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Birmingham & Solihull Learing Exchange Ltd v Her Majesty's Revenue and Customs [2005] UKVAT V19310 (27 October 2005)

19310

SUPPLIES — Appellant administering and distributing grants on behalf of Learning and Skills Council for England — whether a supply of services to the recipients of the grants and whether such supplies are carried out in the course or furtherance of a business — on the facts, no supply of services to the recipients — appeal allowed

MANCHESTER TRIBUNAL CENTRE

THE BIRMINGHAM & SOLIHULL

LEARNING EXCHANGE LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Lady Mitting (Chairman)

Sitting in public in Birmingham on 4 October 2005

Robert Grierson, of counsel, for the Appellant

James Puzey, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

The disputed decision is that of the Respondents contained in a letter dated 25 October 2004 that the Appellant was making taxable supplies to learning centres in the course of a business and was therefore liable to account for VAT on those supplies. The Notice of Appeal contained a two-fold challenge to this ruling. First, the Appellant's activities were non-profit making services to the community, not amounting to a business and in the alternative, that if they did constitute a business, then the supplies were in any event exempt. I was expressly asked to adjudicate on the first ground of appeal only and not to consider the liability of the supplies – whether they were taxable or exempt. The sole issues before me are therefore whether the Appellant was making supplies to the learning centres and secondly, if so, whether in the course of a business. The Appellant's contention was no to both questions; the Respondents' yes to both.

An agreed statement of facts was put in and oral evidence was given by Mr Tarlok Singh, the Appellant's Finance Manager. The Respondents called no oral evidence.

The Appellant is a company limited by guarantee, incorporated in 1999 and which commenced its activities in August 2001. Its activities have now ceased and it is in the process of being wound up. Its stated object in the Memorandum of Association is "to expand significantly participation in education and training, using public and employer investment to stimulate increased motivation and self investment by individuals in their own skills, qualifications, and career prospects". The agreed description of the Appellant's function is to administer grants given by the Learning and Skills Council for England ("LSC") which is a quango, and to distribute them to local learning centres, all of which make supplies of education. This function is a non-profit making activity and the Appellant is a non-profit making body.

I understand from Mr Singh that the LSC was given government funding to run the "Learn Direct" project which is aimed at providing, free of charge, to 16 to 19 year olds basic learning courses in reading, writing, IT skills, literacy and numeracy. Courses would be provided in approved learning centres throughout the country. The project was to be operated regionally and the LSC, needing a local organisation to promote the scheme in the Birmingham area, contacted the principals of local colleges to seek their views on how the scheme could be operated. They decided to set up an independent company, the Appellant, and many of the college principals in fact either serve or have served on the Appellant's board. The Appellant is what is known in the process as a hub.

Mr Singh said that the Appellant began with a couple of employees, increasing to eight. It employed an executive manager, a development manager, a finance director, staff specialising in quality control, audit control and management information systems and general office help. The arrangements between the LSC and the Appellant are governed by an annually renewable contract and I was referred to the contract for the year to 31 July 2004. The contract is a lengthy document, spelling out in detail the Appellant's obligations to the LSC and the standards to which the LSC expects the Appellant to work and providing for the monitoring by the LSC of the Appellant's activities. The service to be provided by the Appellant is described in the contract (Schedule 1F, clause 6.1) as "the delivery of the Learndirect services specified in the Hub Operation Agreement". The statement of facts expands upon this by describing the contractual obligation upon the Appellant to "select and accredit learning centres, supervise the quality of training provided by the learning centres and allocate funding based on the activities and number of learners attending a given learning centre".

Payment for the services provided by the Appellant to the LSC is dealt with under clause 12.1 in the following terms:

"In consideration of the services to be provided by the contractor (the Appellant) the council will make the payments to the contractor in accordance with schedule 2".

Schedule 2, paragraph 1.2, states "the payments for the services specified in schedule 1F of this contract is subject to an overall maximum value of £6,212,045. In effect, therefore the figure given is the overall amount of the grant income available to the Appellant for that year to distribute amongst its learning centres. The amount of funding varies each year.

The contract contains no provision for the funding of the Appellant's running costs and it was the practice of the Appellant to allocate and retain 10 per cent of the grant monies to meet its costs. This percentage had been agreed by the Board of the Appellant prior to Mr Singh joining the company and he did not know how it had originated but it had remained in place throughout. Mr Singh told me that the percentage slice retained was of no concern to the LSC although they were aware of it, presumably because it would appear in the accounts and audited information submitted to the LSC. The LSC did not apparently have the power to either approve or alter it. Mr Singh described the retention as being a matter between the Appellant and the learning centres, each of whom would be made aware of the deduction at the commencement of their agreements. As the Appellant is a non-profit making body, any of the 10 per cent retention which proves surplus to the Appellant's costs is retained as ongoing working capital. It does not represent profit or reflect a profit motive. On dissolution, any balance of funds still held by the Appellant as working capital, after payment of all its liabilities, will be returned to the LSC or distributed to the learning centres or any other group that has the same objects as the Appellant.

