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Cite as: [2006] ScotCS CSIH_13, [2006] CSIH 13

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FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lady Cosgrove

Lord Clarke

[2006] CSIH 13

XA18/05; XA22/05

OPINION OF THE COURT

delivered by LORD CLARKE

APPEALS

EDINBURGH TELFORD COLLEGE

Appellants;

and

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Appellants and Respondents;

against

A DECISION OF THE EDINBURGH VAT AND DUTIES TRIBUNAL dated 18 January 2005

_______

Act: Tyre, Q.C.; Brodies (for Appellants)

Alt: S.P.L. Wolffe; Shepherd & Wedderburn (Appellants and Respondents)

22 February 2006

Introduction

[1] These are two appeals, one at the instance of Edinburgh Telford College and the other at the instance of the Commissioners for Her Majesty's Revenue and Customs against a decision of the Edinburgh VAT Tribunal dated 18 January 2005. The College has conceded that the Commissioners' appeal should be allowed and the parties have reached an agreement as to the manner in which the issues between them should be disposed of, apart from the matter which is the subject of the College's appeal.

[2 ] The case involves the proper treatment of input tax charged in relation to the construction of a new campus for the College, the works in respect thereof having commenced in or about October 2002. The appeals involve a consideration of both the relevant domestic and European legislation regulating VAT. Ultimately, however, the main point in issue is to be resolved by a consideration of the relevant European legislation and the case law relating thereto.

The relevant UK legislation

[3 ] Section 4 of the VAT Act 1994 provides as follows:

"(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2) A taxable supply is a supply of goods or services in the United Kingdom other than an exempt supply".

Section 24 of the 1994 Act provides as follows:

"(1) Subject to the following provisions of this section 'input tax', in relation to a taxable person, means the following tax, that is to say -

(a) VAT on the supply to him of any goods or services;

(b) VAT on the acquisition by him from another member State of any

goods; and

place outside the member States,

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

(2) Subject to the following provisions of this section, 'output tax', in relation to a taxable person, means VAT on supplies which he makes or on the acquisition by him from another member State of goods (including VAT which is also to be counted as input tax by virtue of subsection (1)(b) above).

(3) For the purposes of subsections (1) and (2) above, where goods or services are supplied to a company, goods are acquired by a company from another member State or goods are imported by a company from a place outside the member States and the goods or services which are so supplied, acquired or imported are used or to be used in connection with the provision of accommodation by the company, they shall not be treated as used or to be used for the purposes of any business carried on by the company to the extent that the accommodation is used or to be used for domestic purposes by -

(a) a director of the company, or

(b) a person connection with a director of the company.

(4) The Treasury may by order provide with respect to any description of goods or services that, where goods or services of that description are supplied to a person who is not a taxable person, they shall, in such circumstances as may be specified in the order, be treated for the purposes of subsections (1) and (2) above as supplied to such other person as may be determined in accordance with the order.

(5) Where goods or services supplied to a taxable person, goods acquired by a taxable person from another member State or goods imported by a taxable person from a place outside the member States are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies, acquisitions and importations shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax".

Section 25 of the 1994 Act provides as follows:

"(1) A taxable person shall -

(a) in respect of supplies made by him, and

(b) in respect of the acquisition by him from other member States of any

goods,

account for and pay VAT by reference to such periods (in this Act referred to as 'prescribed accounting periods') at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

(3) If either no output tax is due at the end of the period, or the amount of the credit exceeds that of the output tax then, subject to subsections (4) and (5) below, the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the Commissioners; and an amount which is due under this subsection is referred to in this Act as a 'VAT credit'.

(4) The whole or any part of the credit may, subject to and in accordance with regulations, be held over to be credited in and for a subsequent period; and the regulations may allow for it to be so held over either on the taxable person's own application or in accordance with general or special directions given by the Commissioners from time to time.

(5) Where at the end of any period a VAT credit is due to a taxable person who has failed to submit returns for any earlier period as required by this Act, the Commissioners may withhold payment of the credit until he has complied with that requirement.

(6) A deduction under subsection (2) above and payment of a VAT credit shall not be made or paid except on a claim made in such manner and at such time as may be determined by or under regulations; and, in the case of a person who has made no taxable supplies in the period concerned or any previous period, payment of a VAT credit shall be made subject to such conditions (if any) as the Commissioners think fit to impose, including conditions as to repayment in specified circumstances.

(7) The Treasury may by order provide, in relation to such supplies, acquisitions and importations as the order may specify, that VAT charged on them is to be excluded from any credit under this section; and -

(a) any such provision may be framed by reference to the description of

goods or services supplied or goods acquired or imported, the person by whom they are supplied, acquired or imported or to whom they are supplied, the purposes for which they are supplied, acquired or imported, or any circumstances whatsoever; and

(b) such an order may contain provision for consequential relief from

output tax".

It is the next section of the Act, section 26, which provides for the input tax allowable under section 25. Section 26 is in the following terms:

"(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business -

(a) taxable supplies;

(b) supplies outside the United Kingdom which would be taxable supplies

if made in the United Kingdom;

supplies as the Treasury may by order specify for the purposes of this subsection.

(3) The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above, and any such regulations may provide for -

(a) determining a proportion by reference to which input tax for any

prescribed accounting period is to be provisionally attributed to those supplies;

(b) adjusting, in accordance with a proportion determined in like manner

for any longer period comprising two or more prescribed accounting periods or parts thereof, the provisional attribution for any of those periods;

to a taxable person (or a person who has been a taxable person) or by a taxable person (or a person who has been a taxable person) to the Commissioners, in cases where events prove inaccurate an estimate on the basis of which an attribution was made; and

(d) preventing input tax on a supply which, under or by virtue of any

provision of this Act, a person makes to himself from being allowable as attributable to that supply.

(4) Regulations under subsection (3) above may make different provision for different circumstances and, in particular (but without prejudice to the generality of that subsection) for different descriptions of goods or services; and may contain such incidental and supplementary provisions as appear to the Commissioners necessary or expedient".

