England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		26th November 2003

Mr Justice Lindsay :

Introduction

1. The Public and Commercial Services Union ("the Union") is a Trade Union the main income of which consists of subscriptions from its Ordinary and Associate Members. In return they receive a package of benefits which includes within it a circulation to them of the Union's own magazines, the supply of which is, for VAT purposes, zero-rated. The magazines have no cover price and no specifically identifiable price ascribed to them and the question arises as to what amount, out of the overall subscriptions to the Union, is, for VAT purposes, properly attributable to the supply of the magazines. It was common ground both below and before me that the package of benefits did not represent one single composite provision by the Union.
2. Before the London Tribunal the Union argued that assessments based, as were those made by the Commissioners of Customs & Excise ("the Commissioners") by seeking to work out the cost of the magazines, were inappropriate both as to method and amount. The Commissioners argued that the basis which they had used was right in both respects. The Learned Chairman, Mr Stephen Oliver Q.C., held that the Union had not discharged the burden of showing that the assessments in question were excessive. The Union, which appeared below and appears before me by Mr Roger Thomas, appeals; the Commissioners, who appeared below and appear before me by Mr Andrew Macnab, resist the appeal.
3. It is impossible to deal with the case without being conscious of its inadequacies. The Learned Chairman said:

"I should say …. that I have found this case difficult to fathom. The reason, I have come to realise, is because of the absence of relevant evidence ….."

4. The dissatisfaction arises, so far as I can tell, from the fact that the proceedings in the London Tribunal Centre were spread over a long period and changed character as they progressed. There were two days of hearing in late-May 2002 followed by a further two in January 2003 and one in March 2003. What had begun as a way of ascertaining in principle what the correct approach to attribution might be became, perhaps as late as the hearing on the fourth day, an examination of what was the appropriate amount to be attributed. Rather than one side or another seeking an adjournment for further and better evidence as the issues in dispute had changed, both sides went on. One could understand their wish, after so long an interim, to get to an end but, like the Learned Chairman, I, too, have found the matter unsatisfactory. I suspect that issues argued before me as issues of law would, had only more evidence been available below, have been either resolved by the Tribunal below as ones of fact or would have been capable of being solved by negotiation. However, like the Learned Chairman, I have to deal with the case as I find it.

The Union and its magazines;

5. The Union, which at the material time had a staff of some 300 employees, received subscriptions from its members and in return the members received a number of benefits which included their receipt of magazines published by the Union. The main magazine so published is called "PCS – The Magazine" ("the Main Magazine") of which there are 10 issues per annum. Every member is sent every issue of the Main Magazine. Within the Union there are occupational groups; they are linked by the identity of their employer or the type of work they do. A group with 10,000 or more members (and other groups, should the Union's National Executive Committee so decide) is entitled to have its own separate group magazine ("Group Magazine"). For example, those respectively working for the Department for Work and Pensions, for the Inland Revenue, for the Customs and Excise and for the Ministry of Defence and the Defence sector are in corresponding groups and each of those groups has its own separate Group Magazine. Group Magazines are also published by the Union and have, of course, a smaller circulation than the Main Magazine; they are smaller in content and may be published less frequently than the Main Magazine.
6. Counsel were unable to tell me whether every Union Member received a Group Magazine in addition to his or her Main Magazine, nor whether Group Magazines were distributed bundled in with the Main one. Group Magazines have editors different from one another and different from that of the Main Magazine but whether there is any, and if so what, staff or other cost overlap between Main Magazines and Group Magazines does not appear. None of the magazines, Main or Group, bears a cover price and no member pays any specific sum or any specific part or proportion of his or her subscription identified as such as the price for either or both of the Main or Group Magazines which he or she receives.
7. The membership of the Union naturally fluctuates but may be taken to be of the order of 265,000, divisible, so far as relevant, into two chief classes. They are Ordinary Members and Associate Members. Ordinary Members are entitled to receive the full range of the Union's benefits which, apart from magazines, include, for example, the conduct of bargaining as to their salaries and conditions of service, advice on employment and other law issues, shopping discount schemes and a diary. Associate Members, who, broadly speaking, are retired, get the Main Magazine and the diary but do not get all the other benefits. It is unclear whether they get the Group Magazine of the group to which they had formerly been attached.
8. The amount paid by a Union Member as subscription to the Union depends chiefly on that member's remuneration. The broad scheme is that subscriptions for Ordinary Members are capable of being varied but in the relevant period were set at 0.6% per annum of the member's basic pay but with a maximum of £9.50 per month. Associate Members generally pay less; 0.3% of their Civil Service Pension with a maximum of £25 per annum and (generally) £2.50 per month for those not receiving a Civil Service Pension. There is no provision whereby a member may opt to receive no magazine, Group or Main, and thereby pay less, nor is there any provision for a member to pay less should he or she not be entitled to a Group Magazine but only to the Main Magazine.
9. The Union's financial objectives as set out in an appendix to its audited accounts include meeting General Fund expenditure from net subscription income after allowing for VAT recovered, budgeting for a surplus of around 5% of net subscription income, maintaining its General Fund at the equivalent of about 6 months' subscription income and maintaining a Campaign and Disputes Fund at the greater of £6m or the equivalent of 3 month's subscription income.
10. I shall need to return to the Union's audited accounts in more detail but to give some broad picture of its scale of operations, in the calendar year 1999 the Union's net subscription income was £20,556,009 which, with net investment income, came to an income of £21,343,970. Of that, £18,431,696 was spent in ways which the accounts divided into five headings, of which "Members' Communications" (which included some or all costs attributed to the Main and Group Magazines) came to £1,754,455. By far the largest of the five headings of expenditure is "Network administration" at £10,388,990.