The Appellant's annual accounts give some idea of the financial scale of the operation. For its first year of trading, its grant income from the LSC was £4.7 million. Its administrative expenses were £436,000 and it made an operating deficit of £9,000 converted by receipt of interest to a surplus for the year of £35,000. For the following year, when its grant income was £4.8 million, after administrative expenses of £369,000 it made an operating surplus of £129,000 and an overall surplus of £257,000.

I have so far described the set up of the Appellant company and the arrangement between it and the LSC. I now turn to the manner in which the Appellant conducts its activities and its relationship with the learning centres. As I have said, the role of the Appellant is to distribute LSC funding to individual learning centres. The Appellant does not itself provide education. A learning centre is any accredited centre providing Learndirect courses. Such a centre does not have to be within an existing educational establishment and does not have to operate within a non-profit making organisation. As at 24 January 2002, there were 21 learning centres benefiting from funds distributed by the Appellant. Of these 21, 18 were wholly owned by further education colleges and were non-profit making. The other three centres offered their services with a view to making a profit either as part of another business or independently. I understand that such a privately run centre (subject of course to it being accredited) can be operated by any person or organisation and could be run for the benefit, not only of that organisation's own staff but any member of the local community who wished to take advantage of the courses run.

Mr Singh said that the Appellant does not itself seek out centres to provide Learndirect courses, nor does it advertise its services. When an interested organisation approaches the Appellant, amongst other things, the Appellant must look at the services which the organisation could offer and its location. The latter is important because it is not desirable to have too many centres providing similar courses in one vicinity. Ideally, the courses on offer should be spaced out to serve a whole community and the specified course mix provided would have to be appropriate to the area.

The Appellant then has to satisfy itself that the applicant meets the LSC's criteria for funding. Once so satisfied, the applicant's application is put forward to the LSC who have the power to, and on occasion do, veto the application. Provided the LSC approves it, the Appellant will then accredit the learning centre and enter into a contract with it enabling the centre to access funding from the LSC through the Appellant.

Learning centres forward to the Appellant details of their projected activities for the year to come. The Appellant will submit to the LSC an application for funding based on the activities and an estimate of the funding required. Based on this information and the funding available, the LSC will allocate a budget to the Appellant whose final funding will not be determined until its yearly activity has been audited.

Prospective learners enrol at the learning centres and the learning centres order appropriate teaching materials from the University For Industry ("UFI"). The learning centres report to the Appellant the number of learners and the type of educational activity respectively undertaken by the learners at the learning centre. The Appellant allocates funding to the learning centres according to a set table agreed with the LSC which takes into account the number of learners and the type of learning activity undertaken. UFI will invoice the Appellant for the teaching materials which it has provided to the learning centres on a monthly basis and the Appellant will settle their invoices out of the grant funds from the LSC. The teaching materials will normally consist of software for the direct use of the student.

At regular intervals throughout the year, the Appellant will account to each learning centre for the funds allocated to it by the LSC. Such payment is made net of the Appellant's 10 per cent top slice and the costs of the materials which it has paid to UFI. Mr Singh told us that the monthly payments were in effect payments on account and they would be balanced at the end of each year, with any excess reverting back to the LSC.

The Appellant has to supervise the quality of the training provided by the learning centres, further to which they prepare performance data for submission back to the LSC. Additionally, the LSC appoints, at the end of each year, external auditors to prepare an audit report. The report is provided for and to the LSC but with a copy going to the Appellant.

Submissions

The first question we address is whether or not there was a supply of services by the Appellant to the learning centres. I therefore at this stage address the submissions and my conclusions on this point alone.

It was Mr Grierson's contention that the Appellant provided services to the LSC alone and that it, in effect, did no more than shoulder the administrative burden carried by the LSC of identifying suitable recipients for the distribution of their funds. The Appellant was doing something which the LSC could have done itself but chose to outsource. The government set up the LSC to distribute government funding and it was the duty of the LSC, carried out through the Appellant, to ensure its funds were properly utilised.

Mr Puzey accepted that the onward transmission of an educational grant is outside the scope of VAT but it was his contention that the Appellant made a supply of administrative services to the learning centres, the consideration for which was a 10 per cent retention from the grant. The Appellant, in Mr Puzey's submission does far more than merely pass the money on. It is the means by which the learning centres can access government funds. Without the Appellant, learning centres could not be accredited or receive their funding. To continue to receive their funding, they have to be monitored by the Appellant. They are assisted and advised by the Appellant in making their application. This was a supply of services to the centres.

