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The ETOA case and Item 1(d) public interest exemptions

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The European Tour Operators’ Association case considered VAT exemptions for certain activities in the public interest. The authors contend that the objective approach adopted by Henderson J for ascertaining the ‘primary purpose’ of an association is overly restrictive. A mixed subjective and objective test would provide a more accurate picture of an association’s purposes. More broadly, however, the authors suggest that VATA 1994 failed to transpose properly the relevant European legislation. The resulting ‘primary’ purpose requirement represents a departure from the wording and intentions of the Directive. VATA 1994 should be reconsidered to remedy the restrictive approach of the law in this area of VAT exemptions.

On 23 October 2012 Henderson J, sitting in the Upper Tribunal (UT), handed down judgment in HMRC  v European Tour Operators’ Association [2012] UKUT 377 (TCC). This case has far-reaching implications for VAT exemptions for activities in the public interest described in VATA 1994.

Henderson J advocated an objective test for ascertaining an association’s ‘primary purpose’ under VATA 1994 Sch 9 Group 9 Item 1(d). This approach is too restrictive. Instead a mixed subjective and objective test is required to ensure accuracy when assessing an association’s purposes.

Furthermore, there is a broader issue in that VATA 1994 failed to properly transpose the relevant European legislation into English law. The specific requirement for a ‘primary’ purpose is overly restrictive and departs from the wording and intention of the Directive from which it was transposed. It is also unnecessary given the existence of other stringent checks that limit the operation of this exemption.


The ETOA case: The case concerned the VAT liability of membership subscriptions paid to the European Tour Operators’ Association (the ETOA). The ETOA is a non-profit making organisation that accounted for VAT on its membership subscriptions between 1991 and 2008. It then submitted a repayment claim on the basis that it was exempt under Item 1(d). HMRC rejected this claim and the decision was appealed to the First-tier Tribunal (the FTT). The FTT held on 26 January 2011 that the membership subscriptions were exempt from VAT. On appeal, Henderson J in the UT held that the FTT had erred in law in applying a subjective test for ‘primary purpose’, and remitted the case for rehearing.

The domestic legislation: The exemption contained in VATA 1994 Sch 9 Group 9 Item 1(d) and qualified by note 5 reads as follows:

‘Item No. 1

‘The supply to its members of such services and, in connection with those services, of such goods as are both referable only to its aims and available without payment other than a membership subscription by any of the following non-profit-making organisations —

‘(d) an association, the primary purpose of which is to make representations to the government on legislation and other public matters which affect the business or professional interests of its members. …

Notes: …

‘(5) Paragraph (d) does not apply unless the association restricts its membership wholly or mainly to individuals or corporate bodies whose business or professional interests are directly connected with the purposes of the association.’

The above domestic legislation was transposed from article 13(A)(1)(l) of Council Directive 77/388/EEC (the Sixth Directive), which was replaced with similarly worded provisions in articles 131, 132(1)(l), 133(d) and 134 of Council Directive 2006/112/EC (the current Principal VAT Directive).

The decision of the FTT in ETOA v HMRC: The FTT held that the Item 1(d) exemption applied as the ETOA’s ‘primary purpose’ was ‘to make representations to the government’. When ascertaining ‘primary purpose’, the FTT adopted a mixed subjective and objective test. Judge Kempster concluded at [32] that its ‘primary purpose’ was ‘what its directors and members consider to be the most important matter it is seeking to achieve or doing in return for membership subscriptions.’ These subjective views were then objectively ‘tested against what happens in reality’.

The decision of the FTT in British Association of Leisure Parks v HMRC: Before the UT heard HMRC’s appeal, Item 1(d) was considered again by the FTT in October of the same year in The British Association of Leisure Parks, Piers & Attractions Ltd v HMRC [2011] UKFTT 662 (TC). In giving judgment, Sir Stephen Oliver QC accepted that subjective evidence was a relevant, if not ultimately convincing, factor in determining ‘primary purpose’. He therefore considered objective evidence alongside oral statements given by the chief executive. He also suggested at [27] that if evidence of members’ views regarding the association’s purposes had been put forward, he would have considered it relevant. Consequently, it seems that he had in mind a mixed subjective and objective test similar to that adopted by the FTT in ETOA.

The decision of the UT in HMRC v ETOA: Henderson J held that the FTT had erred in applying a subjective test. He stated at [28] that:

‘The relevant enquiry is an objective one, to be answered primarily by an examination of the stated objects and the actual activities of the body in question. The subjective views of the members or officers may throw some light on this enquiry, but they cannot be elevated into a diagnostic test. That this is the correct approach is in my judgment clear, both as a matter of principle (the aims or purposes of an organisation are an objective concept, and may be quite distinct from the subjective views or motives for joining of individual members), and on the authority of BASC...’

