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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2006] CSIH 46

XA30/05

Lord Macfadyen

Lord Abernethy

Lord Marnoch

OPINION OF THE COURT

delivered by LORD MACFADYEN

APPEAL

under section 11 of the Tribunals and Inquiries Act 1992

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Appellants;

against

EMPOWERMENT ENTERPRISES LIMITED

Respondents:

in respect of

a decision of the Edinburgh VAT and Duties Tribunal dated 19 January 2005 and communicated to the appellants on 22 February 2005

_______

Act: Young; Shepherd & Wedderburn

Alt: Ghosh; Burness LLP

11 October 2006.

Introduction

[1] The issue in this appeal is whether Value Added Tax (VAT) is chargeable on tuition provided by the respondents to students, where the tuition is carried out by teachers who are employees of the respondents. In the circumstances which we shall explain, that turns on the proper construction, not of the domestic legislation (the Value Added Tax Act 1994, schedule 9, group 6, item 2) but of the Directive 77/388/EEC (the Sixth Directive) Article 13A.1(j). The Commissioners of Customs and Excise decided that VAT was chargeable on the tuition in question and issued an assessment. The respondents appealed against the decision and the assessment, and the Edinburgh VAT and Duties Tribunal (the Tribunal) allowed the appeal. The Commissioners of Revenue and Customs (the Commissioners) have in turn appealed to this Court.

The facts

[2 ] The parties presented to the Tribunal a Statement of Agreed Facts, which is set out at pages 3 to 6 of the Tribunal's decision. For present purposes it is sufficient to record only certain facts drawn from that Statement.

[3 ] The respondents, Empowerment Enterprises Limited, are a company incorporated under the Companies Acts, which was incorporated in about October 2002. The respondent company is, and has been since 1 February 2003, registered for VAT purposes. It has since that date traded as the Upledger Institute, and is engaged in the provision of training courses in Craniosacral Therapy.

[4 ] Prior to 1 February 2003 Mr John Page, who is a director of the respondent company, was registered for VAT purposes as a sole trader. He had been so registered since 1 June 1994. During that period he carried on a business of the same nature under the same trading name.

[5 ] The following details about the way in which the respondents operate are agreed.

(i) Mr Page is a director and employee of the respondent company.

(ii) There is no written agreement between Mr Page and the respondent company.

(iii) Mr Page is the only permanent member of the teaching staff of the respondent company.

(iv) Occasionally additional teaching staff are required to provide tuition, and are engaged as employees of the respondent company to do so.

(v) The tuition supplied by the respondent company is provided by Mr Page and other members of the teaching staff.

(vi) Students who receive tuition are invoiced by the respondent company.

(vii) Mr Page does not invoice the respondent company.

(viii) Payments made by students in settlement of the respondent company's invoices are deposited in the respondent company's bank account, and the money is treated as income of the respondent company.

(ix) All overheads and running costs are incurred by the respondent company and recorded through its books and records.

The domestic legislation

[6 ] Section 31 of the Value Added Tax Act 1994 provides inter alia that:

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

Schedule 9, group 6, item 2 is in the following terms:

"The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer."

[7 ] It is common ground that, if the matter fell to be judged by the application of the domestic legislation, the tuition supplied by the respondent company through Mr Page and other teachers employed by the company would not constitute an exempt supply, because he and they are not "acting independently of an employer".

The Sixth Directive

[8 ] The respondent company maintains, however, (1) that the domestic legislation does not accurately transpose the corresponding provision of the Sixth Directive, namely Article 13A.1(j), and (2) that on a proper construction of that provision of the Directive the tuition supplied by it is an exempt supply. The Commissioners dispute those propositions, but do not dispute that, if the respondents are right on those matters, the Directive has direct effect, and the tuition in question is therefore an exempt supply.

[9 ] Article 13A of the Sixth Directive is headed "Exemptions for certain activities in the public interest." Paragraph 1 then begins:

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse".

There then follow a number of sub-paragraphs describing exempt activities. The one which is of direct relevance to the present case is sub-paragraph (j), which is in the following terms:

"tuition given privately by teachers and covering school or university education".

[10 ] It is not suggested that there is any difference in meaning between the phrase "in a subject ordinarily taught in a school or university" in Schedule 9, group 6, item 2, and the phrase "and covering school or university education" in Article 13A.1(j). It is common ground that the tuition in question in this appeal falls into that category. The issue in the appeal is therefore confined to the proper construction of the phrase "tuition given privately by teachers".