The regulations referred to in section 26(3) are to be found in Part XIV of the Value Added Tax Regulations 1995 (SI 1995/2518). Regulation 101 sets out the general method for attributing input tax to taxable supplies. Regulation 102(1) provides:

"Subject to paragraph (2) below and [regulations 103, 103A and 103B], the Commissioners may approve or direct the use by a taxable person of a method other than that specified in regulation 101 ... ".

Regulation 100 provides:

"Nothing in this Part shall be construed as allowing a taxable person to deduct the whole or any part of VAT on ... the supply to him of goods or services where those goods or services are not used or to be used by him in making supplies in the course or furtherance of a business carried on by him".

The relevant European legislation

[4 ] The issues raised in the present appeals are also governed by the European Union Directive 77/388 "the Sixth VAT Directive". Article 2 of that Directive provides:

"The following shall be subject to value added tax:

1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such ... ".

Article 4 of the Directive is in the following terms:

"1 'Taxable person' shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2 The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.

3 Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 and in particular one of the following:

(a) the supply before first occupation of buildings or parts of buildings and

the land on which they stand; Member States may determine the conditions of application of this criterion to transformations of buildings and the land on which they stand.

Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply or the period elapsing between the date of first occupation and the date of subsequent supply, provided that these periods do not exceed five years and two years respectively.

'A building' shall be taken to mean any structure fixed to or in the ground;

(b) the supply of building land.

'Building land' shall mean any unimproved or improved land defined as such by the Member States.

4 The use of the word 'independently' in paragraph 1 shall exclude employed and other persons from the tax in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer's liability.

Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links.

5 States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities".

Article 17 of the Directive deals with the origin and scope of the right to deduct and provides

"1 The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2 In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in

respect of goods or services supplied or to be supplied to him by another taxable person ... ".

Article 17.5 provides as follows:

"As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

However, Member States may: ...

basis of the use of all or part of the goods and services".

Article 18 of the Directive makes provision for the mechanics of the right to deduct and provides:

"2 The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.

...

3 Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2".

[5 ] The College's appeal was directed at the Tribunal's approach to what is called the "Lennartz" mechanism, which derives from a case of that name decided by the European Court of Justice. This mechanism is derived from Article 5(6) and Article 6(2) of the Directive which provide as follows:

Article 5.6:

"The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question ... was wholly or partly deductible, shall be treated as supplies made for consideration".

Article 6.2 provides:

"The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private

use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;

(b) ... Member States may derogate from the provisions of this

paragraph provided that such derogation does not lead to distortion of competition".

The College's appeal

[6 ] The appeal by the College raises the question as to whether, in providing what are described as its core activities, being the provision of further education courses within what is known as the Scottish Qualifications Framework Levels 4 to 8, these courses being funded from a grant made available by the Scottish Education Funding Council, the College is not to be regarded as a taxable person because of the provisions of Article 4.5 of the Directive. While, as has been seen above, there is no equivalent provision within domestic legislation, it was common ground between the parties that it has been authoritatively determined that the provisions of Article 4.5 of the Directive have direct effect.

[7 ] The appeal, at the instance of the Commissioners, relates to the question as to whether, as the Tribunal decided, where the College engages in non-business, taxable and exempt activity it is entitled to immediate deduction of the total input tax charged on the construction costs of the campus. As has been noted the parties are at one that the Tribunal erred in so holding and they have agreed a special method as to how the input tax should be treated in relation to those activities of the College which are non-business and exempt supplies.

[8 ] In a long-running construction contract, like that under which the College's campus was constructed, costs will be charged to the employer such as the College, together with input tax at various points in time. These appeals arise out of a rejection by the Commissioners of a voluntary disclosure by the College for repayment of input tax of £383,669.08 arising from the construction costs of the new campus (see page 131ff of the joint bundle of documents). The date of that voluntary disclosure was 9 January 2004. After discussion before us it was, ultimately, a matter of agreement between the parties that the appropriate date for determining the College's appeal in relation to the question of whether or not it was a taxable person should be 9 January 2004. We should add that the position, in fact and in law, of the College in relation to its supply of the core activities, would have been the same at the date of the Tribunal's decision on the matter.

[9 ] It was accepted, on the College's behalf, that it does provide what might be described as "commercial courses" that is non-funded courses, and other activities, where it would fall to be regarded as providing exempt supplies for the purposes of the legislation. As has been noted, however, the College's core activity is the supply of further education, funded by central Government through the Funding Council, at the relevant time, under the Further and Higher Education (Scotland) Act 1992 (that Act has been amended by the Further and Higher Education (Scotland) Act 2005 which came into force on 6 October 2005).

[10 ] Prior to the passing of the 1992 Act further education in Scotland had been, in large part, the responsibility of local authorities. Section 1(1) of the 1992 Act provides as follows:

"It shall be the duty of the Secretary of State to secure adequate and efficient provision of further education in Scotland".

Since the passing of the Scotland Act 1998 the responsibilities, under the 1992 Act, of the Secretary of State, have been passed to the Scottish Ministers. Section 3(1) of the 1992 Act provides that the Scottish Ministers shall have the power to do all that is necessary or expedient for the purposes of the exercise of their duties under section 1 of the Act, and in particular they may

"subject to subsection (3) below -

(a) establish new colleges of further education;

(b) merge two or more colleges of further education;

Section 3(3) provides that:

"The power conferred by paragraphs (b) and (c) of subsection (1) above shall be exercised only in relation to colleges for which boards of management have been established in pursuance of this Part of this Act".

Section 1(3) of the Act provides:

"In this Part of this Act 'further education' means any programme of learning, not being school education, provided for persons over school age, being a programme falling, for the time being, within section 6 of this Act".

Section 6(1) of the Act is to the following effect:

"A programme of learning falls within this section if it -

(a) prepares a person for a vocational qualification;

(b) prepares a person for -

(i) a Scottish Examination Board qualification; or

(ii) a General Certificate of Education qualification of England and

Wales or Northern Ireland;

of learning which falls within this section and who have a learning difficulty;

(d) prepares a person for access to higher education;

(e) is designed to assist persons whose first language is not English to

achieve any level of competence in English language;

(f) is designed predominantly to prepare a person for participation in any

programme of learning which falls within this section".

