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Cite as: [2007] ScotCS CSIH_36, [2007] CSIH 36, [2007] STC 1280

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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord Johnston

Lord Kingarth

Lord Penrose

[2007] CSIH 36

XA90/06

OPINION OF THE COURT

delivered by LORD PENROSE

APPEAL UNDER THE TRIBUNALS & ENQUIRIES ACT 1992, SECTION 11

THE HIGHLAND COUNCIL

Appellants

against

A DECISION OF THE VAT AND DUTIES TRIBUNAL RELEASED ON 10 APRIL 2006

_______

Act: Tyre, Q.C.; Biggart Baillie (Appellants)

Alt: Mrs. S. Wolffe; Shepherd & Wedderburn (Respondents)

25 May 2007

[1] The appellants, as local authority, provide a range of leisure facilities at a number of locations within their area. In addition to the appellants' own facilities, there are a number of not for profit community leisure facilities which are supported by the appellants. In order to stimulate use of the facilities, the appellants sell three types of cards, described as "Highlife" cards.

[2 ] The appellants and HMRC are in dispute as to the categorisation for purposes of value added tax of the proceeds of sale of one type of card, the "All Inclusive" card. There is no dispute about the other two types of card. These are the 'Budget' card, which is available without payment to households in receipt of certain State benefits, and which allows recipients to enjoy leisure facilities at a flat rate of 50 p. per activity, and the "Pay as You Go" card, which is available without payment to those under eighteen, in full time education or over sixty, and which allows recipients to enjoy leisure facilities at half the standard price per activity. The provision of these cards does not constitute a taxable supply for value added tax purposes because there is no consideration: Value Added Tax Act 1994 section 5 (2).

[3 ] The All Inclusive card is issued in return for payment in terms of the appellants' standard application form. The form advertises the advantages offered by the card to frequent users of leisure facilities, and states:

"For unlimited access to all leisure

centre run activities

You Pay:

a set monthly amount by

direct debit or equivalent

annual lump sum by cash,

cheque or debit/credit

card"

The category is defined further in these terms:

"ALL INCLUSIVE

This allows unlimited use of all facilities and activities in the scheme during their normal opening hours for individuals or families (up to two adults and dependants under 18 living at the same address) committed to paying an all inclusive fee by direct debit for a minimum of one year. There are some restrictions to All Inclusive use detailed in the terms and conditions above."

So far as is material, the terms and conditions exclude certain specified forms of use of facilities, regulate payment where card holders and non card holders play games together, exclude priority of access to facilities over non card holders, and restrict advance booking of facilities. More particularly, it is provided:

"k) Highland council reserve the right to charge additional fees for selected activities/classes.

p) Cardholder fees are non-refundable.

r) 'All Inclusive' card holders will not be entitled to credit for any part of courses not attended

s) The scheme includes an annual 2 week shut down of facilities. However, if the building is closed for an extended period of emergency repairs then credit will be given for every additional full week closed."

[4 ] The activities available at the facilities were not explored in any detail. The majority of the facilities include swimming pools, and the use of the pools was taken as sufficient illustration of the factual background to the dispute. The supply of facilities for swimming, and similar forms of physical exercise, for a consideration, are exempt in the case of certain qualifying providers: Article 13A (1) (m) of the Sixth Directive and Group 10 in Schedule 9 to the 1994 Act. The appellants do not fall within the scope of the exemption, and such supplies by them are liable to standard rate value added tax. However, tuition in sporting activities, such as swimming lessons, provided for a consideration, are exempt in the case of the appellants: Group 6 in Schedule 9. Typically, therefore, the holder of an All Inclusive card would be able to participate in activities that, if provided for a consideration paid at the time of enjoyment, would attract value added tax at the standard rate or would be exempt from tax depending on the particular category involved. The issue in the case turns on the characterisation of the transaction between the appellants and the All Inclusive cardholder. HMRC contend that the issue falls to be resolved on the terms of the contract between the parties, and that the contract provides a right to enjoy an undifferentiated range of facilities and activities. At the time of payment, nothing was provided that qualified for exemption. The whole consideration was standard rated. The appellants contend that what was provided by them was the use of the facilities; that the use comprised standard rated and exempt activities; and that the exemption for provision of education applied subject only to apportionment of the consideration.

