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University of Glasgow v Revenue and Customs [2005] UKVAT V19052 (29 April 2005)

19052

Supply of goods or services – Supply – University Staff made available to hospital trusts so that consultant services be provided – whether exempt or standard rated supply.

Apportionment between business and non-business supplies – whether fair or reasonable.

EDINBURGH TRIBUNAL CENTRE

UNIVERSITY COURT OF THE UNIVERSITY OF GLASGOW Appellants

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: (Chairman): T Gordon Coutts, QC

(Members): Miss Karen Bruce Lockhart, WS

James D Crerar, WS., NP

Sitting in Edinburgh on Thursday 20 and Friday 21 January 2005

for the Appellants Mr Colin Tyre, QC

for the Respondents Mr Andrew Young, Advocate

© CROWN COPYRIGHT 2005.

DECISION

Introductory

The dispute before the Tribunal was, in the first instance, whether certain income obtained by the University from NHS Trusts should be treated in the partial exemption calculation between the parties as a standard rated or exempt supply. The second issue was whether the basis upon which the Commissioners had made the assessment under appeal represented a fair and reasonable apportionment of the University's non-directly attributable input tax between business and non-business activities.

The Tribunal in addition to a number of documents demonstrating the contractual situation between the University, the Health Trust and the individual Medical Practitioner concerned, heard evidence on the first matter from Professor McKillop. In relation to the other matters Mr Rumbles, Tax Consultant gave evidence for the Appellant and Mr W P Hendry for the Commissioners. Parties were ably represented by Counsel.

The Statutory Background

By Article 13A (1)(c) the Sixth Directive provided that Member States should exempt "the provision of medical care in the exercise of the medical and para-medical professions as defined by the Member State concerned".

The United Kingdom has given effect to this exemption in Group 7, Schedule 9, VATA 1994 by exempting as follows:

"1. The supply of service by a person registered or enrolled in any of the following – (a) the register of medical practitioners or the register of medical practitioners with limited registration … …2. The supply of any services or dental prostheses by – (a) a person enrolled in the dentists' register;

Note (2) in group 7 provides that item 1(a) and 2(a) "include supplies of services made by a person who is not registered or enrolled in any of the registers or rolls specified in those paragraph where the services are wholly performed or directly supervised by a person who is so registered or enrolled".

Case Law

The ECJ has held in Kugler (C-141/00, 10 September 2002) at paras 28-31 that the exemption for medical care does not require the services to be supplied by a taxable person endowed with a particular legal form, but that what is required is that medical services are involved and that those services are supplied by persons who possess the necessary professional qualifications.

In Customs & Excise Commissioners v Reed Personnel Services Ltd 1995 STC 588 the High Court considered a case involving the supply of nursing services between Reed and a Hospital. A Tribunal had held that the service which was provided was the supply of nursing staff not nursing services on the facts in that case. Laws J held that, while a simple agreement for the supply of goods or services between two parties would be conclusive of the issue of supply for VAT purposes, where three or more parties were concerned the contractual arrangements need not define and conclude issues arising as to supplies. Where they do not the resolution of such issues remains a question of fact for the Tribunal. An illustration of a different view on facts was cited to us. In Gambro Hospital v the Commissioners a decision of a Tribunal was issued on 4 May 2004 (V18588). That case, although cited to us by the Commissioners as authority for the proposition that there can be an exempt supply by a body which was not a registered medical practitioner, does not detract from the above proposition enunciated by Laws J.

Findings in Fact

Over the course of some years a symbiotic relationship has developed between the University and various NHS Trusts. These arrangements involved the utilisation by the NHS Trusts of academic staff as consultants. The arrangement resulted in the consultant having a foot in both camps i.e. being an NHS Consultant as well as having academic status. It was plainly of advantage, if only for career and status purposes, to the individual, of advantage to the University in obtaining funds and to the Trusts in obtaining the services of distinguished consultants, not on their payroll as employees.

The arrangements varied in individual cases. There was illustrated to us, in the documents, persons who were fully funded by the Trust, persons who were partially funded by the Trust and various divisions of time operating as between academic and Trust duties.

Significantly however so far as the individual practitioner was concerned there were 2 contracts. He had a standard academic contract of employment with the University with all the usual terms. When the University and the Trust wished to bring the above arrangement into play, it was set up by an offer from the Trust to the individual setting out their relationship. The individual accepted the Trust's offer.

That offer and acceptance meant that the individual was appointed by the Trust, not the University, as a consultant. He was on the staff of the Trust. The offer between the Trust and the individual embodied the terms and conditions of his University service contract. The Trust paid travelling and subsistence expenses and might also pay "distinction awards". The appointment as Consultant was said to be unpaid. The direction of activities and the hours worked for the NHS was dictated by the NHS Clinical Manager subject only to the University being satisfied that the total hours were not eating into time which had been arranged as appropriately designated University time between the Trust and the University. In relation to the consultant position disciplinary action was to be taken in the first instance by the Trust but reported to the University for their participation. Matters concerning professional conduct and competence, including a requirement for a current GMC registration, were provided in the contract between the individual and the Trust.