Submissions for the appellants

[11 ] For the Commissioners, as appellants before this court, it was submitted that, although there was no jurisprudence of the European Court of Justice (ECJ) on the meaning of Article 13A.1(j), there was guidance on the proper approach to the construction of Community provisions in general, and exemptions in particular. First, it was settled law that the wording used in one language version of a Community provision cannot serve as the sole basis for the interpretation of that provision, or be made to override the other language versions in that regard; in the event of divergence between versions the provision in question must be interpreted by reference to the purpose and general scheme of the rules of which it forms part (Institute of the Motor Industry v Customs and Excise Commissioners [1998] STC 1219 at paragraph 16). Secondly, exemptions fall to be construed strictly, since they form exceptions to the general principle that turnover tax is levied on all services supplied for consideration by a taxable person (Institute of the Motor Industry, paragraph 17; Gregg v Commissioners of Customs and Excise [1999] STC 934 at paragraph 12; Hoffmann [2004] STC 740, per Advocate General at paragraph 28). The concepts used in Article 13 are independent concepts of Community law designed to promote harmonisation; however, they provide exemption not for every activity performed in the public interest but only for those listed and described in great detail in the Article, mostly for organisations whose activities are directed to non-commercial purposes (Hoffmann, paragraph 30).

[12] Turning to the wording of sub-paragraph (j), counsel for the Commissioners submitted that it was the most restrictively expressed exemption contained in Article 13A. It was concerned with "tuition", which had to be given "by teachers" and "privately". It thus defined by whom the tuition must be given, and how it must be given, to fall within the scope of the exemption. Unlike some other sub-paragraphs (e.g. (c)), sub-paragraph (j) conferred no discretion on the Member State as to how the scope of the exemption was to be defined. Unlike certain other sub-paragraphs (e.g. (m) and (q)), it was not confined to non-profit-making or non-commercial entities. Comparison with sub-paragraph (i) was instructive. That paragraph also dealt with education, indeed was the main education exemption. It was of broader scope, encompassing education other than education of the same sort as school or university education. It covered education provided by public law bodies, and also education provided by other organisations defined by the Member State as having similar objects. The power conferred by Article 13A.2(a) on Member States in granting exemption to non-public law bodies to impose conditions prohibiting the making of profit, the distortion of competition and the like applied to the sub-paragraph (i) exemption, but not to the sub-paragraph (j) exemption.

[13 ] Counsel submitted that there were three possible views of the content of the word "privately" in sub-paragraph (j). First, it might be intended to contrast the tuition to which the exemption applied with tuition supplied in the public sector. Secondly, it might be intended to denote tuition given by means of direct contact between the student and the teacher, in contrast with distance learning. That had been the meaning accepted by the Tribunal (decision, page 13). Thirdly, it might be intended to connote that the tuition was given by the teacher in a personal capacity, and not on behalf of any other body or organisation.

[14 ] Counsel submitted that the first possibility should be rejected. It had a superficial attraction. Public sector bodies were specifically mentioned in sub-paragraph (i). But, sub-paragraph (i) also covered private sector bodies in so far as the Member State exercised its discretion to include them. It would be odd if sub-paragraph (j) then exempted all private sector tuition (in the restricted school/university category) without reference to the exercise of any discretion by the Member State. It would also be odd if sub-paragraph (j) exempted all such private sector tuition but did not include the supply of service and of goods closely related thereto, as sub-paragraph (i) did.

[15 ] Counsel submitted that the second possibility should also be rejected. It was hard to discern any rationale for exempting tuition given by a teacher face-to-face with the student, but to exclude from the scope of the exemption tuition given from a remote location. At the time when the Directive was made in 1977, distance learning by means of the internet was not available. That made it even less likely that the intention was to treat distance learning differently from face to face tuition. This interpretation also left an inelegant overlap between sub-paragraphs (i) and (j).

[16 ] The third possibility was, in counsel's submission, the correct construction of the word "privately". What was exempt was tuition given by a teacher acting on his or her own behalf, in a private or personal capacity, and not as the agent or employee of a body or organisation which was the supplier of the service. That made sense of the relationship between sub-paragraphs (i) and (j). On that view there was no overlap between them. Sub-paragraph (i) dealt with public sector bodies, and private sector organisations defined by the Member State. Sub-paragraph (j) dealt with individual teachers giving tuition in a personal capacity. Some support for that interpretation of "privately" could be found in Ellicott (VAT Tribunal Decision 11472, 5 October 1993).

