The First-tier Tribunal (FTT) has recharacterised as ‘abusive’ a structure devised to avoid VAT by the use of two purportedly non-profit making companies to claim VAT exemption when the companies were found to be making covert distributions through the use of uncommercial terms, non-arm’s length arrangements and excessive payments.


The appellant taxpayers, Hilden Park Partnership (HPP) and Hilden Park LLP (LLP), were partnerships that, in succession, owned a golf club. Before 2001, HPP provided the right to play golf to individuals, with VAT payable. In 2001, HPP sought tax advice and, as a result of the advice received, let the golf course to two companies limited by guarantee. Each company had two directors, who were unpaid and had alternative employment. In practice, the directors were appointed by Mr Massey. The consideration for the transfer of the golf club business was £200 from each company.

The annual rent for the golf course (payable by the companies to the appellants) amounted to the higher of £364,250 and 50% of the companies’ combined turnover. The lease originally took the form of a tenancy at will, followed by a lease on the same terms plus a service charge comprising a "fair and reasonable" apportionment of costs to which the premises were subject. The term was seven years, with the appellants able to break at a month’s notice.

The appellants, trading as Leisure Management (LM), agreed to provide management and other services to the companies. The fees for the services amounted to £40,000 a year, which LM was entitled to vary "reasonably" once a year on a month’s notice. LM could end the agreement by a month’s notice but the companies had to give 12 months’ notice. These termination and variation provisions also applied to a management agreement and two consecutive facilities and equipment agreements, all of which were prepared sometime after the arrangements had started and the total consideration under which was not known. The FTT also noted that the service agreement required LM to do things that only HPP could do. In evidence, Mr Massey said that the agreements did not reflect what happened in practice.

The evidence of the directors of the companies was that they had seen all of the relevant agreements but that there was no negotiation of terms as such, Mr Massey seemingly dictating all terms. From the evidence, it appeared to the FTT that the directors of the companies were informed as to actions that Mr Massey had decided that the companies should take and that there was very little discussion of financial matters by the directors.

HMRC sought to assess the appellants to VAT on the basis that the structure constituted an abuse of rights and the golf service supplies should be recharacterised as being made by those entities. The appellants appealed to the FTT.

The decision of the FTT

The FTT dismissed the appeal, holding that the arrangements were abusive under the Halifax principle.1

The FTT said that taxpayers were entitled to choose a tax-efficient structure so long as the tax advantage obtained thereunder was not contrary to the purpose of the relevant legislative provisions.

The FTT stated that the purpose of the sports exemption was to cover bodies that did not have a profit-making purpose. In the present case, the terms of the structure enabled covert distributions by the companies to the appellants and thus the companies were not truly non-profit making. The FTT concluded that the objective aim of the structure was to obtain the tax advantage. The tribunal noted that this test looked to the principal, rather than the sole, aim. Looking at the excessive rent which, objectively, was intended to strip profits from the companies, the lack of practical independent scrutiny of the arrangements by the companies’ directors and the implementation of a professed VAT scheme without due consideration of the commercial elements, the sole and essential aim of the structure was to obtain an abusive tax advantage.

Having decided that the structure was abusive, the FTT reclassified it for VAT purposes as constituting supplies by the appellants, rather than by the companies.


An initial issue raised by the parties was the burden of proof. Ultimately, this made no difference in the present case as the FTT stated that its decision would have been the same in either case. However, the tribunal did consider this issue and held that the burden was on the taxpayer to establish a prima facie case, with HMRC then having successfully to challenge it.

This decision highlights the importance of looking at the substance, not just the form, of a structure and ensuring that the reality accords with the documentation, and that the directors of a company within a structure properly scrutinise the company’s affairs and ensure that they act in the company’s best interests. It is also interesting to note that the FTT had regard to the fact that the appellants’ tax adviser had advised other taxpayers on similar structures in other cases before the tribunal.

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