United Kingdom VAT & Duties Tribunals Decisions

Robert Gordon University v Customs & Excise [2004] UKVAT V19317 (22 September 2005)

19317

Supply of goods and services - Education - supply of staff and other services to subsidiary company who provided services of education to Scottish Ministers in place of Appellant - contract between Appellant and company for staff and other services - whether standard rated or exempt - VATA 1994 Sch 9 Group 6.

EDINBURGH TRIBUNAL CENTRE

THE BOARD OF GOVERNORS

OF THE ROBERT GORDON UNIVERSITY Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: (Chairman): T Gordon Coutts, QC

(Member): Mr K W Pritchard, OBE., BL., WS

Sitting in Edinburgh on Thursday 22 September 2005

for the Appellant Mr Colin Tyre, QC

for the Respondents Mr James Campbell, QC

© CROWN COPYRIGHT 2005.

DECISION

Introductory

The Appellant ("the University") registered for VAT purposes with effect from 8 January 1996. It is an educational establishment. The present appeal has as the only live issue the question whether what was supplied by the University to Univation Ltd, ("the Company") in terms of an agreement between them was an exempt supply of education or a taxable supply of services and staff. The question before the Tribunal was the proper characterisation for VAT purposes of a supply by the University to the Company.

The Appellants were represented by Mr Colin Tyre, QC and the Respondents by Mr James Campbell, QC. Mr Tyre led evidence from Mrs Briggs the University's Director of Finance and the Company Secretary.

The Tribunal had heard at the first Hearing on 16 February 2004 the evidence, which was recorded in short- hand; a transcript of which was produced and agreed by the parties as being a matter to which the Tribunal could refer and heard submissions.

The Tribunal came to the view at the first Hearing that the supply was one of services which were not exempt. The Respondents appealed to the Inner House of the Court of Session where, we were informed, after some discussion, the Court of consent quashed the Decision we had made and remitted to the Tribunal to make further Findings in Fact and hear further argument on the evidence already before it. No guidance was given to the Tribunal by the Court about any particular matter that was occasioning them difficulty in our original Decision.

In order to assist themselves on this the Tribunal ordered, after a Directions Hearing, that the parties submit to them such agreed Findings in Fact as they could formulate and thereafter to present such argument as they wished. In effect the Tribunal heard a re-hearing of the argument previously presented.

They saw no reason to alter their views but in obedience to the reported wishes of the Court make, of new, Findings in Fact and rehearse the arguments which were presented to them substantially in written form. Resisting the temptation simply to reproduce these written arguments in our Decision we attempt to summarise them.

The Statutory Provisions

These are contained in the Sixth VAT Directive; Article 13A (1)(i) which provides

"Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse

(i) children's or young people's education, school or university education, vocational training or re-training, including the supply of services and goods closely related thereto provided by bodies Governed by Public Law having such as their aim or by other organisations to defined by the Member State concerned as having similar objects

That Directive was translated into Domestic Law in VATA 1994 Section 31 and Group 6 Schedule 9

Group 6(1) provides that the provision by an eligible body of education is an exempt supply

An eligible body is defined in the Notes for the present purposes as including a United Kingdom University.

The definition would exclude the Company and it is accordingly apparent that a supply of education unlike the sale of a tin of beans may have different VAT consequences according to the position of the provider.

Findings in Fact

The Tribunal was invited to adopt the proposed Findings in Fact which are here reproduced. They observe that in relation to Findings in 3, that they would not have thought it relevant to make such Findings but reproduce them as matters of fact on the invitation of the parties despite considering them to be irrelevant particularly in the light of the Respondents concession, below, that no artificial tax avoidance issue arises in this case. How the advice given by accountants has any bearing on the issue defeats the Tribunal. References to certain documents are made in the Findings. They are not reproduced in this Decision, but are referred to only for the sake of brevity.