Section 4(1) provides that the Scottish Ministers may

"(a) pay to the board of management of a college of further education in

respect of any expenditure incurred or to be incurred by them in connection with their functions under or by virtue of this Part of this Act in relation to the college; and

(b) in order to facilitate the carrying out of (their duties) under section 1 of

this Act, pay to such other persons as appears to (them) to be appropriate in respect of the expenditure of such persons incurred or to be incurred for the purposes of or in connection with the provision of further education,

grants, loans or other payments of such amounts as (they) may determine".

Section 11(1) of the 1992 Act provides:

"With effect from 1 April 1993 ... each college of further education as may be prescribed shall cease to be under the management of the education authority which, immediately before that date, was responsible for its management, and the college council for each such college shall, with effect from that date, cease to exist".

Section 11(2) provides:

"With effect from the first transfer date there shall be established for each college of further education prescribed by an order made under subsection (1) above a body corporate to be known as 'the Board of Management of' that college".

The legislation goes on, in section 12, to provide, with regard to Boards of Management, the following:

"12-(1) A board of management shall have the duty of -

(a) managing and conducting their college; and

(b) ensuring that their college provides (either by itself or by arrangement

with any other person) suitable and efficient further education to students of the college,

and in carrying out their duty under paragraph (b) above, the board shall have regard to the provision of education in the area in which the college is situated and to the likely needs of persons desirous of becoming students of the college".

Section 12(2) then sets out the specific powers with which the Boards of Management are vested. Section 12(3) provides:

"In carrying out their functions under this section a board of management shall have regard to the requirements of persons over school age who have learning difficulties".

Section 12(7) provides:

"A board of management shall not, without the prior consent, given in writing, of (the Scottish Ministers) -

(a) borrow money from any source, give any guarantee or indemnity or

create any trust or security over or in respect of any of their property; or

(b) effect any material change in the character of their college".

[11 ] By the Scottish Further Education Funding Council (Establishment)(Scotland) Order 1998 (SI 1998 No. 2887) there was established, under section 7 of the 1992 Act, a Funding Council for further education in Scotland. Article 4 of the Order provides as follows:

"The functions of the (Scottish Ministers) which may be exercised on (their) behalf by the Council are -

(a) (their) duty under subsection (1) (as read with subsection (2)) of

section 1 of the Act ... to the extent that it can be exercised by use of the powers and functions specified in paragraphs (b) to (e) below;

(b) (their) power under subsection (1) of section 3 of the Act ...

education);

(d) (their) power to give consent in relation to the matters specified in

subsection (7)(a) of section 12 of the Act (Boards of Management);

(e) (their) power to give consent under section 18 of the Act (disposal of

certain property)".

Section 8 of the primary legislation confers advisory functions on the Funding Council to give advice to the Scottish Ministers in relation to further education. Section 9(1) of the 1992 Act provides that:

"(The Scottish Ministers) may give the Funding Council directions of a general or specific character with regard to the discharge of their functions, other than their functions under section 8 of this Act; and it shall be the duty of the Funding Council to comply with such directions".

Section 21(1) of the 1992 Act provides that

"(the Scottish Ministers) may give boards of management directions of a general or specific character with regard to the discharge of their functions; and it shall be the duty of a board of management to whom any such directions are given to comply with the directions".

Section 10(2A) of the 1992 Act, inserted by the Teaching and Higher Education Act 1998, is to the effect that:

"The power of the (Scottish Ministers) under subsection (2) above to impose conditions shall include power to impose a condition requiring the Funding Council to impose, in such cases as may be specified in the condition, a condition under subsection (2B) below in relation to any grant, loan or other payment made by the Funding Council in the exercise of any function prescribed by an order under section 7(2) of this Act".

Section 10(2B) goes on to provide that:

"A condition under this subsection shall require -

(a) the board of management of any college of further education; or

(b) any other person to whom any such grant, loan or other payment as is

mentioned in subsection (2A) above is made,

to secure that no fees are payable to the board of management or, as the case may be, person by any specified class of persons in respect of any specified matters in connection with their attending courses of any specified description".

Section 22 of the 1992 Act imposes on every Board of Management a duty every year to submit to the Scottish Ministers a college development plan in respect of their college. The plan is to contain a statement of:

"(a) the number of persons the board estimates will be students of the

college;

(b) the programmes of learning of further education (within the meaning

of section 1(5)(b) of the 1980 Act) which the board proposes to provide or secure the provision of;

recurrent expenditure proposed and income of the college; and

(d) such other matters as may be determined by (the Scottish Ministers)

as regards each academic year to which the plan relates".

[12 ] Senior counsel for the College referred the court to two documents which are to be found as part of the parties' agreed bundle of documents at pages 210 and 216 respectively. These documents were, in effect, it was contended, how the statutory powers and duties of the Scottish Ministers, and the Funding Council, in respect of further education colleges were exercised in relation to the provision of funded further education. The first of these documents is a letter from the then Minister responsible for further education. It is addressed to the chairperson of the Funding Council and is dated 12 January 2004. It is headed "Further Education: Guidance for 2004-05". The letter sets out expectations or goals which the Minister wishes to be realised in the field of further education. Senior counsel for the College submitted that this letter contained non-negotiable guidance to the Funding Council as to how they were to provide funding for further education and, in particular, they were being told what they were entitled to permit colleges to spend money upon. The second of the two documents is a circular dated 28 April 2004 from the funding authority setting out the terms and conditions of the granting of funds to colleges. It was, in effect, an offer of funding to each college which they were only free to accept subject to also accepting certain specified terms and conditions. The letter is extremely detailed in setting out the requirements of the Funding Council and its expectation as to how the colleges will conduct themselves in the provision of further education courses. In paragraph 57 of the letter it is stated:

"The allocations we have announced today will be underpinned by a funding agreement with each college. Recurrent grant is made available to enable boards of management to meet expenditure incurred by them as defined in part one of the Further and Higher Education (Scotland) Act 1992. A condition of grant is that colleges adhere to the financial memorandum between the Council and colleges".

The letter was sent to all the Boards of Management of further education colleges, including Edinburgh Telford College. At paragraph 71 it is stated:

"You and your board of management should consider the terms of this letter and attachments carefully. We advise that your board should have the opportunity to discuss the issues arising before you consider taking any further action".