Value Added Tax; the Commissioners' assessment;

11. Amongst the powers of the Commissioners in relation to VAT is that conferred by section 73 of the Value Added Tax Act 1994 which enables the Commissioners, where it appears to them that returns made by a taxpayer are incomplete or incorrect, to assess the amount of the VAT due from the taxpayer, such assessment to be to the best of their judgment, and for the Commissioners then to notify the taxpayer of such assessment. The Commissioners formed such a view in respect of 6 prescribed accounting periods of the Union from June 1998 to September 1999 and on the 26^th June 2001 notified the Union of assessments amounting in aggregate to £80,696 + £14,250 of interest. The Commissioners took the view that the Union had under-declared its tax liability by amounts ranging from £10,450 to £18,053 in the 6 periods.
12. It is important to have in mind that Mr Thomas does not argue that it could not reasonably have appeared or did not genuinely appear to the Commissioners that the Union's returns had been incomplete or incorrect. Nor, either, does he say that the assessments made by the Commissioners under section 73 were not made to the best of the Commissioner's judgment.

VAT; the key issue;

13. The key issue, that which separates the Union and the Commissioners, is how is one properly to arrive at the value of taxable supplies made by the Union in the relevant periods so as to reflect that what the Union's package of supplies included was a supply of the Main Magazine (perhaps also supply of Group Magazines) but where no cover price or any other specifically identified part of the overall membership subscription was plainly attributable to that supply. The importance of that issue arises by way of Rule 101 of the VAT Regulations 1995 (SI 1995/2518) which, so far as relevant, provides:-

"101 (1) Subject to Regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this Regulation.

(2) In respect of each prescribed accounting period –

(a) ……….

(b) ……….

(c) ……….

(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period."

14. The Regulation thus requires a computation which may be expressed as:-
Value of taxable supplies Value of all supplies

where "taxable supplies" include zero-rated supplies, such as supplies to the Union's members of the Main Magazine (and Group Magazines). It is in the Union's interest to have as large a numerator, the figure above the line, as can be achieved. There is no dispute as to the denominator, the figure below the line.

15. Before the Learned Chairman the Union is recorded by him as having argued for a numerator arrived at for a year by multiplying the number of members, 265,000, by £1.80 (the value the Union ascribed to each copy of the Main Magazine) X 10 (the number of issues per annum). The Union arrived at £1.80 per copy as being, it contended, the market value of the Main Magazine per copy. Such a method of valuing taxable supplies may be called "a Market Value Method".
16. By contrast, the Commissioners assert that the value of taxable supplies, so far as referable to the magazines, should represent the costs of producing the magazines. I will call methods of attribution dependent on cost as "Cost Methods". The Commissioners' assessments, the ones in dispute, represent the Commissioners' computation of the costs of the Main Magazine.
17. The Learned Chairman upheld the assessments that were in dispute; he thus upheld not only a Costs Method but also the Commissioners' computation in this particular case. The Union, as I mentioned, appeals.
18. Mr Thomas' first position on behalf of the Union is that a Market Value Method should have been used by the Commissioners and that that throws up an aggregate value for taxable supplies which is derived from each magazine copy having a value of £1.80 per Main Magazine. His second position, should that first one fail, is that the Cost Method used by the Commissioners in their assessment was so flawed as to represent error of law.
19. Under the heading "Determination of Value" section 19 of the 1994 Act provides:-

"19 (4) Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it."