Conclusions

Neither party took me through the contracts, although Mr Puzey referred to certain individual clauses. I have, however, read through them and made of them the best I can. The Respondents called no oral evidence and specifically, I heard no evidence from any of the learning centres of the service or services which it perceived it received from the Appellant. I have some difficulty in ascertaining the precise obligations of the Appellant to the LSC under the terms of the contract. Clause 4.1 obliges the Appellant to "carry out the services …". Clause 1.7 defines the services to be "as specified in the contract". Clause 6.1 in schedule 1F describes the services to be provided as "the delivery of Learndirect services specified in the Hub Operation Agreement". Clause 2 of schedule 1F defines the Hub Operation Agreement as "the agreement between UFI and the contractor, the terms of which were issued by UFI in August 2002 and entitled "Hub Operation Agreement"". I was given no additional document which appears to match this description. I am not certain, therefore, whether there is a further document which I have not seen or whether that document either is or is incorporated or summarised within Schedule 1F. However, as this would merely no doubt expand upon the obligations of the Appellant to the LSC, it may well not assist in defining the services if any supplied by the Appellant to the learning centres.

Looking at the contract between the Appellant and the learning centres, paragraph 2 sets out the obligations of each party to the other. The only obligation on the part of the Appellant is the payment over of the funding. However, it is clear from the evidence that the Appellant has other functions as well and working from the agreed set of facts, Mr Singh's oral evidence and the contracts, I have identified the following to be the activities which I believe the Appellant undertakes in relation to the learning centres. I have set out each activity with my conclusions beneath it.

(i) To select and accredit learning centres.

Before the LSC can distribute grant funding, the recipient of the funding, the learning centres, must be accredited. Mr Singh's evidence was that the Appellant has to satisfy the LSC that individual centres meet LSC's criteria for the funding and it is only when the LSC is so satisfied that the Appellant can accredit. Accreditation is not therefore a service to the learning centre but the completion of a process carried out on behalf of the LSC to enable the LSC to ensure its funding is being properly directed. I also note that from paragraph 23 of the agreed statement of facts, that it seems to be accepted that the obligation upon the Appellant to select and accredit learning centres is pursuant to the contract between the LSC and the Appellant.

(ii) To submit applications for funding on behalf of the learning centres.

Without hearing any evidence from the learning centres, it is not easy to ascertain precisely what role the Appellant plays in the submission of the applications. I take from paragraph 5(1) of the contract with the learning centres that it is the responsibility of the learning centre to complete its own application forms. These may well be passed to the Appellant and submitted by them to the LSC but this hardly amounts to an administrative service to the centres. Indeed, a reading of 5.1 implies that the submission of properly completed forms is an obligation upon the Appellant imposed by the LSC. It is, in so doing, complying with the requirements of the Council, not serving the centres. I accept the Appellant will check the forms and may assist the centres in their completion, as per Mr Singh's evidence, but this is to enable the Appellant to fulfil its own obligation to the Council in the submission of a properly completed application.

(iii) To gather statistics on the number of learners and types of educational activity undertaken.

This function has nothing to do with the learning centres and is carried out by the Appellant on behalf of the LSC and pursuant to its contractual obligations to the LSC.

(iv) The allocation and distribution of funds to the learning centres

The allocation and distribution of funding is carried out by the Appellant on behalf of the LSC who provide the funds and the authority to distribute them.

(v) The monitoring and supervision of the quality of the training provided by the learning centres.

This is a contractual obligation imposed upon the Appellant by the LSC to enable the LSC to be certain that its funds are being properly applied and utilised. It is therefore an activity carried out, pursuant to contract, for the LSC and is not an administrative service provided to the learning centres.

(vi) Monitoring the health and safety of the learners

This is also a contractual obligation imposed upon the Appellant by the LSC, not a service provided to the centres (paragraph 2, schedule 3).

As I see it, the Appellant was set up to enable the LSC to fulfil its grant distribution function. This appears to be the sole purpose of the Appellant and indeed, now having lost its contract with the LSC, it is being wound up. Any other activity it carries out is derived from this, its principal function, and only enables that function to be properly performed. As Mr Grierson put it, the Appellant is shouldering the burden of the LSC. It is doing on behalf of the LSC and pursuant to contract with the LSC, what the LSC could have done itself but instead decided to contract out. The Appellant is not conferring any additional services on the centres. I conclude, therefore, that the Appellant is not making any supply of services to the learning centres. It follows from this that I need not consider whether any such supplies would have been carried out in the course of business.

There is one further point which was not referred to by either party and upon which I therefore make no ruling or indeed express a view. Both parties seem to have accepted and assumed that the 10 per cent deduction from the grant monies constitutes "consideration". If my findings of fact had been different or if this matter were to go further, I think the parties may wish to address the issue of whether there is a sufficient correlation between a flat rate retention and the value of any services supplied to an individual centre.

The appeal is allowed. Mr Grierson applied for costs, given the non-profit making position of the Appellant. Mr Puzey did not challenge the application and I therefore direct that the Respondents pay the Appellant its reasonable costs to be fixed by a tribunal chairman if incapable of agreement between the parties.

LADY MITTING

CHAIRMAN
Release Date: 27 October 2005

MAN/04/0684