Paragraph 72 then goes on to say:

"You should then confirm by Friday 11 June 2004 ... whether your college accepts the conditions of grant set out in this circular letter and if:

· you are prepared to accept the funded activity offered by the Council; or

· you could accommodate extra student activity (WSUMs) in 2004-05 beyond that offered in this circular letter and indicate what magnitude of additional activity could be accommodated; or

· you consider that you are unable to deliver the level of funded activity offered, stating the proposed reduction".

In Annex A2 to the letter, in paragraph 2 it is provided:

"The basis of the methodology used to allocate recurrent grant to colleges remains the same. Colleges undertake to deliver a specified volume of activity (measured in weighted SUMs) in return for grant in line with the funding agreement (contained in Annex B). We have decided that there will be no overall growth in activity for 2004-05".

Senior counsel for the College submitted that, in the exercise of its function, on behalf of the Scottish Ministers, the Funding Council controlled the number of students the College might take and the fees which they might charge the students for the courses which were funded under these arrangements. The College is also required, under these arrangements, to provide courses which may lead to certain kinds of certification or qualification. The College is also discouraged by the Funding Council from extending its activities beyond further education to higher education. Reference in this regard, was made to Annex B of the funding letter which is to be found at pages 249, and following, of the agreed bundle of documents. Paragraph 3 of Annex B provides:

"The funding methodology developed by The Council is based on levels of student activity to be delivered by Colleges in an Academic Year. Allocations have been determined based on the understanding that a College will deliver a specific number of WSUMs worth of activity, of an acceptable quality, in return for an amount of funding directly related to that level of provision. This agreement describes the conditions of grant linked to the funding issued by the Council for academic year 2004-5."

Paragraph 7 of Annex B states:

"It is a condition of grant that each College makes a clear statement of its policy concerning provision for students with learning disabilities. This statement should be made in the College's strategic plan and kept under review. Colleges are expected to demonstrate how the policy is implemented, monitored and developed through the use of a separate report, further details of which will be issued to colleges in due course".

At paragraph 12 of Annex B it is provided:

"In accepting recurrent funding from The Council for Academic Year 2004-05, it is a condition of grant that the College Board of Management should provide the Target Weighted SUMs. If the College's activity in Academic Year 2004-05, as measured by weighting its audited SUM count, and as checked and verified by The Council, falls short of the Target Weighted SUMs by more than 2%, The Council reserves the right to make adjustments (including the repayment of allocated monies) to the College's funding allocation for 2004-05 or/and subsequent years at a rate to be determined by The Council. Any such shortfall will also inform The Council's decisions about allocations of funded activity in subsequent years".

At paragraph 19 of Annex B it is provided:

"It is a condition of grant that no fees should normally be charged to home or EU students studying full-time in Scottish further education Colleges or on courses designed for, and delivered to, students with Special Educational Needs".

Paragraph 20 goes on to provide:

"It is a condition of grant that no additional fees, top-up fees or other surcharges for teaching will be levied on home or EU full-time students".

Senior counsel for the College submitted that all of the foregoing conditions of the grant were legally enforceable. The discouragement of the College by the Council from straying into the activity of higher education is to be found at paragraph 30 of Annex B of the letter which is to the following effect:

"It is a condition of grant that if any College exceeds its full-time HE control total for 2004-05 as set by The Council by more than 5%, The Council reserves the right to make appropriate adjustments to the College's funding".

Senior counsel for the College drew the court's attention to the fact that the funding arrangements, operated through the machinery just described, are subject to the scrutiny of the Auditor General, (compare pages 266-271 of the agreed bundle).

[13 ] It was a matter of concession, on behalf of the Commissioners, that for the purposes of the Sixth Directive Article 4.5 the College is "a body governed by public law". Accordingly, against the statutory and administrative framework just rehearsed, the question to be addressed is whether or not the College, in providing their funded core courses, were engaging in "activities or transactions ... as public authorities", even though they collected "fees ... in connection with these activities or transactions". As to how that question is to be answered there is guidance to be found in jurisprudence from the European Court of Justice and in domestic case law.

European case law

[14 ] In joined cases 231/87 and 129/88 Ufficio distrettuale delle imposte dirette di Fiorenzuola d'Arda and Others v Comune di Carpaneto Piacentino and Others (1989) E.C.R. 3233, the European Court of Justice was asked for preliminary rulings in relation to the construction of the first subparagraph of Article 4.5 of the Sixth Directive in the context of various activities of certain Italian local authorities. At pages 3274 to 3275 of its judgment the court said this:

"It should be pointed out that it follows from Article 2 of the Sixth Directive, which defines the scope of VAT, that within the territory of the Member States only activities of an economic nature are subject thereto. The concept of economic activities is defined in Article 4(2) as comprising all activities of producers, traders and persons supplying services.

According to Article 4(1), 'taxable person' is to mean any person who independently carries out any of those economic activities. It is thus by way of exception to that rule that the first subparagraph of Article 4(5), of which the first question seeks an interpretation, excludes from the category of taxable persons States, regional and local government authorities and other bodies governed by public law in respect of some of the activities or transactions in which they engage, 'even where they collect dues, fees, contributions or payments in connection with these activities or transactions'.

As the Court held in its judgments of 11 July 1985 in Case 107/84 Commission v Federal Republic of Germany (1985) E.C.R. 2663 and of 26 March 1987 in Case 235/85 Commission v Kingdom of the Netherlands (1987) E.C.R. 1485, it is clear from that provision, when examined in the light of the aims of the directive, that two conditions must be fulfilled in order for the rule of treatment as a non-taxable person to apply: the activities must be carried out by a body governed by public law and they must be carried out by that body acting as a public authority.

A definition of the latter condition cannot be based, as has been argued, on the subject-matter or purpose of the activity engaged in by the public body since those factors have been taken into account by other provisions of the directive for other purposes.

The subject-matter or purpose of certain economic activities falling within the scope of VAT is a decisive factor, on the one hand, for the purpose of limiting the scope of the treatment of bodies subject to public law as non-taxable persons (third subparagraph of Article 4(5) of and Annex D to the Sixth Directive) and, on the other, for that of determining the exemptions referred to in Title X of the directive. Article 13(A)(1) of that title of the directive provides, inter alia, for exemptions in favour of certain activities carried out by bodies governed by public law or by other bodies regarded as social in nature by the Member State concerned by reason of their activities being in the public interest.