20. It is common ground that I am looking at a section 19 (4) case; the subscriptions paid related, even as to associate members, not only to the supply of magazines. A proper attribution of some part of the subscriptions to represent provision to members of the magazines therefore has to be made. No particular method is prescribed in the Act; all that is required is that the attribution shall be proper. I shall first deal with the Union's Market Value argument.

The Market Value argument;

21. Mr Thomas, basing himself on Customs & Excise –v- Madgett & Baldwin [1998] STC 1189 ECJ argues that it is a Market Value Method which the ECJ has held to be so much the preferred method of valuing by way of proper attribution that it must generally be used save where it is excessively complicated or manifestly not proper.
22. In Madgett & Baldwin the taxpayers ran a hotel in Devon. Most of their business came from the North of England and so they offered " package" deals which involved their offering not just hotel accommodation and services but the use of a coach to pick up customers from various points in the North, to transport them to the hotel, and to return them to the North of England after their stay. Some 90% of the hotel's customers used this coach service, which also offered them a sight-seeing tour in Devon. The hotel did, though, have customers who did not use the coach service. The taxpayers "bought-in" the coach service from a coach operator. The Commissioner of Customs & Excise took the view that the taxpayers were to be taxed under the special provisions of the Tour Operators' Margin Scheme ("TOMS"), which was a scheme intended by the domestic legislature to implement Article 26 of EC Directive 77/388. It was necessary for the purposes of TOMS to find a taxable amount to ascribe to the "in-house" services, namely, in Madgett & Baldwin, the provision of hotel accommodation and hotel services. Plainly it would not be right to use the consideration for the whole package as a proper value for what was merely part of what was provided. Both the VAT and Duties Tribunal London and the Queen's Bench Division referred questions to the ECJ on the subject.
23. Having mentioned the inappropriateness of using the whole consideration as the taxable amount for the "in-house" services the ECJ, at its paragraph 42 said:-

"It is therefore necessary to determine the unit of reference to be used as an alternative to the consideration in order to identify the part of the package which relates to the "in-house" services. There are two methods, one based on actual costs as under TOMS, the other based on market value."

A number of points were then made, often going in opposed directions. Thus in its paragraph 43 the Court held that the actual cost method there used by the Commissioners:-

"…… could be problematical, as there is no reason to suppose that the margins on the different services which make up the package are proportional to the respective costs of those services."

It was not there said that an actual cost method was necessarily problematical in all cases but rather that it could be, at any rate where the ratio of margins to costs differed as between the various goods and services supplied within the package.

24. Then, a factor point pointing in the other direction, in its paragraph 44 the Court held that looking to what customers who did not use the coach service paid as a price for the hotel accommodation and services which they received might also be:-

" …. to some extent arbitrary if the price of the accommodation offered as an in-house service as part of the package is taken as being the same as the price for accommodation offered as a single service."

A Market Value basis could therefore be arbitrary on certain possible facts.

25. Then in its paragraph 45, reverting to the actual cost method, the Court held that it required:-

"A series of complex sub-apportionment exercises and thus also means substantial additional work for the trader."

It was not there said that, of necessity, an actual cost method in general should require a series of complex sub-apportionment exercises but rather that it did on the facts of that case. It would not be difficult to postulate circumstances in which, in terms of work for the trader, an actual cost method would be relatively easy and a Market Value Method no easier.

26. Continuing in its paragraph 45 the Court said:-

"By contrast use of the market value of the in-house services …. has the advantage of simplicity since there is no need to distinguish the various elements of the value of the in-house services."

27. There, of course, the Court was dealing with an apportionment as between in-house and bought-in services; that is not the nature of the apportionment that arises in the case on appeal before me. Then, in its paragraph 46 the ECJ held as follows:-

"46. In those circumstances – bearing in mind that it is common ground in the present case that calculation of the VAT on the margin for the bought-in services by using one alternative or the other in principle gives the same figure for VAT – a trader may not be required to calculate the part of the package corresponding to the in-house services by the actual cost method where it is possible to identify that part of the package on the basis of the market value of services similar to those which form of the package."

That last sentence was repeated in paragraph 47 and in paragraph 2 of the dispositif which answered the specific questions raised by the English Court and Tribunal.