The individual received his academic salary from the University who were awarded funding either in whole or part by the Trust.

Contentions for Parties

The Appellants contended that the supply was properly classified as standard rated. The Appellants cited as persuasive the decision of this Tribunal in Robert Gordon University v C&EC EDN/02/179 No 18541. The supply is of staff who give their service to the Trusts. The University is not in a position to supply medical services, nor is it an employment agency.

It was contended for the Respondents that there were medical services involved here, and these were supplied by persons of the necessary professional qualifications. The Appellant is not a registered medical practitioner but there can be an exempt supply of medical care to a health authority – Gambro Hospital v Commissioners – by an entity which possesses neither professional qualifications nor a G.M.C. registration. The University was able to and was thus supplying exempt services.

Decision on Supply

It did not appear to the Tribunal that on a sensible view of the contractual relations in this case the University were providing exempt supplies. In the first place this is a tripartite arrangement. The relationship between the individual consultant and the NHS Trust is constituted by a contract in which there is an offer and acceptance. The Trust gives the individual the title of consultant, doubtless regarded as having value: whether the Trust pays the individual himself for that, or not, does not seem to the Tribunal to be important. The Trust controls the individual's working arrangements while he is acting as their consultant.

The University has an arrangement, whether spelled out in writing or not, that it will, for the consideration of reimbursement of the individual's salary in whole or in part, permit him to operate as an NHS Consultant. The University is supplying the individual as staff for NHS purposes and as a matter of reality have no concern with what it is that the individual does, nor any concern with any qualification or Registration the individual may require to operate as a Consultant. Such qualifications are not essential for a holder of an academic post. The clinical and academic functions are separate and the University has no say in the actual medical services.

For these reasons and viewing the matter overall as one of reality the University supplies their staff, and their staff supply their services to the Trust. The intervention of the contract between the individual and the Trust, separates the provision of staff and of services. The supply of staff is standard rated and requires to be treated as taxable income in the Appellants partial exemption calculations.

Effect of Decision

As parties recognised since the appeal is to be allowed on the first issue the effect of taxable status will have to be considered and the Tribunal will make no order in relation to the assessment which is inevitably affected by the above decision. On this matter as on the matter following, if parties are unable to arrive at a satisfactory agreement on the figures they may require to return to the Tribunal.

The issue of business and non-business apportionment of input tax incurred by the University

That this issue arises at this stage is the result of a comprehensive reconsideration of the University's taxable status and activities. Hitherto a comparatively simple income based arrangement was agreed. However in the course of reconsideration many more detailed attributions of the University's tax in relation to its activities has been found possible. In the event, without the need to go into minutè detail the parties have been able to agree attribution in the majority of cases. There remains however a residue of activities in which business and non-business activities are so inmixed that a fair and reasonable apportionment requires to be made.

It should be clear at this stage that the Tribunal is not and was not put into the position of being able precisely to determine in detail and on accurate figures the appropriate measure of apportionment.

The contentions of the parties were, broadly put, that the University favoured an apportionment based upon the input tax incurred and its consumption and the Commissioners upon an, albeit modified, income based approach.

Since the matter appears before the Tribunal after an assessment there was a contention that the appeal should be dismissed unless it could be shown that the assessment was not made to best judgement.

We reject that approach at this stage. It appears to us that the Tribunal's task is in the first instance to identify whether a fair and reasonable apportionment has been made upon a particular basis. Best judgement does not arise at that stage.

In broad generality the Commissioners contentions in support of their assessment were that the University's income could be divided into active and passive business income and reflected in any calculation thereafter.

The Appellants contention was that an income based approach was fundamentally flawed and could never apply to a complex taxpayer such as the Appellant. If the method adopted, and sought to be enforced, by the Commissioners were to be upheld it would be based on fundamentally flawed principles. The matter of best judgement does not arise, it was contended, because the first step is to make a fair and reasonable apportionment between the business and non-business activities of the Appellant and, once that is achieved, thereafter to consider any partial exemption method. The Appellants sought findings from the Tribunal upon which a reconsideration of the available facts could be made with a view to providing either an agreed or at least an arguably sustainable result which could be put before the Tribunal if need be.

Relevant evidence for consideration

The University is not a simple trader. It makes supplies which are standard rated, zero rated and exempt. It obtains "income" in various ways including grants for specific purposes from various bodies and individual companies with an interest in research results. It receives funds as above noted from Health Trusts. It has specific chairs and positions independently funded by way, for example, of bursaries and donations.

It has a number of buildings which cannot be allocated to any specific as opposed to general University use which are utilised for various purposes such as provide an infrastructure for supplies which could be standard or zero rated or exempt.

Even a superficial examination of the whole activities of the University leads in our view to a precondition that extreme caution requires to be exercised when classifying funds received by the University as "income".

