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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Edinburgh's Telford College v Customs and Excise [2005] UKVAT V18913 (21 January 2005)
URL: http://www.bailii.org/uk/cases/UKVAT/2005/V18913.html
Cite as: [2005] UKVAT V18913
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18913
Taxable persons – Further Education College – whether acting as a public authority or under private law regime – EC Sixth Directive Art 4.5 Input Tax – application of Lennartz to a partially exempt trader – fair and reasonable attribution.
EDINBURGH TRIBUNAL CENTRE
EDINBURGH'S TELFORD COLLEGE Appellant
- and -
Tribunal: (Chairman): T Gordon Coutts, QC
(Members): Mr K W Pritchard, OBE., BL., WS
Dr Heidi Poon, CA., CTA
for the Appellant Colin Tyre, QC
for the Respondents Dr Paul Lasok, QC
© CROWN COPYRIGHT 2005.
Introductory
The dispute in this appeal arises from the rejection of a voluntary disclosure by the Appellant for repayment of input tax of £383,669.08 in relation to the construction costs associated with a new College Campus which commenced in or about October 2002.
Parties were ably represented by Senior Counsel. The only evidence apart from the written material produced to the Tribunal, came from Mr Adair, who had the job title of New Campus Project Sponsor having been formerly Director of Finance of the Appellant. From the evidence and the documents, the factual position in this appeal was reasonably clear and non-contentious.
Contentions of Parties
The Appellant contended that it was entitled to the full and immediate recovery of input tax on the said construction costs on the basis of the decisions of the European Court of Justice in Case C-97/90 Lennartz, Case C-269/00 Seeling and the Respondents' Business Brief 22/03 dated 18 November 2003, which acknowledges that the 'Lennartz mechanism' will apply where at least part of the input tax on construction services were incurred before 9 April 2003. These cases are discussed below.
It is not disputed that the costs of construction services were incurred by the Appellant well before the qualifying date of 9 April 2003, or that the Appellant is entitled to apply the 'Lennartz mechanism' in its recovery of input tax related to the said costs.
There was dispute about the application of the 'Lennartz mechanism' to a partially exempt supplier. In Lennartz and Seeling, the taxpayer in both instances was a fully taxable supplier. The 'Lennartz mechanism' allows a taxpayer to treat VAT incurred on an asset as business input tax, even when that asset is to be used for both business and non-business purposes. Output tax is charged on the deemed supply of the asset in relation to non-business use in subsequent years. If the taxpayer makes fully taxable supplies, he is able to recover the additional input tax related to the non-business use of the asset upfront, with obvious cash flow advantage. There appears, however, to be no precedent relating to the application of 'Lennartz mechanism' to a partially exempt supplier, nor has the particular question put to the Tribunal been litigated.
For VAT purposes, the income of the Appellant is presently classified into business and non-business, at 20% and 80% respectively. Business income is further split between taxable and exempt supplies at a ratio of 10% to 90%. The non-business income is primarily grant income from the Scottish Further Education Funding Council.
While it is not disputed that the Appellant is entitled to apply the 'Lennartz mechanism', the Commissioners' decision was that the Appellant is not entitled to the full recovery of input tax. The additional input tax recoverable under 'Lennartz mechanism', according to the Commissioners, is subject to the restriction of the Appellant's partial exemption ratio of 1 to 9. Even with the 'Lennartz mechanism', the recovery of input VAT allowed by the Commissioners was restricted to 10% of the total £383,669.08.
In the Appellant's appeal against the Commissioners' decision, the Tribunal was asked to determine two issues. Firstly, the Appellant contended that it was entitled to the immediate and full repayment of input tax on the said construction costs. With reference to EC Sixth VAT Directive, article 4(5), the Appellant contended that it is a public body governed by public law engaging as a public authority in activities which implement the duties imposed on the Secretary of State (and now upon the Scottish Ministers) by Part I of the Further and Higher Education (Scotland) Act 1992, as amended. The Appellant contended that when engaging in such activities, (hitherto classified as exempt supplies) it is in fact not a taxable person. The significance of this argument is to re-define all the exempt supplies as non-business activities. The Appellant's activities will therefore consist wholly of such non-business activities, and to a small extent, taxable activities such as supplies of catering. In this regard, the Appellant is no longer a partially exempt supplier, and the application of the 'Lennartz mechanism' can proceed as in the cases of Lennartz and Seeling, with the Appellant being entitled to the immediate and full recovery of input tax on the costs of construction services.
Alternatively, the Appellant contended that it is, in any event, entitled to the recovery of a substantially greater proportion of the input tax on the said construction costs than the Commissioners are willing to allow. The Appellant argued that there is an error in law in the Commissioners' application of the 'Lennartz mechanism', in that by restricting the recovery of the additional input tax in relation to the non-business use of the construction by adopting the existing partial-exemption ratio, the Commissioners failed to secure 'a fair and reasonable attribution of input tax to supplies' within the provisions of Sections 25 and 26 of VATA 1994, and Article 17 of the Sixth VAT Directive.