28. The expression used – "a trader may not be required to calculate ..." – is ambiguous and not the less so upon its being used three times. Mr Thomas, I apprehend, would read the phrase as meaning that a trader is not to be required to calculate using a Cost Method rather than that it is, in an appropriate case, quite acceptable for the trader not to be required to use that method.
29. I do not read the case as compelling the use of the Market Value Method in all circumstances. If, for example, a Cost Method is unproblematical, where it does not require complex sub-apportionment (as, commonly, of overheads) or where, by contrast, a Market Value Method is especially arbitrary, the reasoning of the ECJ would seem neither to support a Market Value Method nor rule out a Cost Method. The very reference in paragraph 46 of the judgment to what was "common ground in the present case" suggests that the ECJ was looking in particular to the very case before it. I add that it is, by contrast, common ground in the instant case that the two alternatives do not invariably give the same figure for VAT and, moreover, that had the issues in that case been properly been understood, they would have been seen not do so in Madgett & Baldwin either.
30. As I see Madgett & Baldwin, a Market Value Method of attribution was held to have advantages such that it will not uncommonly be the appropriate method to use but the decision is not, in my judgment, authority for a proposition that it is invariably to be used and that use of a Cost Method is invariably wrong. The case points to a number of factors being proper to be borne in mind in making the choice – whether margins are constant or different over the various ingredients of the package; whether it is right to regard the price for separate ingredients separately sold as a useful guide to their proportion of value when sold within the package; whether the Cost (or Market Value) Method would, on the facts of the particular case, lead to considerable work for the trader. All such factors may properly be taken to account in the selection of which attribution method is to be used. Indeed, the case suggests to me that a situation can be arrived at in which, with different factors pointing different ways, it can reasonably be said of the two chief competing methods that neither would be improper but both would be proper for the purposes of making an attribution within section 19 (4). Where that is so, the simpler method should generally be chosen – Card Protection Plan –v- C & E Commissioners [1999] STC 270 at paragraph 31, p. 293.
31. On the facts, Mr Thomas, using a Market Value Method, argues that £1.80 clearly emerges as the appropriate magazine price. Mr Macnab resists that. He points to the inadequacy of the evidence that suggests £1.80. That price emerged because it transpired in the course of the case that some sales of the main magazine had been made to non-members of the Union at, it seemed, £1.80 per copy. It is necessary to have in mind the tiny volume of such sales; 76 copies were sold in 1998, 136 in 1999 and 111 in 2000, a total of 323 copies over three years sold to non-members. In that period there would have been 7,950,000 copies distributed to members of the Union. Outside sales thus represented .00406% of inside sales.
32. It was one thing, says Mr Macnab, for the ECJ in Madgett & Baldwin, to derive a value for in-house sales within the package from the cases – amounting to 10% of the hotel's customers – where the in-house services were sold separately, but quite another, he urges, to extrapolate from .00406% of total sales. In the one case it could be said that a market existed and hence, arguably, a Market Value, but not so where the sales were so close to negligible. Indeed, the only evidence of any actual sales was by way of one produced invoice for £18. Whilst the invoice identified a customer by name, it was not known why the customer had required the copies nor why they had been supplied nor even whether the invoice was paid. As to all other outside sales there was no evidence except as to their number and as to their value appearing to average £1.80 a copy. Whether there was in any particular case a special reason to sell the magazines cheaply or to sell them expensively to any particular prospective customer is quite unknown, as also is the identity or characteristics of the customers.
33. There was, however, other evidence that tended to support £1.80. Mr Newlyn, the Union's Director of Finance, gave evidence that when, in 1998, the Union fell to considering what would be the appropriate subscription to be paid by Associate Members, he explained, when the motion was proposed at the Union, that the appropriate figure should be £25 p.a. on the basis that it would include the £18 for 10 copies per year which had been charged to third parties for the Main Magazine. He said the £18 came from the amount that had been charged to outside organisations.
34. It is difficult, though, to attribute much weight to this factor. No ascription of £18 as the price of the Main Magazine was indicated to the Associate Members or accepted by them, at all events so far as the evidence given before the Learned Chairman was concerned, nor was it as such ruled by the Union to be the appropriate price in the course of its deliberation upon what was to be the subscription payable by Associate Members. It seems that the evidence before the Learned Chairman was no more than that Mr Newlyn had, at the meeting that dealt with Associate Members' subscriptions, urged that £25 was appropriate per annum on the basis that £18 per annum could be attributed to the Main Magazine, that having been the price charged to outsiders. But a weakness of that is that the outside sales were so unexplained in character and so close to negligible in number.
35. In these circumstances and, given that, in my judgment, Madgett & Baldwin does not compel a Market Value Method to be used for attribution in all cases, I cannot see any error of law in the Learned Chairman's failure, on the evidence (or the lack of it) before him, to accept that an attribution of £1.80 per copy of the Main Magazine was so obviously proper as to make any other attribution, and in particular the Commissioners' costs based attribution, unfitting for use for the purposes of section 19 (4) and Reg 101 (2) (d). In this context it is to be remembered that the Commissioners' assessment stands until it is defeated; the Commissioners have no burden to prove anything before the Tribunal. It is for the taxpayer to prove that the assessment was wrong – see Grunwick Processing Laboratories Ltd –v- Commissioners of Customs & Excise [1986] STC 441 at 443 d and 445 h-j and, in the Court of Appeal at [1987] STC 357 at 360 d-e.