1. The Appellants ("the University") and the Secretary of State for Scotland entered into an Agreement, dated 11 and 19 November 1996 ("the 1996 Agreement"). The terms of said Agreement are as set out in the copy agreement at pages 52-89 of the Joint Bundle of Documents before the Tribunal.
2. 1 The effect of the 1996 Agreement was that the University undertook the provision of certain nursing and midwifery teaching in North East Scotland, which had previously been carried out "in-house" by the NHS. At the time of the formation of the 1996 Agreement, the Scottish Office did not wish any limited companies involved in the process of the provision of nurse education.
3. 2 The University supplied nurse and midwife training to the Secretary of State for Scotland pursuant to this Agreement from 1996 to 2002.
4. Univation Ltd ("the Company") was formed by the University in 1995, as a wholly owned subsidiary to provide courses primarily to commercial clients.
5. 1 The Company has no employees of its own, but is run by employees of the University. Approximately 20-30 employees are engaged almost full-time on work carried out for the Company.
6. 2 The Company has a Board of Directors comprising the Principal of the University, Mrs Patricia Briggs ("the University's Finance Director, who gave evidence before the Tribunal), the University IT Director, the University's Vice Principal (Professor John Harper), the nurse contract manager and two external members, one from the oil industry and one from the local council. The Managing Director is Vivienne McKinley who has held that post from the Company's inception. She takes primary responsibility for the day to day management of the Company.
7. In 2001, the University decided to construct a new facility to house its Faculty of Health and Social Care (which includes the School of nursing and midwifery). As part of that process, it sought instructions from KPMG "to advise on a VAT efficient structure for the construction and use of the new Faculty …". Certain of that advice is set out in a letter of 19 January 2001, and the advice involved a three Phase structure, of which the second was the Nurses Training Phase.
8. 1 The Nurses Training Phase proposed by KPMG involved the adoption of what KPMG described as "a more VAT efficient structure" for the delivery of pre-registration nurses training than that currently operated by the University. That advice was that the University assign its contract with the Scottish Executive to a wholly owned subsidiary so that the training will be liable to VAT at the standard rate, which would allow the University to recover VAT on related costs and improve VAT recovery on general overhead expenditure.
9. 2 KPMG further advised: (i) that Univation may be a suitable vehicle "as it already provides taxable training"; (ii) that it would "still be necessary to have one or two individuals who are directly concerned in the nursing training contract employed by the training provider"; and (iii) that their understanding was that "the transfer of undertaking legislation requires that all the employees will have to be notified of the changed arrangement".
10. 3 KPMG further advised that on the assumption that all staff remained as employees of the University it would be necessary to draw up contracts between the University and the nurse training provider for the provision of resources such as staff and the use of equipment. They added, ("It is the supply of such resources which would create increased taxable income for the University").
11. 4 Following that decision by the University, the University assigned the 1996 Agreement to the Company with the approval of the Scottish Executive, and entered into a Services Agreement with the Company.
12. The terms of the Deed of Assignation, dated 24 and 27 May 2002 are as set out in the copy Deed at pages 14 to 17 of the Joint Bundle of Documents. The University retained its rights in the Equipment and the Undertaking. These terms are defined in the 1996 Agreement, Document 9, Annex A, paragraph 1.26 and paragraph 10 (pp. 59 and 66-68 of the Joint Bundle).
13. The terms of the Services Agreement dated 5 June 2002 between the University and the Company are as set out in the copy Agreement in Document 6 of the Joint Bundle (pp. 18-39).
14. Despite the terms of the 2002 Agreements, the University continues to hold itself out in certain documents as the provider of the relevant nursing and midwifery courses. See (i) the extract from its website, produced as page 345 of the Joint Bundle of Documents; (ii) the 9 January 2004 press release issued by the University which states "RGU is the sole provider in the North of Scotland for a wide range of pre and post registration nursing courses …" page 450 of the Joint Bundle; and the literature of CATCH (Centralised Applications to Nursing & Midwifery Training Clearing House) and NHS Scotland. The website extract at page 345 describes the role of the Company. NHS Scotland is aware of the arrangement between the University and the Company.
15. At the time of the Assignation, the Scottish Executive was concerned that, from the students' point of view, nothing should change in the provision of the relevant courses.
16. The University and the Company distinguish two different means of delivering services by the former to the latter. Where the Company's contract with its client places students on existing University courses, that is treated as a supply of education by the University. Where the course is designed specifically to meet the needs of a client of the Company, that is treated as a supply of staff and resources by the University.
17. All students attending the courses in question are matriculated students of the University in the same manner as they were prior to the Agreements of 2002. They apply for places through the Centralised Applications to Nursing & Midwifery Training Clearing House (CATCH), as they did prior to the 2002 Agreements. If successful in their courses their awards are made by the University. From the point of view of the students, nothing has changed as a result of the 2002 Agreements. They are still taught the same courses, by the same staff, in the same premises, and receive the same awards as they have received had the 2002 Agreements not been entered into and their perception is that they are trained by the University.
18. The content of the nursing and midwifery courses in question continued to be determined centrally, after the 2002 Agreements, as it had been prior to those agreements.
19. The University undertakes essential quality control measures in relation to the nursing and midwifery courses, as it is the University which makes the awards to the students at the end of their courses.
20. The management of the nursing and midwifery courses is primarily undertaken by the University's Head of School, Jenny Parry, who reports to Professor Harper. Jennie Parry also deals on a day to day basis with the Scottish Executive in relation to the operation of the contract for the provision of nursing and midwifery courses. Since the 2002 Agreements no circumstance has arisen which has necessitated Jennie Parry to refer any issues to the Board of the Company.
21. A written report is prepared for the Board of the Company once a quarter and every six months or so, Jenny Parry, the Head of the School of Nursing and Midwifery of the University attends a Meeting of the Board of the Company to present papers. Jenny Parry does not hold any formal position within the Company and, in particular is not a member of the Board of Directors.
22. If the Scottish Ministers were dissatisfied with the provision of nursing and midwifery education under the 1996 Agreement they would look to the Company for a remedy and not to the University.
23. The Company has a lease of part of the Faculty of Health and Social Care Building on the University campus.
24. The Company makes a profit which is gifted to the University to avoid any liability to tax arising on the profit.
25. The content of the letter of 22 January 1999 from the Respondents' Policy Directorate to the Director of Finance at the Scottish Office Department of Health (Joint Bundle, pages 203/4) was known to the University's Finance Director prior to entering into the 2002 Agreements. The University took into account the contents of the letter and advice from KPMG before entering into the arrangements. Despite the terms of that letter, the University (a) took no steps to ascertain the precise content of the arrangements being discussed herein, and (b) did not discuss the proposed arrangements (which became the 2002 Agreements) with HMC&E prior to entering those agreements.