[5 ] The Tribunal preferred the approach of HMRC and refused the appellants' appeal, finding support in particular in Kennemer Golf & Country Club v Staatssecretaris van Financien [2002] QB 1252. The scope of the argument before the Court differed considerably from the argument before the Tribunal. In particular, counsel for the appellants abandoned much of the argument before the Tribunal based on an extensive citation of authorities relating to the distinction between single and multiple supplies for a single consideration, founding his submissions mainly on two cases: British Railways Board v Customs & Excise Commissioners [1977] STC 221 and Mothercare (UK) Ltd v Customs & Excise Commissioners [1993] VATTR 104.

[6] The Tribunal's decision reflected the argument before it. So far as material for present purposes, the decision was:

"Applying the principles outlined in the authorities above cited the Tribunal finds that what was supplied to the participant by the Council was, as contended for by the Commissioners, a single supply of a right to exercise and enjoy the use of the Council's facilities as and when and to whatever extent the purchaser required.

Having regard to the transaction the Tribunal has no doubt that what was sold in consideration for the price was a right. The exercise of that right, given that there may be various tax treatment or various services, being a matter for the customer cannot be pre-determined and since it could not be known what the purchaser would do with his card to attempt to dissect the transaction into unrealistic or at best speculative components would not reflect reality and so would be an error.

The BRB case provides a clear example of the supply of the discount card being related to only one class of service. The Mothercare discount card is in the same position. To attempt to allocate an artificial proportion, which might bear no relation to the reality of the only transaction between the Council and the purchaser, the essential matter, which has to be regarded as artificial, unrealistic and bearing no relation to the reality of the situation. Accordingly, as presently administered, the admirable Highlife scheme requires to be standard rated upon an analysis of the transaction in question and also having regard to the unreality of attempting to sub-divide the single transaction into a 'package' of potentially separate items of standard rated and exempt supplies."

[7 ] In setting out the factual background to his submissions, counsel for the appellants contended that the Tribunal's decision reflected a misconception of the appellants' administrative arrangements. The comments made about the "artificial" and "unrealistic" character of the analysis of the transaction for which the appellants contended reflected an error that was obvious in the brief narrative provided by the Tribunal of the background. The Tribunal stated:

"The annual card made available unlimited access to activities with differing VAT liabilities. The Appellant sought to differentiate these and apportion the annual payment on a broad statistical basis which purported to show.. that the general usage of facilities which could be regarded as exempt in terms of VATA 1994 Schedule 9 could indicate that some 13.37% of Highlife all inclusive cardholders might have participated in activities which fell within the exempt category."

[8 ] Counsel submitted that the Tribunal's comments reflected a misunderstanding of the uncontroversial evidence presented. The appellants' witness, Mr Brian Parker, had explained that the appellants accounted for value added tax for the period in which payment of the price of All Inclusive cards was received. For that period, the appellants' computerised records disclosed the actual use made of the facilities by all holders of All Inclusive cards, analysed by category of use. Thus, in the case of a swimming pool, the records disclosed the number of swimming lessons and other educational activities enjoyed and the number of admissions to the pool for exercise. The appellants then valued the supplies of these activities at the rates published in the current tariffs. That produced a fraction for standard rated supplies and for exempt supplies during the period which could then be applied to the period's cash receipts for the sale of All Inclusive cards to obtain a reliable apportionment. The figure of 13.37% was simply illustrative of the outcome of applying that methodology for a specified period. The approach was not unrealistic, nor was it artificial or unrelated to the realities of the situation.

[9 ] The question for the Tribunal and for the court was expressed in a number of ways, but it was agreed that the formulation adopted by Lord Weir in delivering the opinion of the Court in Ivory & Sime Trustlink Ltd v Customs & Excise Commissioners [1998] STC 597, at page 600, was correct: "the proper question is: what specifically and essentially was the (taxpayer) supplying in consideration of the payment" by the customer.

