England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		13th November 2003

Mr Justice Lightman:

1. This is an appeal by the College of Estate Management ("the College") from a decision ("the Decision") of the VAT and Duties Tribunal (Chairman Mr R.P. Huggins) Decision No: 18029 in Case No: LON/02/0145. The Decision was released on the 27^th February 2003. The appeal is brought under section 11 of the Tribunal and Inquiries Act 1992 (appeal on point of law). Mr Sherry appeared for the College and Mr McKay for the Commissioners.
2. The case concerns the scope of the exemption from value added tax provided by Items l and 3 of Group 6 in Schedule 9 (provision of education and of examination services) of the Value Added Tax Act 1994 ("the Act"). By a letter dated the 11th February 2002 the Commissioners ruled that the supply of printed matter (books and study manuals) provided by the College to its students was ancillary to the exempt supply by the College to its students of education and examination services and accordingly was classsed for VAT purposes as part of the education services supplied by the College and not as the zero-rated supply of goods. The College appealed to the Tribunal pursuant to section 83(b) of the Act. By the Decision the Tribunal dismissed the College's appeal.
3. The Tribunal set out the issues between the parties at paragraph 8 of its Decision:

"The issue for determination in this case is whether College of Estate Management is making supplies of:

(a) educational services which are exempt from VAT by virtue of Schedule 9, Group 6, Items 1 and 3 VATA 1994 (as the Respondents contend); or

(b) whether the supplies are of printed matter by way of a single supply (as contended by the Appellant) which supplies are zero-rated by virtue of Schedule 8, Group 3, Item 1; or

(c) alternatively mixed supplies of printed matter and educational services with due apportionment necessary."

4. The Tribunal dismissed the College's appeal (paragraph 70). The Tribunal's conclusion is set out at paragraphs 67 to 69 of its Decision:

"67. In applying the principles as laid down in Card Protection Plan, we came to the conclusion after taking into account all the factors we have referred to that there is one supply which is the provision of education….

68. The supply of the printed materials is an ancillary element and a means of better enjoying the provision of education.

69. For these reasons, we also decide that the College is not making mixed supplies of printed matter and educational services."

5. On this appeal the College submits that there is a supply of goods in the form of the printed matter which is not and cannot be treated as a supply of services.

FACTS

6. I take the facts from the Decision. The College is a higher educational charitable trust incorporated by Royal Charter. It is accordingly an "eligible body" for the purposes of the Act. The College was established in 1919 as a College associated with the University of London and it relocated to the present site on the campus of the University of Reading in 1972 becoming entitled to associate itself with that University. At that time the College ceased to teach full-time students and restricted its involvement with undergraduate and postgraduate tuition to the medium of distance learning. The College receives no government funding and is therefore not an exempt charity.
7. The College is the leading provider in the United Kingdom of distance-taught courses and training to the property and construction professions having more than 2,300 students worldwide in more than seventy countries. About 65% of its students are based in the United Kingdom. It offers a range of widely recognized and prestigious qualifications including degrees and further degrees. It is one of the bodies listed in the Education (Listed Bodies) (England) Order 2000.
8. The total of the staff of the College is over 100 of which the majority are employed full-time. All are based in Reading. The academic staff, which is large in number, has varied roles including teaching, assessing assignments, writing materials and research. It does not deliver lectures as a matter of course since no students attend regularly. Virtually all the College's students have full-time jobs in the property and construction fields. The students choose to undertake distance-learning courses in order to continue to work and earn whilst they study. A certain minimum educational standard must be reached before a student can be admitted to a course. Many of the students are already experienced, but not necessarily qualified, professionals. This is reflected in the average age of twenty-nine.
9. Fifteen courses are currently offered by the College. These are grouped into pre-qualification and post-qualification categories. The former are principally designed for students who wish to qualify for membership of the major professional bodies in the fields of property and construction such as the Royal Institute of Chartered Surveyors, the Chartered Institute of Building and similar bodies in Hong Kong and Malaysia. The post-qualification courses are provided for experienced and qualified practitioners wishing to focus on a particular area of their profession.
10. The College maintains a high quality teaching staff and sets and marks exams and assignments. The teaching provided by the College follows a similar pattern for each course and is designed to reflect the background and time constraints for the majority of the students. The pattern has four main elements:

i. study at home or in the workplace of printed matter provided by the College;

ii. preparation and submission of assignments;

iii. attendance at face-to-face teaching sessions; and

iv. access to the College's virtual learning environment provided on its website including academic forums for students and tutors and access to on-line lecture notes and sources of web-based information.