The Cost Method;

36. On the basis that the Union's argument as to a Market Value basis fails I turn to the second limb of its argument, namely that the cost basis used by the Commissioners in their assessments was in error of law.
37. Whereas the Union's Market Value basis (if at £1.80 per copy) was said to lead to a quarterly figure for taxable supplies of the Main Magazine at £1,234,395, the Commissioners' assessment gave a figure of only £493,758. The figures had been debated between the Union's accountants and the Commissioners of Customs & Excise and the Commissioners had shown a willingness to use a broad brush approach to attribution, no doubt to avoid the "complex sub-apportionment exercise" spoken of adversely by the ECJ in Madgett & Baldwin. The makeup of the Commissioners' assessment was as follows:-

"(i) £215,574 for direct costs,

(ii) £56,148 for staff costs, and

(iii) £213,128 for overhead costs."

38. That aggregate was rounded up a little to £493,758, to the effect that 40% of the Union's quarterly subscriptions were ascribed by the Commissioners to the value of the Main Magazine in every quarter.
39. Mr Thomas raises three criticisms of the Commissioners' costs method, which can be respectively labelled "Overheads", "Group Magazines" and "Mark-up".

(i) Overheads

40. The figure of £213,128 for quarterly overheads arrived at as part of the Commissioners' assessment was reached by looking to see what the Union's unattributed non-employment costs were and then attributing a fraction of them to supply of the Main Magazine. The Union's 1999 accounts include a pie chart showing a division of its General Fund expenditure into seven parts labelled "National Administration" (4.67%), "London HQ Administration" (40.98%), "Regional Office Administration" (10.71%), "Members' Representative Costs" (55.32%), "Members' Communications" (9.52%), "Members' Benefits" (8.13%) and "Affiliation and Donations" (3.7%). Thus roughly 9% was spent on Members' Communications and 56% on otherwise unallocated administration, the biggest component of which was in London.
41. It was thus thought fit, as a starting point, to ascribe a fraction, say 9/56ths, of unascribed non-employment administration expenses to Members' Communications (which heading included costs related to the Main and Group Magazines). Mr Thomas does not criticise the proportion of 9/56ths as a broad brush approach but he says that that proportion then has to be applied to the right figure. The total administrative costs of the Union not otherwise attributed, which in its accounts are labelled "Network Administration (Summary)" amounted, in 1999, to £10,388,990. Outstandingly the highest figure within that total was £7,541,656 for unascribed employment costs. Had 9/56ths of £10.388m been ascribed to overheads relating as to Members' Communications then not less than £1,669,659 p.a. would have been so ascribed rather than the £213,128 for overheads and £56,148 for staff costs per quarter which were so ascribed by the Commissioners. The Commissioners, rather than using the audited accounts, he says, had used a figure derived from the Union's VAT Returns but the VAT Returns included no component of the unascribed employment cost overheads of £7,541,656 p.a. because VAT was irrelevant to such expenditure.
42. In the 1999 Union accounts the separate heading "Members' Communications" included the following annual figures:-

"PCS Magazine £1,003,465

……….

……….

Group Publications £399,949

Employment costs £212,592."