[10 ] Counsel for the appellants submitted that the answer to that question was that the card was simply a method of payment for the use of the appellants' facilities, both taxable and exempt. Exactly the same services were available to members of the public who did not purchase a card. The only difference was the method of payment. No right was created on issue of the card that the purchaser did not have as a member of the general public. The card did not create any priority in favour of or preferential treatment of the holder. The appellants supplied whatever use of the facilities the cardholder chose to request. While it was difficult to find a short and all-encompassing phrase that reflected the position, in essence what was supplied was whatever of the facilities or activities the cardholder used. Those uses had their natural character, and in particular uses that would constitute exempt supplies if purchased contemporaneously with payment retained that character when enjoyed by a cardholder. In the case of non-use throughout the period covered by the card, there was no difficulty: the appellants would not have made any exempt supply, and the whole payment would be standard rated. In other circumstances, it was a matter of computation how properly to apportion the sum. Counsel then put the matter another way: it was making available the facility for use by the cardholder that constituted the supply.

[11 ] If, contrary to his submission, the card did create a right, on a correct analysis of the transaction, the whole consideration would be taxable at the standard rate, because in that event there would be an immediate service supply even if later there was a use for educational purposes. There would be no element of exempt supply in the purchase transaction itself. But one required to consider the sale of the card and the subsequent use together as elements of a single transaction.

[12 ] Counsel submitted that the approach adopted by the respondents had previously been rejected by the Court: British Railways Board and Mothercare (UK) Ltd. He referred to observations of Lord Denning, M.R.; Brown L.J., and Sir John Penicuick in British Railways Board at pages 590, 597 and 599 respectively, and to observations of the tribunal in Mothercare (UK) Ltd at page 398. The question focused in these cases was the same as he proposed: what was the consideration for payment of the price of the card. That approach required one to look at the transaction as a whole, in particular where it was not known at the initial stage what types of supply would result. The court should ask the same question. The Tribunal had not asked the right question.

[13 ] Counsel submitted that the question did not have to be answered in relation to a particular cardholder. One could identify and characterise the supply when the facilities were used. The Tribunal had relied on Kennemer Golf & Country Club, but the case was not helpful. The All Inclusive card did not confer on the holder any exclusive benefit. That had been a central feature of the case: page 1253, paragraph (3) of the findings. There was a subsidiary issue relating to the non-use of facilities. In the light of the decision at page 1271 of the report, counsel could not argue that the appellants did not make a supply to a person who did not make use of the facilities throughout the currency of the card. But the significant factor was that there was nothing in the decision that supported the respondents' contention that the grant of the right was the supply. The case was concerned with membership of the club, and that was not relevant. No Highlife cardholder was a "member" of any body. He understood that counsel for the respondents would refer to the Tribunal decision in MacDonald Resorts Ltd VAT Decision 19599. But the Court should be aware that that case had been appealed and would itself come before the Court for decision.

[14 ] Counsel summarised his criticisms of the Tribunal's decision as follows:

1. The Tribunal erred in concentrating on the point of issue of the card. That they did so was clear. That was contrary to the reasoning of the Court in British Railways Board which required one to look at the transaction as a whole.

2. The Tribunal considered that British Railways Board and Mothercare (UK) Ltd each related to transactions in one class of goods. That was wrong. Mothercare (UK) Ltd was an example of a case relating to a mix of standard rated and zero-rated goods, and involved two classes of supply accordingly.

3. The Tribunal's criticisms of the appellants' accounting methodology failed to take account of the fact that actual use of the facilities was recorded, and erred in failing to treat apportionment as a secondary stage in the process of accounting for tax. It treated apportionment as determinant of the character of the transaction. On a proper approach to characterisation of the supply, the appellants' analysis was neither artificial nor unrealistic. The appellants supplied the use of the facilities, and that was all.

4. Finally, counsel repeated that the line of authority discussed before the Tribunal, focused on Card Protection Plan v Customs and Excise Commissioners (2) [2001] 1 AC 202, was not relied on in this appeal.

