.
"Consequently whilst Customs recognise that local authorities may wish to ensure that leisure facilities are widely available to all, including the more socially and economically disadvantaged, in all cases the terms of the payment and the direct benefit received by the funding body must be considered."
The Commissioners themselves therefore consider that the nature or existence of a statutory obligation is not conclusive, but the terms of payment and the direct benefit received by the local authority must be considered. Further, in the Business Brief in re the facts of Edinburgh Leisure the Commissioners state:
"The payments from the local authorities to the appellant constituted consideration for a supply, that of agreeing to take over the provision of leisure services previously supplied by the local authority."
It appears therefore that the Commissioners accept that agreeing to take over a job previously undertaken by the local authority can amount to a supply of services. If the Trust had not assumed a key role in the provision of B&NES' cultural strategy, the onus would have fallen on B&NES itself to do so.
- In all the circumstances we find that the Trust is supplying services to B&NES and that the payments made by B&NES are consideration for those service and not he payment of a grant. For this reason the payments made are within the scope of VAT and we allow this appeal.
- The Respondents shall pay the Trust costs; in the absence of agreement the matter to be referred to a costs judge of the High Court.
MISS J C GORT
CHAIRMAN
RELEASED: 22 October 2008
LON 2006/0511