43. The £212,592 p.a. there seen in the accounts refers, says Mr Thomas, to employment costs where the employment indicated served only the purposes of Members' Communications. The scheme of the Accounts suggests that is so. But, he says, as in any organisation of any size, there will have been costs, including employment costs, which are incurred more generally and from which all subdivisions or many subdivisions of the business benefit. He gives the example of the receptionist in an office block. His or her services benefit all the departments on various floors of the block that are occupied by the business in question. The same may be said of janitors and of security staff and cleaners. It could have been the case that each of the three main spending subdivisions of the Union shown in the pie chart – "Members' Representatives", "Members' Benefits" and "Members' Communications" -should each have within the title of its own "employment costs" its own due apportioned share of all the Union's administration employment costs but that is manifestly not how the accounts were drawn. "Members' Representatives" employment costs were given as £150,266, "Members' Benefits" employment costs as £310,534 and, as I have already stated, "Members' Communications" employment costs as £212,592, the total, of course, being hugely short of the "Network Administration" employment costs at £7.54m. There is no reason to think that the difference between the total of the three separate "employment costs" (£673,392) and the "Network Administration" employment costs (£7.54m) represents employment that served to benefit only either the Members' Representatives service or the Members' Benefits service or both only in such a way that none of the difference is fairly to be attributable as an overhead of Members' Communications.
44. The Learned Chairman's response to this argument about overheads is to be found in his paragraph 36. The difficulty arose from the very unsatisfactory way in which the case had proceeded, as I have explained earlier. He said:-

"The apparent failure of the Commissioners to include the full figure for Network staff costs had not been pointed out by the Union and its advisers at an earlier stage. It only arose as a challenge to Mr Smith [the Customs Officer who had visited the Union and had commenced the process leading to the assessments] when giving evidence in the course of the present hearing. The suggestion for the Union that a proportion of the general overheads of the Union at £10,388,990 (called "Network Administration" in the accounts) was not substantiated by any evidence. Apart from the Editor and an assistant (who I have assumed in paragraph 14, to have been the Union-employed staff involved exclusively in the production of the magazine) were any of the 297 other employees of the Union involved? All I could find of involvement of other Union staff was one very short contribution from the General Secretaries (paragraph 13). I only know for certain that £56,124 per quarter was ascribed to the staff costs in the production of the magazine. There was no evidence adduced for the Union to demonstrate that this was, in actual fact, anything other than the true staff cost."