[15 ] Counsel made submissions on the respondents' written submissions that can best be narrated as a response to the respondents' oral argument. Counsel for the respondents submitted that the appeal should be refused. The Court's analysis of the issue in Ivory & Sime Trustlink Ltd showed that the starting point in characterising supplies was the contractual provisions specifying the service provided. The contract was not conclusive. The inferences from the contractual terms and conditions might be displaced by other relevant facts and circumstances. But the starting point was clear. Where the terms and conditions relating to the same class of service in two types of investment vehicle were the same, it was illogical that the VAT treatment should differ. The focus in the present appeal should be the same: the contract between the parties for the supply of services by the appellants. Further, in dealing with that issue, the issue for the Court was whether the Tribunal, properly instructed on the relevant law, could not reasonably have reached the conclusion which it did: Edwards v Bairstow [1956] AC 14, applied in Ivory & Sime Trustlink Ltd at page 598. It was of note that counsel for the appellant did not suggest that that test had been satisfied in the present case.

[16] The test in characterising transactions had been expressed in different terms in the authorities. But it was accepted that the Ivory & Sime Trustlink Ltd formulation was appropriate. One had to look at what was supplied in return for the consideration. It was not proper to concentrate on what was received. Similarly, it was wrong to analyse the question in terms of what transpired after the transaction event. The terms and conditions of the contract on which the issue turned were found in the application form. Those terms and conditions provided the cardholder with an immediate right of access to the appellants' facilities without further payment. The product of the transaction was of a different type from those found in British Railways Board and Mothercare (UK) Ltd. In those cases there was no completed transaction until the card came to be used as part of a subsequent transaction. In the present case, it begged the question to "look at the whole transaction", as counsel for the appellants had argued. One had to identify the transaction. Counsel for the appellants had shifted position on that issue. Before the Tribunal the appellants had argued that the supply in this case was the use of the facilities. When the question arose of the proper treatment where no use was made of the facilities, counsel had reformulated the position: the supply was in making the facilities available for use. But that caused problems when one sought to identify the point of supply. If it was at the point of subscription, there was no means of characterising the supply other than as an undivided right.

[17 ] On a proper view of the contract, an immediate right of access was supplied without further payment. It was immaterial that the word "right" was not used. That did not detract from the contractual analysis. The provisions relating to the other two classes of Highlife card provided a helpful contrast: there was no consideration and no supply at the point of issue of the card. The terms on which later supplies were made were regulated, but there was no relevant transaction unless and until such supplies were made. The "two-tariff" analysis in British Railways Board provided a comparison for the types of transaction in this case, and explained the requirement, in appropriate cases, to look at the transaction as a whole. In that context it was fundamental that there were two stages to the transaction. In the case of the All Inclusive card, mutuality of rights and obligations arose immediately on issue of the card. The holder had unlimited access to the facilities without further payment. The appellants had an obligation to allow such access, if available. The holder's obligation to make payment was immediate. And the payments were not refundable as a matter of right if the cardholder sought to terminate the arrangement. The appellants' revenue from the scheme was guaranteed.

[18 ] A consequence of operating the All Inclusive card scheme was that the provision of some services that in other circumstances would be exempt supplies for tax purposes were provided without attracting the exemption. But that was not irrational or inappropriate. The Card Protection Plan line of authority demonstrated that such a result was acceptable. In the case of composite supplies, the characterisation of a transaction by reference to its principal elements might result in subordinate or ancillary elements being taxed at standard rate when, if supplied separately, they would have been exempt or zero rated. In the present case the contract was the starting point, and the heart of the issue. It was a straightforward mutual contract leading to one possible characterisation of the supply.

[19 ] The respondents' approach did not result in complexity. It accommodated the case in which no use was made of the facilities. It accommodated all degrees of intensity of use. There was no need to look at what the cardholder got. The supply had already been made.

[20 ] Further, the respondents' analysis satisfied the requirement in Apple and Pear Development Council v Customs and Excise Commissioners [1988] ECR 1443 (Case 102/86) to characterise the transaction by considering the relation between payment and supply. Here there was a close and direct relationship between the payment and the rights conferred on the holder of the All Inclusive card. There was no need to consider any more convoluted approach. In evidence before the Tribunal there was a great deal of discussion of the appellants' accounting procedures. But the focus was not on the methodology as such. It was on the appropriateness of relating the transaction with the individual cardholder to the use made of the facilities by others. The accounting treatment was tested in the struggle to find any correlation between the factors used in making the allocation. There was no substantial relationship. In the end the exercise was notional.