Historical Background
Telford College was originally run, funded and managed by the local authority in the provision of educational facilities, mainly vocational training in the customer area which lay between the top end of school and the bottom end of university. By the Further and Higher Education (Scotland) Act 1992 Telford College, amongst others, was given an incorporated legal status and was funded and managed directly via the Scottish Office.
Section 12 of that Act provides:
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.
(2) A board of management shall have the power –
(a) to provide or secure the provision of further education (within the meaning of section 1(5)(b) of the 1980 Act);
(b) to charge fees for or in connection with the provision by them of any form of further education;
(c) to provide to students of the college such assistance of a financial or other nature (including waiving or granting remission of fees) as they may consider appropriate;
(d) for the purpose of the administration and management of the college, to receive any property, rights, liabilities and obligations transferred to the board under or in pursuance of any provision of this Part of this Act;
(e) to provide facilities of any description appearing to the board to be necessary or expedient for the purpose of or in connection with the carrying on of any of the activities mentioned in this subsection or in subsection (1) above (including boarding accommodation and recreational facilities for students and staff and facilities to meet the needs of students who have learning difficulties and disabled staff);
(f) to supply goods and services;
(g) subject to subsection (7)(a) below and section 18 of this Act, to acquire, hold and dispose of land and other property;
(h) to enter into contracts, including in particular –
(i) contracts for the employment of teachers and other staff for the purpose of or in connection with the carrying on of any such activities as are mentioned in this subsection or in subsection (1) above; and
(ii) contracts with respect to the carrying on by the board of any such activities.
Schedule 2 provides for the status and membership of the Board of Management and specifically provides that the Board is not to be regarded as an agent of the Crown.
In 1999 the Scottish Further Education Funding Council was, by S1 1998 No 2887, formed to act as the funding and managing body. This Council now reports directly to the Scottish Executive's Department of Enterprise and Lifelong Learning. It receives a block grant which it then distributes to 46 Colleges in Scotland. The Council also issues instruction, guidance and advice to the Colleges and monitors College performance.
The Appellant is one of the larger Colleges in the UK. It employs 550 staff, has an annual income level of about £25m and offers a wide range of subjects to about 20,000, mostly part-time, students each year.
In addition to courses designed to enhance the employment prospects of a student the Appellant also has significant activity in catering for students who have learning or physical difficulties. It has a broad curriculum ranging from media and design courses through business studies, beauty therapy, sports, science, languages, construction and engineering amongst other things. The core curriculum levels fall within the Scottish Qualifications Framework levels 4-8. Their courses will be credited by the Scottish Qualifications Authority or by specific industry bodies.
However the Appellant runs various non-core activities offering no qualification, such as Christmas flower arrangement and commercial training courses such as developing computer and similar skills, again with no certificate or formal accreditation. At the other extreme, there is a dance course designed to provide an honours degree accredited by Northumbria University.
The College also seeks to recruit international students and does so.
Another purpose which has been imposed on the Appellant is their position in the Scottish Executive's "lifelong learning strategy". This amongst other things may be seen in the guidance letter from the Minister for Enterprise and Lifelong Learning at paragraph 2 of the 2004-05 letter which states "further education colleges… have a key role to play in helping the Executive to realise its vision of a more inclusive society". Specific funds are allocated by the funding council to "social inclusion". To comply with the allocation the Appellant has made its second corporate objective that of seeking to increase enrolments from local communities with low participation rates in the college activities.
The College thus has income consisting in large measure of a grant but also from "their commercial courses", peripheral activities, and from foreign students. It would appear that students resident in England pay more than Scottish students and are funded by their particular local authority. Students from outwith the EU pay "full cost recovery" which can be as much as £4,500. Full cost recovery is sought from those enrolling for the 'peripheral' courses. Core courses are funded from the grant.
The Appellant is subject to audit by the Auditor General for Scotland who audits the technical correctness of the financial statements and also reports upon value for money achievements. The second main audit is an audit of quality by Her Majesty's Inspectorate for Education of teaching, College facilities and management.
The College has statutory restrictions on property transactions which need the explicit and prior approval of the funding council.
The mechanism of the acquisition of grant is that it is offered to the College and accepted by them by way of a formal agreement between the Scottish Further Education Funding Council and the College. In return for accepting the grant the College agrees to various conditions amongst which are a restriction on using the money for other than the purposes of the 1992 Act.
The main sources of taxable income for the Appellant are the commercial non-accredited one day courses, customised training or consultancy for companies and restaurant income. The latter is also part of the work of students in attendance for courses giving instruction in restaurant work.