Henderson J therefore concluded that an objective test was correct as a matter of both precedent and principle. These conclusions warrant close examination.

The objective test for ‘primary purpose’

Is an objective test correct as a matter of precedent?

Henderson J relied on the decision of the High Court in British Association for Shooting and Conservation Ltd v HMRC [2009] STC 1421. In that case, Lewison J considered whether the association’s subscription income fell within the exemptions contained in article 13A(1)(l) and (m) of the Sixth VAT Directive (the same European legislation at issue in ETOA). He held at [47] that the VAT tribunal had not erred because it had:

‘looked at BASC’s constitutional document, supplemented it by reference to other materials from which, objectively, conclusions about its objectives can be drawn, and tested that against the reality of what it does.’

Whilst BASC was cited at first instance in ETOA, the FTT departed from this objective test. Authority for a mixed test was found in a decision of the VAT Tribunal in Bookmaker’s Protection Association (Southern Area) Ltd v C&E Commrs [1979] VATTR 215. In Bookmakers, the Tribunal concluded that:

‘we must have regard to the objects set out in its Memorandum and its various activities to determine what its directors and members consider to be the most important matter it is seeking to achieve or doing in return for membership subscriptions. The words ‘primary purpose’ indicate to us that the test is subjective and not purely objective…’

Henderson J rejected this reasoning, claiming that BASC was precedent for a wholly objective test. However, following the Tribunals, Courts and Enforcements Act 2007, the Upper Tribunal is not formally bound by decisions of the High Court (see CM v London Borough of Bexley [2011] UKUT 215 (AAC) per UT Judge Ward at [42]). As a matter of judicial comity, Henderson J should follow High Court decisions wherever possible. Nonetheless, it was open to him to depart from BASC.

Is an objective test correct as a matter of principle?

Henderson J stated at [28] that ‘the aims or purposes of an organisation are an objective concept, and may be quite distinct from the subjective views or motives for joining of individual members.’ However, the authors do not agree that this objective approach is correct as a matter of principle.

In the absence of deceit or inaccuracy, it is unclear why evidence of the views of officers and members should be excluded. For, objective evidence taken on its own may be insufficient to ascertain properly an association’s ‘primary purpose’.

This will be true where determination of the ‘primary purpose’ is a question of emphasis. An association might not have a single ‘primary’ purpose, or its primary purpose may not have been documented. Furthermore, an association’s constituting documents might be manipulated to include an inaccurate primary purpose that intentionally fell within Item 1(d). In these situations, oral evidence given by officers and members may be essential in determining which purpose, if any, was actually ‘primary’.

 A wholly subjective test could be misleading in determining an association’s ‘primary purpose’. However, to come to a decision on ‘primary purpose’ without some consultation with directors and members could lead to just as misleading a result as if their views alone were ‘elevated into a diagnostic test.’ The correct test must therefore be a mixed subjective and objective one.

Should a ‘primary’ purpose be required at all?

The authors contend that VATA 1994 failed to transpose correctly article 13(A)(1)(l), and that this failure has led to an unnecessarily high exemption threshold. Consequently, certain organisations, such as the ETOA, are denied VAT exemptions contrary to the Directive’s intentions.

The Sixth Directive exemption: The term ‘primary purpose’ is not found in article 13 of the Sixth Directive, which reads as follows:

‘Article 13 Exemptions within the territory of the country

‘A. Exemptions for certain activities in the public interest

‘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: …

‘(l) supply of services and goods closely linked thereto for the benefit of their members in return for a subscription fixed in accordance with their rules by non-profit-making organisations with aims of a political, trade union, religious, patriotic, philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition; …

‘2(b) The supply of services or goods shall not be granted exemption as provided for in (1)… (l)… 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 value added tax.’

In both article 13 above and article 132 of the updated 2006 Directive, the relevant exemption is available to ‘non-profit-making organisations with aims of a political, trade-union, religious, patriotic, philosophical, philanthropic or civic nature…’ (emphasis added). There is no requirement for an association to have a ‘primary’ purpose or to elevate one aim over others. A common-sense reading of the Directive suggests that an association must merely have some aims of a certain nature to fall within this exemption. This also leaves open the possibility that an association could have a mix of aims that combine to permit its exemption.