45. Even on the basis of a strict burden of proof being wholly upon the Union as in Grunwick supra I would be a little uneasy at adopting a view that only 2 persons' employment contributed to the preparation and circulation of the magazines. The Learned Chairman took there to be an editor and an assistant. I note that the magazine speaks of a Competition Editor but he or she may, of course, be that (assumed) assistant. The Main Magazine gives 160 Falcon Road, London, SW11 as the address of the Union in its capacity as Publisher and the accounts show that to be a Union property. It would be natural, absent proof to the contrary, therefore to expect the Editor and the assumed assistant to work at that property; the e-mail address given in the Main Magazine for the Editor is editor@pcs.org.uk which, again, suggests that the Editor does not work mainly at home or from other premises.
46. It is difficult to contemplate an Editor and one assistant alone writing, compiling and then seeing to the distribution of 2,650,000 copies of the Main Magazine per annum yet still having both time and inclination, in addition to their editorial and assistant duties, themselves to provide, for example, all the cleaning, security, reception, computer, word-processing and photo-copying employment services needed for a modern office producing magazines. It may be, as the Main Magazine gives both a general telephone number and a direct line number, that the Magazine Editor and assistant or one of them also had the benefit of a Union telephone exchange, possibly one that was manned. It is, in theory at least, possible that all such services, so far as falling within a broad description of employment costs, are to be found in the £212,592 given in the audited accounts under the heading of "Employment Costs – Members' Communications" and in such a way that not a halfpenny of the £7.45m of employments costs under the heading of "Network Administration" indirectly benefited the production and distribution of the magazines but such an approach, as I have indicated, unless accompanied by a quite different accounting technique used by the auditors for Members' Communications than for "Members' Representatives" employment costs, and "Members' Benefits" employment costs would leave a huge gap of totally unexplained employment costs. The form of the Accounts suggests to me that within the heading "Members' Communications – employment costs" at £212,592 were to be found only ones directly and exclusively so attributable. A fair inference from the accounts does suggest, in my view, that there were true employment costs, ones fairly attributable to the production and distribution of the magazines, beyond that figure of £212,592 p.a.. But was there error of law?
47. I would not wish to say anything to deter the Commissioners from avoiding complex sub-apportionments by way of a broad brush attribution such as they would deploy in a 9/56ths exercise as to non-employment overheads but, given the scheme of the audited accounts, it was, in my judgment, an error of law to exclude from the computation of the denominator all £7.54m of the annual employment costs without there having been any evidence that, or, as it would seem, any inquiry into whether, the £56,148 per quarter for staff costs in the Union's VAT Return as to Members' Communications employment costs represented not only all employment directed exclusively to that heading but also all other employment overheads fairly to be attributed to it. Correspondingly, the Tribunal erred in not identifying and rectifying that error. The Commissioners were fully entitled either to adopt or require a more detailed analysis of costs (albeit at the risk of falling foul of Madgett & Baldwin) or to use instead a global approach by, for example, attributing 9/56ths of the whole of Network Administration to Members' Communications, but for them to leave out, so to speak, 75% of the globe (the £7.54m Network employment costs) without good evidence appearing for doing so and without any detailed inquiry as to whether it was appropriate to do so represented, in my view, an error of law. It is to be remembered that the Commissioners' own starting point had been that the Union's Returns were incomplete or incorrect, which would tend to make reliance on any part thereof by the Commissioners without inquiry especially unsafe.
48. A look at the Union's accounts would have shewn the Commissioners that it was not open to them to say that they took the figures under the "Members' Communications" heading in the Accounts to be the totality of everything directly or indirectly to be attributed to Members' Communications as, had that been the case, the Commissioners' fractional approach (e.g. 9/56ths) which they used in the attribution of non-employment indirect costs, would not have been appropriate for the attribution of part of the £2,847,334 of Network Administration expenses that were for subjects other than employment costs. Many of those Network non-employment costs – for example, computer system running costs, printing, stationery and photocopying, postage, office running costs and telephone – could be expected to be costs some of which would be likely to have been incurred in production and distribution of the magazines. If it was right on a fractional basis to apportion some of such expenses to Members' Communications then, absent adequate inquiry and explanation otherwise, the starting point should have been that so, equally, a fraction (say 9/56ths) of the employment costs of £7.54m was to be attributed to Members' Communications.
49. If, alternatively, the Commissioners, not relying on the audited accounts but on one or more VAT Returns, wished to rely on a returned figure of £56,124 per quarter for staff costs in the Members' Communications sector, they should have inquired whether that figure represented not merely direct and exclusive employment within the sector but all employment that benefited the sector. There was no evidence that was done and a comparison with the audited accounts would have suggested it was improbable. Whilst the audited accounts gave a figure of £212,592 p.a. for employment costs in the sector but, when examined, suggested that that was only for employment costs exclusive to the sector and that the total attributable employment benefit to the sector had to be far higher, it was, in my judgment, wrong of the Commissioners, without having satisfied themselves by inquiry, to have taken the VAT Return figure of £56,124 a quarter (£224,496 p.a., so akin to the Accounts' exclusive sector employment costs) as an adequate indication of total attributable employment costs. That, in the circumstances, was an error of law by the Commissioners and, upon its not identifying it and acting to rectify it, by the Tribunal.
50. When the Learned Chairman wrote (with my emphasis) "I only know for certain that £56,124 per quarter was ascribed to the staff costs in the production of the magazine", that may, perhaps, have been true but the Returns that gave that figure were believed by the Commissioners to be incomplete or incorrect and, whilst the audited accounts provided no certainty, they did point, on a balance of probabilities, to employment costs beyond £56,124 per quarter being fairly ascribable to employment costs in the composition, production and distribution of the magazines. In all, no reasonable person charged with the task of making a fair assessment from the figures available, although able to use a Cost Method, could, in the absence of adequate inquiries (which were not made), have used the particular method which the Commissioners did.

The Group Magazines

51. The position of Group Magazines exemplifies the unsatisfactory nature of the proceedings. The Union had not, prior to the proceedings, asserted that such magazines, separately, were properly to be regarded as zero-rated nor had raised with the Commissioners their separate cost as a factor either to stand on its own or to contribute to an overall value of magazines generally. However, in his Appellant's Skeleton Argument below Mr Thomas did refer to the Group Magazines, to their supply being zero-rated and he had asserted that their costs, when taken into account, made it clear (it was alleged) that the value of magazines received by members exceeded £18 per annum. I do not understand that the Union itself called evidence as to the Group Magazines' proper VAT treatment but it did obtain an answer from the Commissioners' witness, Mr Smith, that he knew that the Union made zero-rated supplies other than by way of the Main Magazine and that he had omitted Group publications from his (Mr Smith's) computation of the direct costs of zero-rated supplies. There seems to have been, no doubt unintentionally, some sort of shadow-boxing in which the Union felt that it had done enough, though calling no clear evidence of its own as to the Group Magazines, and in which the Commissioners felt that, in the absence of that evidence, they could rely upon the onus being wholly on the Union.
52. The Learned Chairman referred at a number of points in his decision to the Group Magazines. In his paragraph 11 he said they were not paid for by Union members. In the sense that no cover or other price was specifically attributed to them that is right but in a broader sense they were as paid for as were the Main Magazines. He records the Union's argument that their value should have been included in the value of all the Union's zero-rated supplies (his paragraphs 20 (ii) and 37) and in his paragraph 38 he held:-