The Appellant owns a subsidiary company, Telford Training and Consultancy Services Limited ("Telford Training") limited by guarantee. Telford College and Telford Training were separately registered for VAT purposes until 1 April 1994, when a VAT group was registered with the Appellant as the representative member. The taxable income from the commercial courses noted above is channelled through Telford Training. The profits from Telford Training are covenanted to the College to fund its core activities. The fee revenues from the commercial activities generated through the Company account for 5% of the group's total income, and it is in the College's investment strategy to increase this source of income by a minimum of 10% per annum in the years to July 2007.
The Appellant has no significant private company competition in its core area. It does however have competition in vocational qualifications, in particular hairdressing. In the area of commercial courses e.g. in computer packages competition is significant.
The Appellant's provision of buildings and facilities are spread over several sites. Accordingly a new campus was envisaged. The project for that was of a new build 30,000 square metre campus on a regeneration site in North Edinburgh, to cost about £70m. The scheduled date for completion of construction was November 2004.
The construction of the campus commenced in February 2004. Various legal and professional fees to financial advisers, lawyers, quantity surveyors, and architects, amounting to a total of £2.5 million (excluding VAT) were incurred before the qualifying date of 9 April 2003. The input VAT in relation to these costs in construction services is the sum which is in issue.
The Statutory Framework
The EC Sixth Directive Article 4.5 provides:
"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".
Article 4.5 has been the subject matter of references to the European Court of Justice. Directly relevant are Carpaneto No. 1 [1989] ECR 3233 and Carpaneto No. 2 [1991] STC 205 and Fazenda Publica v Camara Municipal do Porto [2001] STC 560.
In paragraph 17 of the Porto case the Court stated as settled law based on, inter alia, Carpaneto No. 1:
"… that activities pursued as public authorities within the meaning of the first sub-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 economic operators …"
The remaining part of the Court's judgment on this issue reads as follows:
"In the main proceedings, the activity engaged in by Porto, 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 ….
19. In determining whether such an activity is engaged in by Porto as a public authority, it must be noted, first, that this cannot depend on the subject-matter or purpose of the activity (see Carpaneto at 235).20. Similarly, whether or not Porto owns the land on which the activity in 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 private authority.
21. The national court must, in accordance with the case law referred to in paragraph 16 and 17 above, analyze 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 has been 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.
22. The fact that the pursuit of an activity such as that in issue in the main proceedings involves the use of public powers, such as authorizing or restricting parking on a public highway or penalizing by a fine the exceeding of the authorized parking time, shows that this activity is subject to a public law regime.
23. 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 in issue in the light of the criteria adopted by the court …."
First Question for Determination
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.
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.
We record that there was drawn to our attention by the Appellant the Further and Higher Education (Scotland) Bill (as introduced) before the Scottish Parliament was said to be strongly indicative of the Appellant would become subject to a public law regime. It was suggested that this assisted the Appellants' argument based upon the view that the funding arrangements and concomitant obligations would confirm that the current state of matters was that the Appellants were subject to a public law regime. The Tribunal assumes that that was the purpose of reference to the Bill because otherwise the Bill would have been wholly irrelevant since it had not been enacted and its form could change. We did not consider the fact of the Bill being discussed assisted us in any respect.
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 the 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.
It is unnecessary to consider the question of significant distortion of competition since neither party based any reliance upon it but in any event it does not arise since it is not for that reason that the Tribunal holds that the Appellants require to be treated as taxable persons.
The "Lennartz Mechanism"
The application of the Lennartz Mechanism to a partially exempt trader has not, according to the case law cited to the Tribunal, been previously considered.
In Lennartz v Finanzamt München III 1995 STC 514 the taxpayer purchased a car and used it mainly for private purposes and to a limited extent for business purposes. He was found to be entitled to deduct input tax on the car even where it was used initially only to a limited extent for business purposes. He could deduct the entire tax but was subject to accounting for VAT on the private use.
In para 26 of the Court's judgment it said:
It is apparent from the combined provisions of art 6(2)(a) and of art 11A(1)(c) that, where a taxable person acquires goods which he employs partly for private use, he is deemed to effect for consideration a supply of services taxed on the basis of the cost of providing the services. Consequently, a person who uses goods partly for the purposes of taxable business transactions and partly for private use and who, upon acquiring the goods, recovered all or part of the input VAT, is deemed to use the goods entirely for the purposes of his taxable transactions within the meaning of art 17(2). Consequently, such a person is in principle entitled to a right of total and immediate deduction of the input tax paid on purchasing the goods.