[17 ] Counsel also sought to support that construction of sub-paragraph (j) by reference to other language versions of it. He laid before us the following versions:

French:	"les leçons données, à titre personnel, par des enseignants et portant sur l'enseignement scolaire ou universitaire";
Italian:	"le lezioni impartite da ensegnanti a titolo personale e relative all' insegnamento scolastico o universitario";
Spanish:	"las clases dadas a titulo particular por docentes y que se relacionen con la enseñanza escolar o universitaria";
Dutch:	"privelessen die particulier door docenten worden gegeven en betrekking hebben op het school of universitaire onderwijs";
German:	"den von Privatlehrern erteilten Schul-und Hochschulunterricht".

Counsel submitted that the wording of those versions supported the construction of the exemption as applying only to tuition given by teachers acting in a personal capacity.

[18 ] Counsel for the Commissioners cited three cases which dealt with aspects of the construction of Article 13A, but ultimately submitted that they afforded only limited assistance in construing sub-paragraph (j). Gregg v Commissioners of Customs and Excise (supra) was concerned with sub-paragraphs (b) and (g). It was held that the words "establishment" and "organisation" in these sub-paragraphs were broad enough to include natural as well as legal persons. The Advocate General, at paragraph 29 of his opinion (page 945 e-g), referred to the general principle of tax neutrality, in accordance with which supplies of the same kind should in principle be taxed in the same way, but observed:

"Of course the principle of neutrality can in no circumstances constitute the basis for an interpretation contra legem of the provisions in question."

The court held, however, (at paragraph 20 of its judgment, page 950) that:

"The principle of fiscal neutrality precludes, inter alia, economic operators carrying on the same activities from being treated differently as far as the levying of VAT is concerned. It follows that that principle would be frustrated if the possibility of relying on the benefit of the exemption provided for activities carried on by the establishments or organisations referred to in article 13A(1)(b) and (g) was dependent on the legal form in which the taxable person carried on his activity."

Ambulanter Pflegedienst Kügler GmbH v Finanzamt für Körperschaften I in Berlin [2002] ECR I-6833 was concerned with Article 13A(1)(c) and (g). Sub-paragraph (c) exempts "the provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned". The Court repeated what was said in paragraph 20 in Gregg, and held on that basis that the exemption applied to the provision of care of a therapeutic nature by a capital company running an out-patient service under which care was provided by qualified nursing staff. Counsel accepted that the circumstances of Kügler were closer to those of the present case than were those of Gregg, but nevertheless submitted that they were distinguishable because sub-paragraph (c) contained no such concept as "given privately by teachers" which, in sub-paragraph (j), should be construed as expressly dictating the form of the persons carrying on the exempt activity, and thus overcoming the presumption of fiscal neutrality. Hoffmann (supra) applied the ratio of Gregg to sub-paragraph (n). It was held that soloist musicians could be regarded as "other cultural bodies". Counsel, however, referred to passages in the opinion of the Advocate General in which he expressed the views (1) that sub-paragraph (n) does not treat all taxable persons equally, benefiting only certain taxable persons; that it was thus at odds with the principle of fiscal neutrality; and that that principle is not always the deciding factor (paragraph 60); and (2) that in any event that principle does not preclude a difference of treatment between activities that are similar, but not the same (paragraph 61).

[19] In summary, the submission of counsel for the Commissioners was that while in general the principle of fiscal neutrality meant that the precise legal form adopted by a supplier of services did not matter, and that an exemption should prima facie be construed in a way which accorded with that principle, the application of the principle could be overcome if the wording of the provision made it clear that an exemption was available only to a supplier operating in a particular form. In the case of sub-paragraph (j), the words used - "tuition given privately by teachers" - made it clear that the exemption was available only where tuition was given by teachers acting in a personal or individual capacity, and not available where the tuition, albeit given by teachers, was given by them on behalf of some other person or body, such as an employer. That interpretation of the wording of the English version of sub-paragraph (j) was strongly reinforced by consideration of the other language versions. It was also consistent with a coherent scheme in which sub-paragraphs (i) and (j) did not overlap. The wording of sub-paragraph (j) thus demonstrated that, notwithstanding the principle of fiscal neutrality, the exemption was not intended to be available to organisations such as the respondent company, which provided tuition through employed teachers. So to construe sub-paragraph (j) was in accordance with the principle of strict construction of exemptions. To construe it as contended for by the respondents would give it much wider effect.