"…… I observe that at no point in the correspondence leading up to the assessment did either the Union or its advisers do anything to correct any apparent failure on the part of the Commissioners (as is now alleged) to take the other publications into account. Here again there was no evidence. Mr Newlyn, who admittedly disclaimed any VAT expertise, referred only to the Magazine [i.e. the Main Magazine] as a zero-rated publication and said nothing to suggest that the other publications might have been zero-rated."

The argument as to Group Magazines and their treatment was also raised as a "best of judgment" point, as to which the Learned Chairman said:-

"Furthermore, the advisers to the Union took no initiative in drawing to the assessing officers' attention the implications of the other publications possibly ranking as taxable supplies. It seems to me that the assessment was based on an honest and genuine attempt by the assessing officers who listened to and took into account what they were told by the Union and its advisers."

No best of judgment point is taken on the appeal. The Learned Chairman concluded:-

"I have already observed that I am not satisfied from the evidence that any expenditure relating to the other publications (i.e. those other than the Magazine) should be included in the calculation of value of taxable supplies."

As I have mentioned, the Learned Chairman said that by reason of the absence of relevant evidence he had found the case in general difficult to fathom. Whilst a sight of the Group Magazines, which the Tribunal did have, would, I think, suggest that they were, in VAT terms, indistinguishable from the Main Magazines the Tribunal had little before it as to this subject. There was little or no evidence as to how they were prepared and supplied, to whom they were supplied and, in particular, at what attributable cost. It was risky for the Union to rely chiefly on inference and upon the Commissioners' witness and in the circumstances which, in agreement with the Learned Chairman I, too, find unsatisfactory, I am quite unable to hold that the Learned Chairman, on the scanty evidence before him, erred in law under this heading.

"Mark-up"

53. It is, of course, a familiar experience that commercial undertakings supply goods and services not at the cost to them of such provision but at a "cost-plus" basis; they add a "mark-up". Mr Thomas argues that there needs to be a corresponding mark-up in the course of the Commissioners' costs-based method of arriving at a value for the supply of magazines to Union members, apportioning, he says, not just costs but, within section 19 (4), consideration. The particular mark-up he asserted before me (though I do not think it was put in such a way below) was based on the 1999 accounts of the Union and was a mark-up to reflect an uplift from £18,431,696 (the Union's expenditure) to £20,556,009 (the Union's net subscription income), an uplift of some 11.5%. The Learned Chairman in his paragraph 39 held:-

"I am not persuaded that it is appropriate to apply a mark-up when the entity in question is a Union or some other body that finances its year by year operations out of subscriptions. The entity provides the benefits of membership to its members each year. These will be the actual benefits provided during the course of the year and may include provision for unforeseen outgoings and for possible expenditure in later years. That, according to the evidence here, is what the Union has been doing by budgeting for an annual surplus of about 5%. But I know of no reason why, in the case of a mutual organisation such as the Union, for the purposes of calculating the value of taxable supplies any mark-up should properly be factored in in valuing any particular supply. Certainly no evidence was adduced to show such a course was necessary in the present circumstances or even supported by good accounting practice."

54. In his paragraph 41 the Learned Chairman added:-

"Arguably a mark-up should be applied to the cost of the zero-rated publications, though I am not satisfied on that score."

55. Given my conclusion on the Overheads issue, which requires a remission to the Tribunal, it is unnecessary for me to come to a concluded view on this issue. There will be fresh argument and, one hopes, more evidence given second time round that may put a different complexion on things than at present appears. Thus, whilst I make it very plain that I am not deciding the issue, I do add that had I had to decide the issue I would, as at present advised and given the poor evidence before the Learned Chairman, have had difficulty in concluding that the Learned Chairman had erred in law. I would have been even less receptive to a bald mark-up of 11.5% as being appropriate upon its being argued to be based on no more than the difference between Union expenditure and Union net income.

Conclusion

56. For the reasons I have given under the Overheads heading, there was here, in my judgment, error of law and accordingly (as the parties agreed would be the case should I so conclude) I set aside the decision of 26^th March 2000 and remit the matter for consideration by a fresh Tribunal.