Thereafter in Seeling v Finanzamt Starnberg [2003] STC 805 the Court said in its findings:
40. It must first of all be pointed out that it is settled case law that a taxable person may choose whether or not to integrate into his business, for the purposes of applying the Sixth Directive, part of an asset which is given over to his private use (see Armbrecht [1995] STC 997, [1995] ECR I-2775, para 20, and Bakcsi v Finanzamt Fürstenfeldbruck (Case C-415/98) [2002] STC 802, [2002] QB 685, para 25).41. If the taxable person chooses to treat capital goods used both for business and private purposes as business goods, the VAT due as input tax on the acquisition of those goods is in principle wholly and immediately deductible (see, inter alia, Lennartz v Finanzamt München III (Case C-97/90 [1995] STC 514, [1991] ECR I-3795, para 26, and Bakcsi [2002] QB 685, para 25).
42. It follows from art 6(2)(a) and from art 11A(1)(c) of the Sixth Directive that the use of capital goods for the private use of a taxable person or of his staff or for purposes other than those of his business, where the input VAT paid on such goods is wholly or partly deductible, is treated as a supply of services for consideration and is taxed on the basis of the cost of providing the services (see Lennartz [1995] STC 514, [1991] ECR I-3795, para 26, and Bakcsi [2002] STC 802, [2002] QB 685, para 30).
43. Accordingly, where a taxable person chooses to treat an entire building as forming part of the assets of his business and subsequently uses part of that building for private purposes, on the one hand, he is entitled to deduct the input VAT paid on all construction costs relating to that building and, on the other, he is subject to the corresponding obligation to VAT on the amount of expenditure incurred to effect such use.
The Respondents have to a large extent accepted that the Lennartz Mechanism can be applied to construction services on buildings (Business Brief 22/03). They said in that Brief that the Lennartz Mechanism could be applied to any input tax incurred on the services incurred on a building project where the works had started before 9 April 2003. They could not do otherwise.
In other words where the Lennartz Mechanism is to be applied, the taxpayer is entitled to the immediate recovery of the whole input tax. The Business Brief continues by discussing the difficulty in calculating a charge for private use. In arriving at a reasonable value for the annual cost of the private use, it appears that a 20-year period of economic life has been adopted.
Accordingly it does not seem to be in doubt that the Appellant is entitled to recover the whole input tax of the construction costs of its building and to account for the output tax on its non-business use as a deemed supply over a 20-year period.
It did not seem to the Tribunal that any real distinction could be made between private use and use by an exempt supplier and we see no difficulty in applying the Mechanism by substituting use of exempt supplies for private use in the ECJ Decisions.
Second Question for Determination: Application of the Mechanism
It may be that the method of calculation of apportionment could result in in the end of the day the taxpayer 'overpaying' but that is a risk that it must take having opted to pursue the matter by recovering the whole VAT "upfront". The significant advantage this gives is in cash flow, but there may be, as noted, disadvantages by the end of the 20-year period.
The remaining area of dispute is how it would be fair and reasonable to operate the recovery and repayment over the time of use of the campus.
It appeared to the Tribunal that the obvious way to provide a fair and reasonable result would be to treat the construction costs of a new campus as a separate sector.
In a letter from the Commissioners' representatives dated 19 November 2004, it was stated "the Commissioners will be willing to consider a new partial exemption special method which will allow the Appellant to sectorise the construction costs of a new campus, providing always that the Commissioners are satisfied that the proposed new method achieves a fair and reasonable recovery of input tax and for the proposed new method to be approved with retrospective effect".
The Tribunal cannot see how sectorisation could achieve other than a fair and reasonable result given the entitlement of the Appellant to the full deduction of input VAT on the costs of construction services following Lennartz, and any derogation from that entitlement must be both unfair and unreasonable.
Since before us the Commissioners maintained that a different method should apply, or rather that sectorisation did not seem to afford a fair and reasonable result they have in our view been guilty of an error of law. It does seem to us that no Commissioners acting reasonably could have arrived at a view which would have the effect of depriving the Appellant of its entitlement to choose for full deduction and subsequent recovery following Lennartz, and to account for the proportion of use in connection with exempt supplies thereafter. The current partial exemption method was demonstrated to us not to produce a fair result, if applied following the full recovery of input tax Lennartz allows.
We should record that one of the arguments presented for the Respondents depended upon there having been a previous agreement on a special method for this partially exempt trader. We do not see the relevance of that contention. If the previous arrangement failed to take account of EC Case Law or even if the arrangement required in the light of events to be reviewed and that was not done, a previous agreed method adds nothing to the argument or to the elucidation of what in the light of the EC Case Law would be a fair and reasonable attribution now.
If indeed prior communings were to be regarded as providing some form of bar to the Appellants current argument then the Respondents are not in a particularly strong position in the light of the letter of 19 November 2004 containing the quotation above noted.
Decision
We accordingly decided that the Appellant is a taxable person. 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. The precise mechanism and practicalities of that view being implemented will require to be determined between the parties. If they are unable to agree they may of course, return to the Tribunal for a particular ruling on any specific question.
EDN/04/44