[21] The issue for the Court, and the Tribunal, was not in dispute. There was no significant issue of primary fact. The appellants' attack on the inferences drawn by the Tribunal was not expressed in terms of the test in Edwards v Bairstow and that test could not be met. Ivory & Sime Trustlink Ltd illustrated one way in which the decisions of a tribunal might be reviewed. But counsel for the appellant had not addressed any of the tests. The Tribunal had not, in any event, erred in any of the respects relied on. The evidence before the Tribunal demonstrated that while a retrospective analysis might provide some basis for allocation of overall income from cardholders, there was nothing to characterise the transaction when it occurred. The accounting exercise was retrospective. Even then, it failed to establish the requisite direct relationship between what the cardholder paid and what was supplied to him. The Tribunal's approach was fairly robust. But it was correct.

[22 ] Further, the Tribunal had adopted the same approach in the later case of MacDonald Resorts Ltd. It explained its decision in the present case in terms that were instructive. The "division of services according to some calculated formula which did not necessarily apply to any transaction was not in accordance with the reality of the supply" properly reflected the basis of the decision in the present case.

[23 ] Counsel for the respondents made observations on some of the authorities. She accepted generally the formulation of the question in British Railways Board. However, the observation of Lord Denning M.R. at page 592 F - G that a railway season ticket was payment in advance for travelling on the railway "whether the passenger uses it or not" was clearly obiter. The case, properly understood, depended on the "two tariff" characterisation of the transaction, as did the case of Mothercare (UK) Ltd. Further the effect of that case had to be considered in view of the fact that a special retail scheme applied, blurring any possible distinction between elements of the transactions. Since these cases, it had been decided that the grant of a right might be the subject of a taxable supply: Granada Group plc Decision No 14803. Kennemer Golf & Country Club had been tendered purely as an illustration. It answered the problem of non-use. But, on its facts, it was the closest of the cases to the present. The aspect of membership that was relied on did not figure in the present case. But that was not material. In that case, making available the facilities of the club was the critical element of the transaction. The respondents' approach in this case was consistent with that. The appellants' approach could not be accommodated.

[24 ] The Tribunal had not been shown to have erred in any material respect. On the contrary its approach and decision were correct. The Court should in any event be slow to interfere with a decision on fact arising from the Tribunal's evaluation of the evidence before it. The appeal should be refused.

[25 ] Counsel for the appellants commented on the written submissions of the respondents and replied to the oral discussion. Properly, there was no authority for the proposition that the grant of a right might be a taxable supply. In the present case, the terms and conditions applicable to the Highlife cards contained no references to the grant of rights. And the cards did not confer rights. The cardholders obtained no right that they did not have independently of the purchase of a card. The payment simply secured access free of further payment to facilities to which they had rights of access in any event on payment according to generally available tariffs as a member of the public. He submitted that, on a proper construction, what the respondents said amounted to a reversal of the question: asking what the cardholder got for payment instead of what the appellants provided in return for payment. The transaction had to be looked at as a whole, including the actual provision of access and use.

[26 ] In his response to the submissions of the respondents' counsel, counsel acknowledged that he had characterised the supply in inconsistent ways, and sought to clarify the appellants' position in relation to the supply. What was supplied was the use of the facilities. That might have different implications in different circumstances. In some cases, the supply of the use of facilities might amount to no more than allowing people to enter. In others the supplier was involved more actively, for example in providing lessons. That was what made the difference, and affected the characterisation of the service. The case of no use of the card was properly characterised as one in which no actual service was supplied. That did not mean that Value Added Tax was not chargeable. The tax point, in terms of section 6 of the 1994 Act, was the point at which the appellants receive payment. The supply was treated as taking place at that time. If no actual service was supplied, the payment was standard rated. No exempt supply was made.

[27 ] So far as the two tariff cases were concerned, the proper view of Lord Denning's comment was that he considered the season ticket case to be a fortiori of the two tariff examples. The observation supported the appellants and undermined the respondents' approach.

[28 ] The Granada Group plc case was distinguishable. It was a single supply case. It fell into the group of cases dealing with the distinction between single and multiple supplies dating from before Card Protection Plan and it was not surprising that the decision of the Court was as it was. It did not decide that there was a supply of a right separate from admission to the site, with all of its facilities.