The VATA 1994 exemption: In contrast, VATA 1994 Sch 9 Group 9 is drafted restrictively. The exemptive aims in the Directives are divided into Items and given different descriptive criteria. Restrictive criteria, such as the requirement for a ‘primary’ purpose, are only introduced to some categories. Furthermore, this subdivision suggests that it may be difficult for an association to qualify for an exemption through the simultaneous pursuit of different aims.

The problem with the ‘primary purpose’ requirement: It is a general principle that VAT is to be levied on all services supplied for consideration by a taxable person. Any exemptions are therefore subject to a strict, but not restrictive, interpretation. In Haderer v Finanzamt Wilmersdorf CJEU Case C-445/04 [2008] STC 2171 the CJEU stated at [18] that:

‘the requirement of strict interpretation does not mean that the terms used to specify the exemptions referred to in Art 13 [of the Sixth Directive] should be construed in such a way as to deprive the exemptions of their intended effect…’

The current domestic requirement for a ‘primary purpose’ deprives the exemption of its intended effect of promoting socially valuable activities. Both the Sixth Directive and the 2006 Directive state that the exemptions are ‘for certain activities in the public interest’. A high threshold might lead to non-profit making organisations that carry out valuable lobbying work, such as the ETOA, being denied VAT exemptions.

The ‘primary purpose’ requirement also creates an artificial distinction between primary and secondary purposes. Why should an association be required to have a ‘primary’ purpose at all? In BASC, Lewison J recognised at [45] that ‘an organisation may have multiple objects no single one of which could be said to be predominant.’ Henderson J cited this reasoning with approval at [29]. This requirement could lead to a situation where an association with numerous worthy purposes would be denied exemption on the basis that a single ‘primary’ purpose could not be ascertained. The interpolation of ‘primary’ might therefore encourage associations artificially to prioritise one purpose to achieve exemption under Item 1(d).

A proposed alternative criterion

Item 1(d) should be amended to exempt ‘an association, a purpose of which is to make representations to the Government on legislation and other public matters which affect the business or professional interests of its members’. This would bring VATA 1994 closer to the original wording and intentions of the Directives and remove the artificial requirement for a ‘primary’ purpose.

This alternative construction of Item 1(d) does broaden the exemption. However, falling within the exemption would still be conditional on meeting several strict criteria.

First, there is the requirement that the association be non-profit-making. This alone significantly reduces both the exemption’s scope and the risk of distorting commercial competition.

Second, under Article 134(a) of the 2006 Directive, an exemption is unavailable if the supply of services ‘is not essential to the transactions exempted’. Consequently, activities not essential to advancing an association’s exemptive purposes are disqualified. Commenting on this provision, Henderson J at [43] said that it may already provide ‘a substantial protection for HMRC’. Furthermore, it has recently been argued that ‘the interaction between article 132 and article 134 is the legislative mechanism by which the exemptions are given a limited scope without being deprived of their purpose’ (‘Green fees and the sporting exception’ (Michael Brady), Tax Journal, dated 23 November 2012, p 26). This reasoning supports the conclusion that article 132 is intentionally restricted by other provisions of the Directive. Therefore, the current high threshold in Item 1(d) is unnecessarily restrictive.

Third, Note 5 to Item 1(d) provides that an association must restrict its membership ‘wholly or mainly’ to those with business interests that are ‘directly connected with the purposes of the association’. If the authors’ proposed construction of Item 1(d) were adopted, the reference to ‘the purposes’ in Note 5 would operate as a further limit on the exemption. Although the current ‘primary purpose’ construction does not deprive Note 5 of all meaning (as counsel for HMRC argued in ETOA), the stipulation in the latter provision relating to ‘the purposes’ adds little.

Finally, article 13(1)(l) of the Sixth Directive states that the exemption is only available provided that it ‘is not likely to cause distortion of competition’. This further limit should be incorporated into domestic legislation.


Henderson J’s decision in ETOA was flawed. The importance of subjectivity in ascertaining ‘primary purpose’ has been overlooked in favour of a misleading objective approach. This should be replaced with a mixed subjective and objective test. Furthermore, VATA 1994 Sch 9 must be reconsidered given its overly restrictive departure from the wording and intentions of the Directives. Item 1(d) performs an important function by encouraging socially valuable activities; such work should be supported, not restricted.

Richard Kingham graduated from the University of Oxford. He will be called to the Bar in June 2013.

Hugo Flaux recently graduated from the University of Oxford. He joins Allen & Overy in 2014.

Issue: 1152
Categories: Analysis