Submissions for the respondents

[20 ] Counsel for the respondents began with certain general submissions. He emphasised that VAT is a turnover tax; it focuses on the transaction, not the identity of the supplier. The fact that VAT is a turnover tax explains the principle of fiscal neutrality. Supplies of goods or services which are the same should be treated as the same for VAT purposes. What matters is that the transactions are the same, not that the suppliers are transacting in the same form. While the principle of fiscal neutrality draws a line between the same and similar, in doing so it concentrates on the transaction. Transactions which are the same should be treated in the same way. Differences relating to the identity or form of the supplier do not reduce transactions which are the same to mere similarity. Such differences are irrelevant. It is not disputed that the respondents are supplying services which would be the same if they were supplied by individual teachers. The Commissioners' only complaint is that the respondents' services are provided by a company, not by individuals.

[21 ] Counsel submitted that certain of the sub-paragraphs contained in Article 13A.1 did specify the identity of the supplier as part of the definition of the scope of the exemption (e.g. sub-paragraphs (a), (c), (f), (g) and (h)), but others, including sub-paragraph (j), did not. A distinction was to be drawn between the person who supplied tuition, as a service, and the person who actually gave the tuition. The respondents were suppliers of tuition services, but it was Mr Page and the other teachers employed by them who "gave" the tuition. The exemption created by sub-paragraph (j) was only available when the tuition was given by teachers, but it was not confined to cases where the teachers who give the tuition are also themselves the suppliers. The supplier need not be a teacher, so long as the tuition was given by a teacher.

[22 ] Counsel recognised, however, that one of the critical words in sub-paragraph (j) was "privately". Although the Tribunal had found in the respondents' favour on the view that "privately" connoted face-to-face tuition, as distinct from distance learning, counsel did not seek before us to support that view. Rather, his submission was that "privately" connoted what he described as "legal or physical specificity". As we understood the submission, it was that there had to be some contractual or other transactional link between the supplier of the tuition and the student which meant that the tuition was supplied to the student, as distinct from being made generally available in circumstances which enabled the student to gain access to it. It was not necessary that the tuition be supplied to a single student; tuition could be supplied to a group, but still be supplied to the members of the group privately. Tuition, on the other hand, in a form such as a public lecture was not tuition given privately, even if those attending the lecture were charged an admission fee. Counsel submitted that we should reject the Commissioners' submission that "privately" connoted that the tuition was given by the teacher in a private, personal or individual capacity. The more natural word to convey such a meaning would be "independently" (cf Article 4 of the Directive).

[23 ] It was wrong in principle and on authority, counsel submitted, to treat sub-paragraph (j) as focusing on a particular type of supplier. In Kügler, at paragraphs 26 and 27, the court pointed out that Article 13A.1(c) defines the exempt transactions by reference to the nature of the services supplied without mentioning the legal form of the person supplying them, and that on a literal interpretation the provision does not require the medical services to be supplied by a taxable person endowed with a particular form in order for them to be exempt.

"Just two conditions need to be met: medical services must be involved and they must be supplied by persons who possess the necessary professional qualifications."

That was so despite the fact that a company cannot possess professional qualifications. That interpretation was not contradicted by the need for strict interpretation of exemptions (paragraph 28). The same approach applied to sub-paragraphs (g) and (h) (Kingscrest Associates Ltd v Commissioners of Customs and Excise [2005] ECR I - 04427 paragraph 34). It also applied to sub-paragraph (j). If there were competing possible meanings for "privately", it was necessary to accept the one which was consistent with the principle of fiscal neutrality and the jurisprudence of the ECJ. There was neither authority nor principle in favour of the view that sub-paragraph (j) activity required to be on a small scale. When the Directive meant to deal with small-scale activities, it said so (cf Article 24). There was no need for the exemption to be construed particularly narrowly; the interpretation had to be consistent with the objectives pursued by the exemptions and had to comply with the requirements of the principle of fiscal neutrality (Kingscrest, paragraph 29). The principle of fiscal neutrality pointed to the irrelevance of the legal form of the supplier. If the language of the exemption admitted of two possible interpretations, the one which regarded the legal form of the supplier as irrelevant must be preferred.