In addition the Tribunal was addressed on proposed Findings which were not agreed between the parties and invited to determine whether they were prepared to make them. The Appellants suggested additional findings which they said were supported by the evidence of Mrs Briggs. These were:

26. The relationship between the University and the Company operates in practice in accordance with the terms of the agreement (page 16 of Mrs Briggs' evidence).
27. Jenny Parry reports to Professor Harper (finding 12) "as a Director of the Company".
28. The Board and the Company exercises general control and direction over the staff who are providing services under the agreement through its Directors Mrs Briggs (in relation to commercial and financial aspects) and Professor Harper (in relation to academic aspects). 2 and 3 were said to be supported by the evidence of Mrs Briggs at page 17.

The Tribunal agree and make the additional Findings in Fact requested by the Appellant.

Common ground between the parties as disclosed in their argument

The principle of neutrality is critical to the operation of VAT ie tax borne should be recoverable until there is a supply to an ultimate consumer, or a person who uses what is supplied to make exempt supplies. It does not matter how many links there are in the chain. In determining the treatment for VAT purposes of a particular supply and a chain of supply it is necessary to consider each transaction in the chain separately to ascertain objectively what is the nature of the supply. It is not permissible to take a global view and be influenced by the character of another transaction further down the chain. Accordingly the character of a transaction between the University and the Company must be determined without regard to the subsequent transaction between the Company and the Scottish Executive (which is agreed to be a supply of education). Those common principles were derived from BLP Group v C&E Commissioners 1996 1WLR 174, paragraphs 9-12, 29-30 and in the judgment at paragraph 24: C&E Commissioners v Robert Gordon's College 1996 SCHL 6 by Lord Hoffman at 11H-12H. Optigen Ltd v C&E Commissioners ECJ Case C-354/03 Advocate General at paras 27-29.