An analysis of the first subparagraph of Article 4(5) in the light of the scheme of the directive shows that it is the way in which the activities are carried out that determines the scope of the treatment of public bodies as non-taxable persons. In so far as that provision makes such treatment of bodies governed by public law conditional upon their acting 'as public authorities', it excludes therefrom activities engaged in by them not as bodies governed by public law but as persons subject to private law. Consequently, the only criterion making it possible to distinguish with certainty between those two categories of activity is the legal regime applicable under national law.

It follows that the bodies governed by public law referred to in the first subparagraph of Article 4(5) of the Sixth Directive engage in activities 'as public authorities' within the meaning of that provision when they do so under the special legal regime applicable to them. On the other hand, when they act under the same legal conditions as those that apply to private traders, they cannot be regarded as acting 'as public authorities'. It is for the national court to classify the activity at issue in the light of that criterion".

The court went on to observe, at page 3276 and 3279, that Article 4.5 has direct effect.

[15 ] The European Court of Justice revisited the subject in case 446/98 Fazenda Pública v Câmara Municipal do Porto (2000) E.C.R. 1-11435. The preliminary rulings sought in that case arose in the context of car parking facilities operated by a Portuguese local authority. As regards the construction of Article 4.5 of the Sixth Directive, the decision of the court was, at pages 11469 to 11471, to the following effect:

"By its first question, the national court essentially asks whether the letting of spaces for the parking of vehicles is an activity which, when carried out by a body governed by public law, may be regarded as being engaged in by that body as a public authority, within the meaning of the first subparagraph of Article 4(5) of the Sixth Directive.

On this point, it should be noted that, as the Court has held on numerous occasions, it is clear from that provision, when examined in the light of the aims of the Sixth Directive, that two conditions must be fulfilled for the rule of treatment as a non-taxable person to apply: the activities must be carried out by a body governed by public law and they must be carried out by that body acting as a public authority (see in particular Case C-202/90 Ayuntamiento de Sevilla v Recaudadores de Tributos de las Zonas Primera y Segunda (1991) E.C.R. 1-4247, paragraph 18).

As regards the latter condition, it is the way in which the activities are carried out that determines the scope of the treatment of public bodies as non-taxable persons (Joined Cases 231/87 and 129/88 Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d'Arda and Others v Comune di Carpaneto Piacentino and Others (1989) E.C.R. 3233, paragraph 15, and Case C-4/89 Comune di Carpaneto Piacentino and Others v Ufficio Provinciale Imposta sul Valore Aggiunto di Piacenza (1990) E.C.R. 1-1869, paragraph 10).

It is thus clear from the settled case-law of the Court that activities pursued as public authorities within the meaning of the first subparagraph of Article 4(5) of the Sixth Directive are those engaged in by bodies governed by public law under the special legal regime applicable to them and do not include activities pursued by them under the same legal conditions as those that apply to private economic operators ...

In the main proceedings, the activity engaged in by CMP, which is a body governed by public law within the meaning of Article 4(5) of the Sixth Directive, consists in making available to motorists in return for financial consideration spaces for parking their vehicles, either on the public highway or in car parks established on the city's public property, its private property, or land belonging to private individuals.

In determining whether such an activity is engaged in by the CMP as a public authority, it must be noted, first, that this cannot depend on the subject-matter or purpose of the activity ...

Similarly, whether or not CMP owns the land on which the activity at issue in the main proceedings is carried on, or whether that land is part of its public or private property, is not in itself determinative of whether it is carrying on that activity as a public authority.

The national court must, in accordance with the case-law referred to in paragraphs 16 and 17 above, analyse all the conditions laid down by national law for the pursuit of the activity at issue in the main proceedings, to determine whether that activity is being engaged in under a special legal regime applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators.

The fact that the pursuit of an activity such as that at issue in the main proceedings involves the use of public powers, such as authorising or restricting parking on a public highway or penalising by a fine the exceeding of the authorised parking time, shows that this activity is subject to a public law regime.

In view of the nature of the analysis to be carried out, however, as the Court has already held, it is for the national court to classify the activities at issue in the light of the criterion adopted by the court (Joined Cases 231/87 and 129/88 Comune di Carpaneto Piacentino, paragraph 16, and Case C-4/89 Comune di Carpaneto Piacentino, paragraph 11)".

In Case C-359/97 Commission of the European Communities v United Kingdom of Great Britain and Northern Ireland 2000 E.C.R. 6355, the European Court of Justice at page 6403 paragraph 50, under reference to its previous decisions said:

"It is clear from the settled case-law of the Court of Justice ... that activities pursued as public authorities within the meaning of the first paragraph of Article 4(5) of the Sixth Directive are those engaged in by bodies governed by public law under the special legal regime applicable to them and do not include activities pursued by them under the same legal conditions as those that apply to private traders".

United Kingdom domestic case law

[16 ] In Rhondda Cynon Taff County Borough Council v Commissioners of Customs & Excise [2000] V & D.R. 150 the VAT London Tribunal had to consider the application of Article 4.5 of the Sixth Directive in relation to the activities of a local authority in its provision and maintenance of cemeteries. In a clear and helpful decision, the Tribunal, after having referred to the analysis of the law as set out by the European Court of Justice in the Carpaneto case above, at page 158, at paragraphs 36-39 said as follows:

"Applying those principles to the facts of the present appeal it is necessary to ask whether, when the Appellant was providing and maintaining cemeteries, it did so under the special legal regime applicable to it or whether, on the other hand, it acted under the same legal conditions as those that apply to private traders.

The Appellant is a local authority and so all its acts are performed under statutory authority. But there are additional special provisions which apply to its activities in connection with the provision and maintenance of cemeteries. Section 9 of the Open Spaces Act 1906 imposes an obligation on local authorities to maintain burial grounds. Section 214 of the [Local Government] 1972 Act contains provisions relating to local authorities and cemeteries and crematoria. The 1977 Order, which was made under the provisions of the 1972 Act, contains detailed provisions governing the management, regulation and control of the cemeteries of burial authorities. The Appellant is subject to all these statutory provisions and acts under them. It follows that, when the Appellant provides and maintains cemeteries, it does so under the special legal regime which applies to it (and to other local authorities). It does not act as a person subject to private law.