This appeared to be recognised by the Commissioners' witness Mr Hendry in a letter dated 16 May 2003 in which he said:

"However, I acknowledged that my contention that an income-based method was the most fair and reasonable available was predicated on the fact that non-business and business activities consumed inputs in the same way and at the same rates. It could distort the outcome if I included income from passive non-business activities which consumed minimal inputs in terms of income generation (such as donations and endowments)".

That letter and the Commissioners' contention appears to be predicated upon the way in which a partial exemption method of the determination of attribution had been operated, and accepted.

In an attempt to resolve the difficulty inherent in the income based calculation he proposed dividing the University's income into "active" and "passive" in which "passive" meant total income for assessment purposes and "active" was the deemed business income for assessment purposes; a somewhat complex and confusing non-statutory addition to the necessary calculations.

It is evident, as was argued for the Appellants that there were 2 essential pre-requisites for the Commissioners approach. The first that there was, as a matter of fact, a correlation between the amount used to measure business and non-business income respectively on the one hand and the consumption of inputs for business and non-business purposes respectively on the other, and secondly if there was such a correlation that business and non-business activities consumed the inputs in the same way and at the same rates.

Were inputs consumed in the same way as rates

On that second aspect there was ample evidence before the Tribunal that that assumption was not justified. Examples were given on heat and light. On non-business use the University paid VAT at 5% and not 17.5%. Alterations to listed buildings for non-business use was a zero rated activity and there were 3 buildings in the University which were used only for non-business research. Some of the "income" in the total University income comprises grants for research carried on in those buildings. VAT on the estate costs for those buildings was removed but the "income" funding the entire matter appears in the Commissioners calculation. Clinical research required high levels of funding. That does not necessarily result in higher overheads. Expensive clinical research is often not even conducted on University premises and so is not consuming overheads. However large amounts of income were being incorporated and founded upon to disallow part of the residual inputs.

Accordingly, argued the Appellants, there is no foundation for the express assumption underlying the method set out by Mr Hendry which itself underlies the assessments. We agree with the Appellant's contentions.

Relationship between income and consumption

There was in the evidence so far presented no basis for holding that there was such a correlation. It was not established that the proportion of consumption of inputs for non-business use would rise if the proportion of non-business income rose. Indeed the definition of business income appears to have been adopted by taking the University's total receipts and then deducting certain types of receipts which had been agreed between the parties in 1992 as distortive. That figure had been produced for a specific purpose according to the evidence, that was for the partial exemption calculation according to the University's special methods applicable for the time being.

That figure it appears to us on the evidence bears no relation to "business activities" as envisaged in Section 24(5) of VATA 1994.

It was argued for the Appellant that business and non-business apportionment must be determined before getting to the stage of a partial exemption calculation and the attribution of input tax to a taxable and exempt supplies. That contention was confirmed by the ECJ in EDM and Fazenda Publica v Ministerio Publico, C77-01, 29 April 2004 paragraphs 53, 54 and 73.

We find and accept from the evidence that some of the University's projects are not fully funded externally, but consumption of inputs would be the same whether the funding comes wholly from a Research Council Grant or from a charity or from a number of sources. Human resources are used in some projects to a considerable extent whereas in others equipment is the major resource. Although the income for these activities will be the same consumption will not and there is no necessary correlation between any figure regarded as income and the degree of consumption of inputs.

Decision

We agree that the first stage in arriving at a basis for calculation has to be an apportionment between business and non-business activity. Such apportionment requires to be fair and reasonable. However the fairness and reasonableness of that apportionment is not dependent upon whether the parties like the result in terms of the amount of tax due or reclaimable. To say that any apportionment does not provide the amount of revenue the Respondents would like says very little about the correctness of that apportionment.

We hold that this matter comes before the Tribunal principally upon the question of determining whether the method of apportionment insisted upon by the Commissioners is fair and reasonable. That underlies any assessment. The matter of "best judgement" does at that stage arise. The Tribunal's jurisdiction in our view is unrestricted and requires it to determine whether the assessment issued would demonstrate a fair and reasonable apportionment when applying Section 24(5). The matter is one of principle and we decide, as a matter of principle, that the method and calculations set out in the letter put forward for our consideration by Mr Hendry dated 16 May 2003 cannot be fully supported. We find that there is no room for any invented distinction between "active" and "passive" supplies. The apportionment requires to be achieved in the particular circumstances of this University's trading and take proper account of the matters above noted. While not expressing any concluded view on the whole matter, in the absence of more detailed submissions, it would appear to the Tribunal that prima facie the adoption in this instance of a tax based as opposed to income based calculation would be both fair and reasonable. The amount of tax incurred is certain. The amount of tax which can be attributed is equally susceptible of calculation, and it does not seem irrational to adopt a proportion disclosed over the University's whole activities as between business and non-business activities and apply that to the residual tax which cannot be specifically attributed.

However it may be that, perhaps for ease of calculation, a fairer income based method could be achieved by the parties and they are at liberty to do so. All that we say in the meantime is that we would not be prepared to uphold the assessment made even if we were in error as to the proper classification of Health Trust income.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE: 29 APRIL 2005

EDN/03/109