11. Students are encouraged to put written questions to their tutors on any point of difficulty: see page 9 of the College Handbook referred to in paragraph 64 of the Decision.
12. The College provides all necessary printed matter to enable students to pass their examinations. The majority of the printed matter comprises A4 binders of printed material written, produced and printed at the College's premises at Reading University. Typically, students receive one or two binders per module studied. The printed matter is not sold separately or available elsewhere. It cannot be purchased from any book store. For most pre-qualification courses, students are expected to study four modules per year. The printed matter may be supplemented by textbooks, audio and video tapes and CD roms. The amount of printed matter and other methods of communication provided by the College is vast. Study is focused around regular assignments which students are expected to complete. These are submitted to the College for marking and comments. It is possible to pass a course without completing the assignments, although this reduces the chance of success. The assignments make up 30% of the mark and the pass mark for each course is 40%. A significant number of students fail to complete all of the assignments. An average student is expected to spend about 94% of their time using the printed matter provided, 4.5% of their time in face-to-face teaching and 1.5% in sitting examinations. The majority of the direct expenditure of the College relates to the production and distribution of the printed matter.
13. Relatively few students follow the exact timetable recommended in each course prospectus. A significant proportion (especially those from overseas) do not attend teaching sessions. The time devoted to study of printed matter varies according to the student's prior knowledge of the subject area and the amount of study time available.
14. In view of the importance attached by the College to the printed matter supplied by the College to students I should set out paragraphs 62 and 63 and the first two sentences of paragraph 64 of the Decision:

"62. In evidence, Mr Batho [the director of studies at the College] recognised that each course qualification was the end that students sought. The course qualifications carry advantage for the students in their specialized professional careers. Mr Sherry argued that the tuition could not possibly be enjoyed without the study materials but the latter can and in a minority of instances were used without face-to-face tuition. That may be the case but we find that on the evidence before us the printed materials are not an end in themselves for the students. Furthermore, only the students can obtain the printed materials; they are not on general sale.

63. In our view, although the means of educating the students relies principally, on the provision of written materials, this does not detract from the College providing overall a supply of education.

64. We have found that the College employed several means in order to provide education. These include mainly: the written materials, assignments which count towards qualifications and are marked by experts, face-to-face teaching sessions, access to the College's website and examinations…."

15. The operating revenues of the College relate primarily to fees for distance learning courses. Production and distribution of the printed matter make up the largest single direct cost item in expenditure. The College's annual consolidated statement of financial activities for the year ended 31 July 2001 reveals that fees receivable amounted to £3,718,790. The "direct employee" costs incurred by the College were £2,452,104 and "support employees" costs totalled £402,345. "Direct employees" are those who are concerned with the provision of training by various means and "support" relates to those employees involved in financial and secretarial services. The printing division staff totalled six and in addition there are three learning materials co-ordinators. In the year ended 31 July 2001 printing and packaging costs amounted to £227,399; books and videos £124,891; and other course expenses £399,857.
16. Historically the College has treated all the supplies made to its students as being exempt from value added tax ("VAT"). This has the consequence that while the College has not had to account for output tax on the supplies made by it, it has not been able to claim input tax on supplies made to it. However the bulk of the VAT input tax incurred by the College relates directly to the production by it of the printed matter (which are now the subject matter of this appeal.) The College was treated as making a self supply of that printed matter to itself pursuant to S.I. 1995/1268 Art.11 (revoked with effect from 1 June 2002). Since the printed matter was always accepted as being within Item 1 of Group 3 in Schedule 8 of the Act (Books etc) the supply of which is zero-rated, historically the College recovered all the input tax incurred in the production of it. Since the deemed self supply was of zero-rated goods there was no output tax.
17. Following the Tribunal's Decision in National Westminster Bank plc VAT Tribunal Decision No: 17000) it became clear that because the printed matter was supplied onwards to students (and not 'used' by the College itself) there was no self supply of zero-rated goods. The question therefore arose as to whether the College was still in a position to claim input tax attributable to the printed matter and that in turn depended upon the issues set out at paragraph 3 above.