[29 ] The parties in this case were not in dispute as to the provisions of the 1994 Act that applied, nor in relation to their construction. Section 1 (1) provides that

"Value added tax shall be charged, in accordance with the provisions of this Act -

(a) on the supply of goods or services in the United Kingdom (including anything treated as such a supply)."

Section 5 (2) provides, so far as is material, that:

"(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;

(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services."

Section 6 identifies the time of supply. In the case of services, the general rule is that supply is treated as taking place at the time when the services are performed: sub-section (3). But sub-section (4) provides:

"If, before the time applicable under subsection..(3) above, the person making the supply.. receives a payment in respect of it, the supply shall, to the extent covered by the.. payment, be treated as taking place at the time.. the payment is received."

Section 4(1) limits the scope of the charge to business supplies, and subsection (2) provides that:

"A taxable supply is a supply of goods or services ... other than an exempt supply."

Schedule 9 to the Act specifies under group headings the classes of goods and services which may be supplies exempt from value added tax in appropriate circumstances.

[30 ] It was agreed that in relation to group 6, education, the appellants are an eligible body, and that accordingly the provision of education, such as swimming lessons, for a consideration, in the course of business operations carried on by the appellants, would in the ordinary course be exempt from value added tax. The superficially simple issue that arose before the Tribunal, therefore, was whether in issuing a Highlife All Inclusive card for a fixed consideration the appellants were, in part, providing education and in part providing other services which fell outwith the scope of the exemption, an issue to be resolved with the degree of particularity derived from the formulation of the general question in Ivory & Sime Trustlink Ltd, namely by a consideration of what, specifically and essentially, were the appellants supplying in consideration of the payment by a cardholder of the annual or monthly price payable in terms of the appellants' terms and conditions of contract.

[31 ] It was agreed that in the present case the tax point was the time payment was received by the appellants. It is clear that, in the case of a family or individual making payment by lump sum, for the minimum period of a year stipulated in the terms and conditions published by the appellants, the components of the activities and uses available which the cardholder subsequently enjoyed during the currency of the card were not known and could not be forecast at the tax point. Where payment was made monthly, information about actual use might in theory be accumulated progressively during the currency of the card. But neither party sought to develop that topic before the Tribunal or before the Court.

[32 ] For the purpose of characterisation of the transaction, it was not disputed that the ability of the appellants to compute on an acceptable arithmetical basis the sums attributable to different classes of service was of little moment. If, on a sound characterisation of the transaction, apportionment was necessary, it would be for the parties in the first place, and, failing agreement between them, for the Tribunal on appeal to determine an appropriate approach to apportionment. In our opinion, it is similarly clear that the mere fact that one might find grounds for objecting to the approach hitherto adopted by the appellants could not determine the question whether in principle apportionment was necessary on a proper characterisation of the transaction. If the current method was unacceptable, again the parties or the Tribunal would determine an appropriate alternative. Counsel for the appellants was correct in submitting that the current accounting procedures and methods used by the appellants could not be determinative of the issue.

[33 ] Before the Tribunal the respondents explored in evidence the practical implementation of the appellants' accounting methodology with a view to demonstrating that there was no relationship between the payment for services and the receipt of the individual or family cardholder's payment. The Tribunal, with little detailed analysis, considered that because use could not be pre-determined in the individual case, an attempt to dissect the transaction into unrealistic or at best speculative components would not reflect reality. It is not clear that the appellants have laid a basis for attack on the Tribunal's findings, given the strictness of the test in Edwards v Bairstow. It does appear that on the appellants' presentation of the position before the Court the accounting methods adopted by the appellants do not assist them in providing a basis for answering the question that arises.

[34 ] The appellants' computerised systems record for each card the particular uses made by the individual cardholder (including the individual members of a family group), throughout the term for which the card is held. The appellants account for value added tax in respect of the accounting period in which payments for All Inclusive cards are received. They have hitherto apportioned those payments as between standard rated and exempt supplies by applying a fraction derived from all recorded uses within the respective periods. On that approach, the reference data used in deducing the fraction may, at best, include some data referable to the customers making relevant payments within the accounting period. But essentially that data must be derived from all uses by all current All Inclusive card holders. The supply of services of all kinds to the whole class of All Inclusive cardholders does not provide a basis for characterising the supply of services to any single member of the class at any given time.