It is then necessary to ask whether the same conditions apply to private traders and the answer is that they do not. The Open Spaces Act, the 1972 Act and the 1977 Order apply only to local authorities and not to private traders. Mr. Parker referred in passing to the Parochial Register Act 1812, the Registration of Burials Act 1864, and to Halsbury's Laws of England Fourth Edition Volume 10 paragraph 1179 but did not take the tribunal to any specific provisions. The most that could be said is that some similar conditions could apply to some private traders but not the same conditions. The legislation referred to by Mr. Parker does not lead to the conclusion that the Appellant engages in the activities of the provision and maintenance of cemeteries as a person subject to private law.

Accordingly, applying the test set out by the Court of Justice in Carpaneto, the conclusion is that, in providing and maintaining cemeteries, the Appellant was acting under the special legal regime applicable to it and was not acting under the same legal conditions as those which apply to private traders. Thus the Appellant engaged in those activities 'as a public authority' within the meaning of Article 4.5 and, as such, was not a taxable person in respect of those activities".

In West Devon Borough Council v Customs and Excise Commissioners (2001) STC 1282, the activity in question was the granting by a local authority of an underlease of property as part of a scheme whereby the local authority sought to put into operation an art centre for the public benefit. At paragraph 15, page 1291 of his judgment Patten J., after referring to the decision in the Carpaneto case said:

"It is not enough therefore for the local authority to demonstrate that in relation to the transaction in question it acted as a local authority. That would be the case in respect of all of its activities. As a statutory body a local authority cannot act in any other capacity. The determining factor seems to be whether the transaction itself is governed by the ordinary rules of private law or whether it takes effect under what the court described as a special legal regime applicable to local authorities. This would mean that the letting of commercial premises owned by a local authority would (apart from being an exempt supply) not fall within art. 4(5) because the transaction would be governed by the same legal rules and principles as a letting by a private landlord. By contrast the provision of secure residential accommodation under the Housing Act 1985 would qualify in that the terms of the letting are applicable only to transactions involving local authorities with their particular statutory responsibilities in that field. The decision in Carpaneto also makes clear that the application of the art. 4(5) exemption does not depend upon whether the local authority is under a statutory duty to enter into the transaction. What matters is whether the governing legal regime is restricted to the local authority not whether the transaction is mandatory or permissive".

The court, in that case, concluded that in the circumstances of the case the Council had entered into the commercial underlease in terms applicable to private traders generally and not under any special regime.

The Tribunal's decision in the present case in relation to Article 4.5

[17] After having set out the factual and legal background in relation to the College's activities the Tribunal's approach, in the present case, to determining whether or not the College was a non-taxable person in relation to its "core" activities was as follows:

In the first place, at page 13 of its decision, the Tribunal formulated the question which they required to decide in the following term:

"Accordingly the question for our determination on this part of the appeal was whether the College was engaging in activities as a public authority under a special regime applicable to it and not activities pursued by it under the same legal conditions as applied to a private operator".

They then went on at page 14 to say this:

"The contract constituted by offer and acceptance between the Funding Authority and the College was for a block sum in respect of various courses to be provided by the College to various students, but not all. So far as the students were concerned they contracted with the College for a supply of education. The College was responsible for providing the course, for discipline and for any ancillary appropriate matters. The College has, as above noted, statutory power to make such contracts with individuals".

At page 15 the Tribunal concluded:

"The analysis appears to the Tribunal to be: Firstly, that there was a supply by the Funding Council to the Appellant so that it might provide educational facilities to various persons subject to certain aims and objectives politically determined. The provision of funds might be regarded as 'third' party consideration for the supply of education to comply with a statutory duty to do so, but that classification is not necessary.

Secondly, there was a supply by the Appellant to a student and the contract there was between the Appellant and the student, and not between the student and Funding Council. It was accepted in the course of the evidence that failure to provide a course would or could result in a legal dispute between the student and the Appellant, which in the end of the day might require to be resolved by the Court in an action perhaps for payment or implement - private law matters.

It appears to the Tribunal to be clear beyond peradventure that in the supply of the courses to students the Appellant was operating under a private law regime and accordingly Article 4.5 does not in this case have the effect of making the Appellant a non-taxable person. The admitted fact that it is a body governed by public law does not detract from that view".

Submissions for the College

[18] Senior counsel for the College submitted that, while the Tribunal had asked themselves the right question they had come up with the wrong answer, having regard to the position of the College in the instant case. After having reviewed the legal provisions referred to above, and the various documents also referred to, together with the relevant case law, senior counsel posed the question as to whether it could be said that the College was operating under a special legal regime when it provided centrally funded further education courses to its students. The reply to the question, it was submitted, fell to be answered in the affirmative. What had been drawn to the court's attention was a statutory and mandatory scheme for the operation of further education colleges in Scotland and which was the scheme by which Scottish Ministers delivered further education in Scotland. It was the only legal regime which applied to the provision of education relating to certain qualifications being achieved by persons after they had left school. Under the funding regime, conditions could be imposed to ensure that courses are given to specific levels. The statutory scheme set out in the 1992 Act conferred defined powers on the Scottish Ministers and the Funding Council to direct activities of the College in its provision of funded further education courses. The Scottish Ministers and the Funding Council could give "high level guidance which in effect dictated overall policy in relation to the provision of further education courses". Again the Scottish Ministers and the Funding Council could determine, in effect, what student numbers should be and they could prevent or discourage colleges going into the provision of higher education courses. The Scottish Ministers and the Funding Council could require the College to operate to certain specified levels of certification and could impose conditions regarding levels of fees. The Scottish Ministers, and through them the Funding Council, had a quality control function and, for example, could direct the College to provide courses for persons with learning difficulties. The actual system of funding, under the 1992 Act, was peculiar to fundable bodies. The very existence, and therefore continuation of, the College's activities could be brought to an end by the Scottish Ministers (see section 3(1)(c) of the 1992 Act). The Board of Management's powers were circumscribed by virtue of the provisions of section 12(7) of the 1992 Act. Cumulatively, all of this, it was submitted, meant that provision of the relevant "services" by the College, and what they could charge for them, was subject to legal conditions which would not apply to a hypothetical private trader providing the same services. Accordingly, it could be truly said that the College, in providing the funded further education courses, was pursuing an activity under the special regime applicable to it. The regime in question applied only to further education colleges and to the extent to which they were funded by public money to supply certain kinds of education. In relation, therefore, to their "core" activities they were not acting under the same legal conditions as a hypothetical private trader providing a similar service. The Tribunal was in error in asserting that the test was whether or not the agreement between the College providing such a service and the student who undertook the courses in question was governed by contract law, with private law remedies available to the parties. That was too narrow an approach to the material question. The relationship between the College and its students was closely regulated by statute. The College was not completely free to enter into contracts with students on whatever terms and conditions it wished. Its legal position in that regard was to a large extent dictated by the funding authority.