LEGISLATIVE BACKGROUND

18. Section 4(1) of the Act provides that 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 any business carried on by him. Section 4(2) states that a taxable supply is a supply of goods or services made in the United Kingdom which is not an exempt supply.
19. Giving effect to EC Article 13 of the Sixth Council Directive 77/388/ECC ("the Directive"), which enacts that educational services provided by non-profit making bodies and closely related supplies of services and goods shall be exempt supplies for the purposes of VAT, section 31(1) of the Act provides:

"(1) A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 …"

And Schedule 9 declares that the following shall be exempt supplies:

"GROUP 6 – EDUCATION

Item No

1. The provision by an eligible body of-

(a) education

(b) research, where supplied to an eligible body; or

(c) vocational training

….

3. The provision of examination services-

(a) by or to an eligible body; or

(b) to a person receiving education, or vocational training which is-

(i) exempt by virtue of items 1, 2, 5 or 5A or

(ii) provided otherwise than in the course or furtherance of a business.

4. The supply of any goods or services (other than examination services) which are closely related to a supply falling within item 1 (the principal supply) by or to the eligible body making the principal supply provided-

(a) that the goods or services are for the direct use of the pupil student or trainee (as the case may be) receiving the principal supply; and

(b) where the supply is to the eligible body making the principal supply, it is made by another eligible supplier."

20. Statutory authority for zero-rating is contained in section 30 of the Act which provides as follows:

"(1) Where a taxable person supplies goods or services and the supply is zero rated, then, whether or not VAT would be chargeable on the supply apart from this section-

(a) no VAT shall be charged on the supply; but

(b) it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(2) A supply of goods or services is zero rated by virtue of this subsection if the goods or services are of a description for the time being specified in schedule 8 or the supply is of a description for the time being specified."

21. The relevant items relating to this appeal contained in Schedule 8 of the Act which are zero-rated are:

"GROUP 3 – BOOKS ETC

Item no

1. Books, booklets, brochures, pamphlets and leaflets ….

6. Covers, cases and other articles supplied with items 1 to 5 and not separately accounted for."

22. The VAT position accordingly is that the supply of education, examination and closely related services and goods are exempt supplies and that the supply of books is zero-rated. The critical distinction is of course that, whilst in both cases the supplier does not have to account for VAT on the supplies made by him, in the case of zero-rated supplies alone (but not in case of exempt supplies) the supplier can obtain credit from the Commissioners in respect of supplies made to him. The supply of books may be a separate supply from, but a supply closely connected with, the supply of education and examination services within item 4 of Group 6 in Schedule 9. In that case it may be both an exempt supply under Schedule 9 as well as a zero-rated supply under Schedule 8 Group 3 and, where this is so, the characterisation as a zero-rated supply trumps that as an exempt supply and the supplier is entitled to credit from the Commissioners.

CHARACTERISATION OF COLLEGE'S SUPPLY

23. The issue in this case is the characterisation of the supply made by the College to its students and most particularly the supply of the printed matter. The Commissioners contend, and the Tribunal held, that the College, an educational establishment, supplies a single principal supply of services, namely teaching and examining its students, and that the provision of the printed matter is an integral part of that service being the essential means of providing the education required. On the other hand the College contends that the College makes a separate and distinct (zero-rated) supply of books, namely the printed matter. In support of this contention the College relies largely on the very substantial proportion of its revenue which it expends on the preparation, production and delivery to students of the printed matter; and the College emphasises the great importance of the printed matter for the courses undertaken by the students, most particularly in the context of a college such as the present providing distance taught courses and training worldwide and affording limited face-to-face teaching and indeed to some overseas students no face-to-face teaching at all.
24. In the case where a transaction is made up of more than one element, it is necessary to decide whether there is one or more than one supply and, if there is only one, how that supply is to be characterised for VAT purposes.
25. The starting point for this exercise is the decision of the European Court made on a reference by the House of Lords in Card Protection Plan Ltd v. CCE [1999] 2 AC 601 ("the Card Case"). The court in that case provided definitive (but not exhaustive) guidance on the approach to be adopted when a transaction is made up of more than one element and it is necessary to decide whether there is one supply or more than one supply. The principles there laid down were as follows:

i. where the transaction in question comprises a bundle of features or acts, regard must first be had to all the circumstances in which the transaction took place (paragraph 28);

ii. every supply of a service must normally be regarded as distinct and independent (paragraph 29);

iii. but a supply which comprises a single supply from an economic point of view should not be artificially split (paragraph 29);

iv. the essential features of the transaction must be ascertained in order to determine whether the taxable person is to supply the consumer, being a typical consumer, with several distinct principal services or with a single service (paragraph 29);

v. there is a single supply where one or more elements are to be regarded as constituting the principal services and one or more elements are to be regarded by way of contrast as ancillary services which share the tax treatment of the principal service (paragraph 30);

vi. a service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (paragraph 30);

vii. the fact that a single price is charged may be indicative of a single service, but is not decisive (paragraph 31);

viii. if the circumstances indicate that the parties intended two distinct services, it is necessary to identify the parts of the single price which relate to each of those two services (paragraph 32).

26. The role of the national court faced with such an issue such as the present was stated by Lord Slynn when the Card Case came back before the House of Lords (at [2002] 1 AC 202 at 212G) as follows:

"It is clear from the Court of Justice's judgment that the national court's task is to have regard to the 'essential features of the transaction' to see whether it is 'several distinct principal services' or a single service and that what from an economic point of view is in reality a single service should not be 'artificially split'. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided."

27. Lord Slynn went on to examine the taxpayer's scheme under consideration in that case, asking himself "what is the essential feature of the scheme or its dominant purpose – perhaps why objectively people are likely to want to join it".
28. The principles laid down in the Card Case can to a degree be fleshed out by reference to a number of other decisions.
29. In Faaborg-Gelting Linien A/S v Finanzant Flensberg [1996] STC 774 ("Faaborg") the European Court held that the supply of prepared food and drink at a restaurant resulted from a whole series of services (including the preparation and service of the meal); and that since restaurant transactions were characterised by a cluster of features and acts of which the provision of food was only one component and in which services largely predominate, they were to be characterised as supplies of services. This must be so though the quality of the food and the cost (e.g. of champagne at the meal) is very high indeed. The court distinguished the situation where the transaction relates to "take-away" food: such a transaction is a supply of goods. Where the transaction consists of a composite supply of services and goods (or of different categories of services) which from an economic point of view cannot be severed, the principal supply must be identified and the character of the principal supply determines the character of the component parts of the transaction.
30. In CCE v Madgett and Baldwin [1998] STC 118 ("Madgett") the European Court had to consider the criteria for determining whether the provision to guests by a hotelier of travel services (and in particular transport to and from the hotel and excursions) constituted an ancillary supply to the supply of accommodation. In paragraphs 24-6 of its judgment the court held:

"24. … traders such as hoteliers who provide services habitually associated with travel frequently make use of services bought in from third parties which take up a small proportion of the package price compared to the accommodation and are among the tasks traditionally entrusted to such traders. Those bought-in services do not therefore constitute for customers an aim in itself, but a means of better enjoying the principal service supplied by the trader.

25. In such circumstances the services bought in from third parties remain purely ancillary in relation to the in-house services, and the trader should not be taxed under art 26 of the Sixth Directive.

26. Where, however, a hotelier habitually offers his customers, in addition to accommodation, services which go beyond the tasks traditionally entrusted to hoteliers, and which cannot be carried out without a substantial effect on the package price charged, such as travel to the hotel from distant pick-up points, such services are not to be equated with purely ancillary services."

31. Referring to these passages Lord Hope said in CCE v. British Telecommunications Plc [1999] AC 1376 at 1386F that the relationship between the supplies of travel services and accommodation must be disproportionate if the transaction was to be regarded as comprising one supply.
32. In EC Commission v. UK [1988] STC 251 the European Court decided that upon the true construction of Article 13A(1)(c) of the Directive the exemption from VAT of the provision of medical care did not extend to the supply of goods in connection with the provision of those services, e.g. the supply of corrective spectacles by registered opticians. The two supplies were separate and distinct, and the exempt supply of services could only extend to "minor provisions of goods which are strictly necessary at the time when the care is provided" (paragraph 33) or are "indissociable from the service provided" (paragraph 35).
33. Finally in CCE v. British Telecommunications [1999] AC 1376 ("BT") the House of Lords held that the sale by a manufacturer of a car and the delivery by the manufacturer of the car to the taxpayer's premises did not constitute two distinct supplies for VAT purposes. This question had to be decided from a consideration of all the circumstances, and looking at the transaction as a matter of commercial reality there was a single contract for a delivered car, and it was artificial to split the various parts of the transaction into different supplies for VAT purposes. The service of delivering the car was incidental or ancillary to the supply of the car, and it was irrelevant that the taxpayer could have made a different arrangement for delivery of the car by a transporter or by collecting the car. Lord Hope (at p.1387B) said:

"This seems to me to be a good example of a transaction which involves the supply of both goods and services, which the court had in mind when it referred in [the Card Case] to a service which did not constitute for customers 'an aim in itself, but a means of better enjoying the principal service supplies.'"

34. Once it is decided that there is a single supply from an economic view which should not be artificially split, the character of the principal supply must be determined and this in turn determines the character of the supplies of the ancillary supplies. Ancillary supplies for this purpose are of two characters. They may be a supply of a component part of the single supply e.g. of food at a restaurant (as in Faaborg) or a supply of add-on goods or an add-on supply e.g. of travel services by a hotelier (as in Madgett) or of delivery of a sold car to the purchaser (as in BT). A strict test is laid down for qualification of add-on supplies as ancillary supplies, which is quite distinct from the test whether a supply is the supply of a component part of a single supply.
35. I must now turn to the identification and characterisation of the supplies in this case. The starting point may be to treat each supply of service separately. But it is plain from an economic (or commercial) point of view that there is a single supply of the services of the College as a distance learning college to the typical consumers, namely its students, of the goods and services under consideration in this case, that is to say its teaching and examination services and the printed matter. This is reflected in the single price paid for all of them. Plainly that single supply cannot and should not be artificially split into supplies of its component parts.
36. The next question accordingly arises how that single supply should be characterised and what is the principal supply. Mr Sherry argues that the principal supply is of the printed matter, for in the context of such an institution that is what students really need and want and the product whose production, publication and dissemination make up the larger part of the College's costs.
37. That approach is in my view totally unreal. It is quite plain: (a) that the College exists to provide education in the broadest sense; (b) that the means by which the College seeks to achieve that end is by the provision of distance learning courses; and (c) that the principle means of doing so is through the provision of the printed matter; see paragraph 63 of the Decision. The supply of the printed matter is indeed expensive. The printed matter (in case of a distance learning institution) is an invaluable, if not essential, teaching tool. But as the Tribunal held, it is not an end in itself for students. The College is an educator, not merely a publisher of course material: compare International Correspondence Schools Limited (VAT Tribunal Decision No 17662) (13^th May 2002).
38. In agreement with the Tribunal, I hold that there was a single supply which cannot be split and that the principal supply in this case was of education and examination services. As it seems to me the supply of the printed matter was a component part of that single supply, not an add-on supply. But whichever of the two ways the supply of the printed matter is treated, the character of the principal supply of education and examination services determines the character of the supply of the printed matter.
39. I should add that, since the supply of the printed matter is part of the single supply to which I have referred, there is no scope for application of Item 4 of Group 6, Schedule 9 of the Act, on which the College sought to rely. Item 4 of Group 6, Schedule 9 affords exempt status to supplies of services and goods closely associated with the supply of education and examination services. To fall within that provision the supply of goods or services, though closely connected, must be a supply which is separate and distinct from the supply of education and examination services and not form (for VAT purposes) a single supply with them or an ancillary supply. The supply of materials in this case no doubt if viewed on its own would fall within Item 4 of Group 6, Schedule 9 as well as within Item 1 of Group 3, Schedule 8 and, since characterisation as a zero-rated supply trumps characterisation as an exempt rated supply, the College would be entitled to the benefits of zero-rating. But, as I have said, since the supply of the printed matter is a component part of a single supply characterised as an exempt supply, Item 4 of Group 6, Schedule 9 can afford the College no assistance.

CONCLUSION

40. I accordingly hold that the supply by the College of the printed matter is an integral component part of its single supply of which the principal supply is of education and examination services, and I therefore dismiss this appeal.