[35 ] Apple and Pear Development Co dealt with a different factual and legal context from the present. But the opinion of the Court is helpful in so far as it dealt generally with the characterisation of the activities of the Council in the context of value added tax. In paragraph 12, the Court stated:

It must be.. stated that the concept of the supply of services effected for consideration within the meaning of art 2 (1) of the Sixth Directive presupposes the existence of a direct link between the service provided and the consideration received."

In the present context, since all relevant supplies by the appellants are taxable supplies unless they are exempt, the requirement for a direct link between the service provided and the consideration provides a helpful starting point. The opinion of the court also illustrates the requirement for that direct link to apply as between the body paying the consideration and the provision of the supply. The reasoning at paragraph 14 indicates that the accrual of benefit to a class in the aggregate is insufficient where different groups within the class may benefit in different ways. The appellants' current accounting methodology proceeds on aggregate values, averaged out among the class of people currently making payments. The connection is broken not simply in terms of differential usage by current cardholders, but by the lack of any relationship between the current subscribers and the constituency of cardholders as a whole.

[36 ] The respondents' approach before the Tribunal appeared to be aimed at showing that, conceptually, it was impossible to use the appellants' accounting information to formulate any relationship between the agreement entered into and the provision of access to and use of the facilities. In our opinion it is not appropriate to approach the issue in that way. Since the appellants' primary accounting records relate to the uses of individual cards, it is not inconceivable that the appellants might compute for each individual cardholder a precise analysis of uses which would enable the character of supplies to that cardholder to be calculated, retrospectively or progressively, over the term for which the card is held. The issue of principle can be tested most rigorously on the assumption that that can be done, and that there would be no mechanical obstacle to the production of precise individual analyses of use after the event.

[37 ] We proceed, then, on the hypothesis that a card is purchased, by lump sum or by instalments, for a period of a year, allowing access to all of the appellants' facilities, and certain related facilities, without further payment. A particular card may not be used at all. It may be used for one class of facility only, for example regular squash games, or regular swimming. It may be used for educational purposes only, for example for swimming lessons for the children under eighteen of a single family unit. Or it may be used for a mixture of games and education. The appellants have leisure centres throughout the region, provided for public benefit by the appellants as regional authority. In the application form produced, fifteen centres are identified in widely spread locations. The facilities are open to members of the public on payment of an appropriate fee in terms of the appellants' published tariffs.

[38 ] At the point of issue, the card is, by definition, all inclusive. One could not pre-determine its actual use positively, or by exclusion of certain classes of use. From the appellants' point of view as suppliers, actual use over the term for which the card remains valid would be unpredictable, depending on purely casual factors, over which they had no control or influence other than that arising from control of numbers taking advantage of number-limited facilities.

[39 ] In our opinion, any attempt to characterise the transaction retrospectively by reference to the uses actually made of the card would be contrary to the approach taken by the Court in British Railways Board: see, in particular, Browne LJ at page 597. The issue turns not on the uses made of the card, but on what the appellants supplied in consideration of the payment. In the hypothetical case of non-use throughout the term for which the card is issued, that is plain from Kennemer Golf & Country Club. In the case of a cardholder who makes use of a wide range of facilities, retrospective analysis could not resolve issues of characterisation, in any practical sense, within the relevant accounting period for value added tax purposes. The pattern of standard rated and exempt activities within the initial accounting period in which payment was made, and for which the appellants would be accountable for value added tax, could not provide a basis for forecasting the pattern of use over the remainder of the year. Some activities would inevitably be seasonal. Some of their nature would be relatively short-term and some of longer term.

[40 ] More particularly, however, one could not define the services provided by the appellants at the point of supply in terms of the uses the cardholder actually, in the event, came to make of the card. A cardholder might, at some stage in the period covered by a card, take a swimming lesson or course of such lessons, if he or she decided to do so and if there was a place on the course for him or her at the time he or she made a non-priority application to join the lesson or course. The appellants could not be said, at the time of receiving payment, to have provided such lessons in consideration of the payment, not least because, on the terms applicable to the card, the appellants reserved the right to remove any activities from the programme at any time, and would not be obliged to provide any lessons until the time of actual provision. Even then, the appellants would be entitled to refuse participation if in the event maximum numbers were exceeded. And the appellants would not know at the material time that in due course the cardholder would seek a lesson. There could be no contractual obligation to provide a swimming lesson until the time the cardholder was admitted to the lesson or course.