[19 ] For all the foregoing reasons the College's appeal should be allowed.

Submissions on behalf of the Commissioners

[20 ] In reply, junior counsel for the Commissioners confirmed that it was conceded that the College was "a public authority" for the purposes of the Sixth Directive. Nevertheless the College's appeal should be refused because the Tribunal had come correctly to the conclusion that the relevant supplies of education made by the College were not made subject to a special legal regime applicable to it and that, therefore, they were not within the ambit of Article 4.5.

[21 ] Junior counsel referred the court to passages in the Opinion of the Advocate General in the Porto case above, particularly at paragraph 33, page 11448 where, it was submitted, the key consideration was identified as being "the way in which" the activity in question was carried out by the public authority in question. So at paragraph 33 the Advocate General, after referring to certain case law said:

"According to this case-law, the external (legal) framework of the activity is the decisive factor. In the view of the Court, only the criterion of the way in which the activity is carried out provides a clear distinction between taxable economic activities and those activities which bodies governed by public law engage in as public authorities".

Again, at paragraph 35 of the Opinion of the Advocate General was to the following effect:

" ... for defining an activity as one engaged in as a public authority the overall context and the way in which an activity is carried out are also important - supporting the fact that the body acts as a body governed by public law ... ".

Later at paragraph 41 the Advocate General opined:

"What matters is the legal way in which the activity is carried out, although the attendant factual circumstances may be taken into consideration as an indication as to the classification of the underlying legal relationship".

Counsel for the Commissioners submitted that this approach was endorsed by the court at paragraph 16 of its judgment, in the case, where it said:

" ... it is the way in which the activities are carried out that determines the scope of the treatment of public bodies as non-taxable persons ... ".

Counsel for the Commissioners went on to submit that the fact that there may be a public law framework governing the exercise of private law activities did not necessarily convert the activity into one involving the use of public powers. For there to be "a special legal regime", there had to be some features of that regime in question which prescribed the way in which the activity was carried out. One way of testing the matter, it was suggested, was to ask the following questions - first, "Is there a duty imposed by the regime in relation to the activity in question which does not apply to a private trader?" and if that question was answered in the affirmative, secondly, "Does the pursuit of the duty involve the use of other public powers?". Only if both of those questions were answered in the affirmative might the test be met. In the present case, however, that test had not been met. There were absent from the activities in question that level of prescription, as counsel put it, "that one should be looking for". While counsel accepted that the College, in providing the services in question, acted under a legal regime she contended that it was not a special legal regime of the kind, as for example, existed in the case of The Radio Authority v The Commissioners of Customs and Excise (1992) 2 V.A.T.T.R. 155.

[22 ] Counsel for the Commissioners endeavoured to distinguish the features present in the instant case from the features in the Rhondda case. There was not, it was submitted, the degree of prescription in the present case as to the way in which the colleges delivered the courses in question as there was over the local authority in providing and maintaining burial spaces. Counsel commented that in this connection there was no statutory duty on the colleges themselves to supply education to any particular class of persons. A letter from the Minister to the Funding Council was not part of a legal regime. It was an exercise in the use of coded and political language. There remained a freedom in the College to set objectives and to pursue them. There was no statutory prescription as to the kind of courses which the College might offer and the range, frequency and variety of courses was for the College to decide. From the point of view of the student taking one or some of the courses there was simply a voluntary arrangement entered into between him and the College. While there was no legal authority yet, in domestic law, to the effect that a student could sue in private law a body such as the College for its failure to provide him with a course, or for providing a course of insufficient quality, students who failed to pay their fees could be sued.

[23 ] The Tribunal were, for the foregoing reasons, correct in holding that in making supplies of funded further education courses the College was not making supplies as a public authority.

Reply for the College

[24 ] In reply, senior counsel for the College pointed out that the existence of a Board of Management was crucial to the College obtaining funding for its courses. That was by virtue of section 4(1) of the 1992 Act. The College has a Board of Management. Section 12 imposes statutory duties on the Board of Management regarding the provision of suitable and effective funded education to students of the College. Schedule 2 of the 1992 Act prescribes, in some detail, the membership, and regulates the proceedings and actings, of the Board of Management. For example paragraph 19 of the Schedule provides that "The accounts of the board shall be open to the inspection of the Comptroller and Auditor General ... ". Section 22 of the Act, moreover, provides as follows:

"Every board of management shall, not later than such date in every financial year as the [Scottish Ministers] may determine, submit to the [Scottish Ministers] a college development plan in respect of their college".

These, and the other provisions previously referred to, could properly be regarded as constituting "a special legal regime" under which the College provided the funded courses. There were also conditions imposed relating to the question of fees. Section 10 of the 1992 Act, as amended, was referred to. In effect, full-time fees for Scottish students were paid by the central funding authority. Part-time fees were not (compare document 578 of the agreed joint bundle). The College was not entitled to charge full-time students an addition to the prescribed fee - this was one of the conditions of the Funding Council's offer. The Funding Council gave directions as to the categories of students in respect of which the College could waive fees (see document 5 in the supplementary bundle of agreed documents). The College was discouraged from providing higher education by virtue of the fact that they could only charge for any such courses the further education level of fees. In all the foregoing circumstances, it was difficult to distinguish the position of the College, in the present case, as any different from the position of the local authority providing secure residential accommodation under the Housing Act 1985 as referred to by Patten J. in the West Devon Borough Council case at pages 1291 to 1292. The approach of the European Court of Justice in the Porto case did not support the approach of the Tribunal in the present case in focusing wholly on the relationship of the public authority with the consumer of the service in question. The European Court of Justice's guidance in that case directed the National Court to look at matters much more generally (see paragraph 38 of the judgment).

Decision in the College's appeal

[25 ] We consider that the submissions made, on behalf of the College, are well-founded and that the Tribunal erred in its approach in focusing exclusively on the nature of the relationship between the College and the individual student, as it might be perceived by the student. No doubt the individual student would not necessarily know of the statutory framework within which the College provided the relevant course to him, far less care about the respective roles of the Scottish Ministers, the Funding Council and the College and the provisions of the statute governing the duties and activities of these parties. But that, in our judgment, is nothing to the point in determining the question in this case, namely, whether, in providing the relevant courses, the College was engaging in activities or transactions as a public authority. The individuals who obtained and paid for the cemetery places and services provided by the local authority in the Rhondda case may well have thought of themselves as simply entering into a private law transaction and may not have been aware of the statutory framework under which the local authority was operating, but that did not mean that the local authority was not providing the facilities and services "as a public authority". Having regard to the plethora of statutory provisions we have set out above which, both directly and indirectly, in our judgment, impact on the way in which the College may provide funded courses, emanating initially from the Executive's statutory duty to provide further education, we consider that, having regard to the language of Article 4.5 of the Sixth Directive, the College, in providing funded courses, was acting as a public authority and not as a private trader. Some of the case law of the European Court of Justice has, of course, provided authoritative guidance as to how the wording of Article 4.5 should be interpreted, and applied, by reference to the need to identify a special legal regime under which the public authority in question engages in the activity or transaction in question. We do not consider that there is any real difficulty in identifying the existence of such a special legal regime arising from the provisions of the 1992 Act itself and its implementation in the documents and directions given by the Scottish Ministers and Funding Council. As noted previously it was conceded on behalf of the Commissioners that these features of the present case could be regarded as constituting a legal regime although the argument for the Commissioners was that it was not "special". In our judgment the legal regime in question is special. It is special to the colleges which provide the courses in question. If there were private traders, which there are not in Scotland, who provided such courses they would not do so under that legal regime. Another way of putting matters perhaps is that once it is accepted that the College is a public authority, it is clear that in providing the funded courses, having regard to the provisions of the statutory framework, it does so as an act of public administration and not as an act governed solely by the rules of private law. While our system of law does not always, and for all purposes, recognise a strict dichotomy between public and private law, we have no difficulty in reaching the view that, having regard to the jurisprudence of the European Court of Justice, the activity of the College in question would be regarded as being governed to a significant extent under that jurisprudence by public, as opposed to private, law.

[26 ] Counsel for the Commissioners' submissions seemed ultimately to amount to saying that the legal regime was not special because it did not involve the necessary degree of prescription and direction and control of the College's activity, in providing the further education courses in question, having regard to what were features present in certain of the previous cases. That approach, in our opinion, is misconceived. Each situation has to be considered in its own context and it is dangerous, and inappropriate, to deduce that because Article 4.5 has been held to apply in situations with certain factual and legal features, the provisions of Article 4.5 do not apply where those particular facts and legal features, or their equivalent, are absent. Ultimately the question in each case, of course, is did the public authority engage in the activity or transaction in question as a public authority? In the present case, in our judgment, the College, in providing the funded "core" activity, did not act as a hypothetical private trader, providing such courses might do. In a very real sense, in our judgment, the College was acting in a public role, carrying out a public function in providing the courses in question, in effect in the room and place of the Scottish Ministers and under restrictive conditions imposed on its managing body as to the way in which it provided those services. We have been unable to see any difference in principle between the situation of the College and the situation of the local authority providing secure residential accommodation under the Housing Act 1985 as discussed by Patten J. in the West Devon Borough Council case supra or that of the local authority providing cemetery places as described in the Rhondda case.

[27 ] We shall, for the foregoing reasons, allow the College's appeal.

The Commissioners' appeal

[28 ] As regards the Commissioners' appeal, it was common ground between the College and the Commissioners that the Tribunal had, in this aspect of the case, in seeking to apply what is described as the Lennartz mechanism, which is an approach in relation to the treatment of input tax arising from the decision in the case of Lennartz v Finanzamt München III (1995) S.T.C. 514, where goods or services are acquired for both private and business purposes, committed certain errors. It was agreed that, where the Tribunal said, at page 18: " ... where the Lennartz mechanism is to be applied, the taxpayer is entitled to the immediate recovery of the whole input tax", the Tribunal was wrong, since on any view of matters, the College was not entitled to recover all of the input tax. The Tribunal was also, it was agreed, wrong in saying, at the foot of page 18, that no "real distinction could be made between private use and use by an exempt supplier" and that it was appropriate to apply the Lennartz mechanism by substituting use of exempt supplies for private use. It was, furthermore, a matter of agreement that the Tribunal had exceeded its jurisdiction by stating, at page 21:

"We also determine that the appellant is entitled to a new ascertainment of a fair and reasonable special method of dealing with the attribution of tax. That in our judgment must involve sectorisation".

While it was within the jurisdiction of the Tribunal to decide whether or not a determination by the Commissioners was fair and reasonable, it did not fall within the Tribunal's jurisdiction to specify a method that the Commissioners should adopt.

[29 ] Parties have now agreed and have in place a special method as to how the College's position as regards deduction of input tax is to be dealt with where they are engaged in non-business, taxable and exempt activities. While we did not hear full argument on the criticisms made in relation to the Tribunal's decision on this chapter of the case, and, in particular, in respect of the Lennartz mechanism, we are content that the parties are in agreement that the decision in this respect should be quashed and that they have themselves reached an agreement regarding a special method to cover the situation. We shall, accordingly, allow the Commissioners' appeal.