[41 ] In making it clear that the appellants' approach was that what was supplied was the use of the facilities, counsel departed from his alternative position that making the facilities available for use constituted the supply. In our opinion, there is no reasonable sense in which any of the facilities, as such, can be understood to be provided in consideration of the payment of sums for issue of Highlife cards. The cards allow the holders the use of all of the facilities, at the holders' choice, on terms which differ from those applicable to members of the public generally. There are minimal restrictions on the use that individual cardholders may make of their cards. These are practical and intelligible. No card holder is entitled to make advance bookings of more than two different sessions of activity on a single day, for example. The facilities are shut for maintenance for certain periods. The cardholder does not have priority over members of the public seeking to make use of the facilities on general tariff terms. Subject to such general qualifications on use, actual use is not regulated as between the appellants and the cardholder by the terms and conditions of issue of the cards.

[42 ] The commercial transaction between the appellants and the cardholder is completed when the payment is made and the individual or family become entitled to cards. Use or non-use thereafter is a matter entirely for the cardholder to enjoy or not at will. The facilities will be provided and maintained, irrespective of such use, by the appellants as local authority. The difference, which provides the basis for characterising the transaction, is that in the case of cardholders the appellants undertake that the facilities will be available for such use as the cardholder cares to make of them without further payment. In our opinion, counsel for the respondents was correct in arguing that the closest parallel to the present case is Kennemer Golf & Country Club. There are obvious distinctions. The advantages supplied for payment were membership of and enjoyment of the facilities provided by an exclusive club, not preferential terms for enjoyment of public facilities. The relevant issue is focused at paragraph 36 of the judgment, and may be paraphrased as whether annual membership fees of a sports club could constitute the consideration for the services provided by the club even though the members who made little or no use of the club facilities paid the full annual membership fees. The question was answered in the affirmative: the necessary direct link between the service provided and the consideration received, applying the test in Apple and Pear Development Council, was established by the legal relationship between the club and the member under which the member paid his subscription and the club made the sports facilities and associated advantages of membership available. Actual use or non-use thereafter was immaterial. The transaction was characterised at the time the legal relationship was created.

[43 ] In the present case the legal relationship governing the cardholders' use of the facilities is created on payment. In our opinion, that can only be characterised as a right to make such use of the facilities operated and made available to the public by the appellants within their boundaries as the All Inclusive cardholder chooses, all without further payment. What happens in fact thereafter is of no relevance. In essence, therefore, in our view, the transaction between the appellants and the cardholder (which can be the only relevant transaction, despite certain arguments which appeared to invite consideration of the relationship between the appellants and the body of All Inclusive cardholders as a whole) is properly characterised as the provision of a contractual right to use the appellants' facilities, for a fixed period, as described in the application form, at the point of payment.

[44 ] We did not understand counsel for the appellants to dispute that, if that were the proper characterisation of the supply, the appeal would not succeed, notwithstanding that the right created included a right to unlimited use of sports and other facilities that would be standard rated in ordinary course, and a qualified right to enjoy educational services which would be exempt from value added tax if supplied directly in ordinary course.

[45 ] In British Airways plc v Customs and Excise Commissioners [1990] STC 643, Lord Donaldson of Lymington MR said of the issue of characterisation that arose in that case:

"The answer to the question which we have to consider - was there one supply or two - may well be one of first impression, but for my part, despite the persuasiveness of counsel for the commissioners, it has proved a lasting and indeed indelible impression. There is a single supply of air transportation."

If it is right to approach the issue as one of impression, the impression we have formed, having considered the written and oral submissions of counsel, is that the transaction is properly characterised as the provision of a contractual right of use of the appellants' facilities, for a fixed period, but indeterminate in its application at the point of supply, and incapable of being understood as a mixed supply of taxable and exempt services at that point. On that basis, also, the appeal must be refused.