The exemptions in Article 13 of the Sixth Directive have their own independent meaning in Community Law and must be given the community definition. The terms used to specify the exemptions provided for by Article 13 of the Sixth Directive are to be interpreted strictly since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person. Strict interpretation does not mean that the terms used to specify exemption should be construed in such a way as to deprive the exemption of its intended effect. Belgian State v Temco Europe SA 2005 1CMLR 23, judgment paragraphs 16 and 17.

The Tribunal notes at this stage that the Respondents accepted and still accept that the University and the Company are engaged in economic activities and are making supplies and they do not contend that the correct analysis is that the University is making supplies to the Scottish Executive and that the Company can be ignored. It was accepted that the University was contracted to make a supply to the Company and that the Company was contracted to make a supply to the Scottish Executive and that these contracts are enforceable under Contract Law. The Respondents accordingly conceded that the Tribunal was not concerned here with an artificial tax avoidance scheme.

It might be thought to follow from that concession, made throughout by the Respondents, that something which was not artificial must be real.

The Respondents Argument

On the facts the Company had neither staff nor resources with which to meet its obligations to the Scottish Executive. The Company required to buy-in staff. Of the 3 types of services described in the Agreement of 5 June 2002, the administration services are obliged to be monitored by the University against the appropriate measures adopted by the University and any other appropriate quality assurance requirements of any appropriate body. The additional services are not described. The staff services are no more than the commitment on the part of the University to continue to provide the staff it formerly provided it to implement its original contract with the Secretary of State. The Company has no independent means of exercising the control of the Appellants over University staff and the control provisions have been inserted into the agreement in an attempt to create artificially a supply of staff as opposed to education. The Company cannot exercise any supervision or control in any meaningful sense and this may be contrasted with the situation before the Tribunal in University Court of the University of Glasgow v The Commissioners 29 April 2005; EDN/03/109. There the staff member had his own separate contract with the NHS Trust and the University had no concern with qualifications or the conduct of the member of staff when working for the NHS Trust. The University had no say in actual medical services. On the facts the current agreement between the University and the Company does not alter the substance of what the Appellant is doing and was doing before the agreements, which was providing education and necessary services ancillary thereto. The University now supplies the Company as opposed to the Scottish Executive, what it supplies remains exactly the same, education to a particular group of students.

If there is a single supply by the University or the Company that falls to be characterised by reference to the totality of what is supplied and the only reasonable characterisation of what is supplied is education.

The written contract between the University and the Company does not determine the issue. A contract may be helpful in determining the nature of a supply and is a natural starting point for such an enquiry. It is not the finishing point nor necessarily determinative. Reliance on contractual form may be questioned when the contract is between connected parties who have as one of their common objectives the minimisation of the University's VAT costs see HMRC v Debenhams Retail Plc 2005 EWCA CIV 892 and C&E Commissioners v Reed Personnel Services Ltd 1995 STC 588 pages 591 and 595 and Muys' en De Winter's Bouw v Staatssecretaris van Financien 1997 STC 665. In Belgian State v Temco Europe SA 2005 1CLMR 23 the Advocate General at paragraph 25 opined that the key was to be found in the nature of the transaction and its economic reality regardless of the legal classification attributed to it by the parties. The re-characterisation of what it supplies now is artificial and distorts the VAT system as it seeks to gain a tax advantage. The Tribunal requires to ascertain what is actually being supplied i.e. look at the "economic or commercial reality". When determining the VAT treatment of a transaction one must consider the economic substance (commercial reality) rather than the way in which the transaction is legally structured to ensure neutrality and uniformity in the application of the tax. Only if a transaction is looked at in that way can similar transactions be treated similarly regardless of variations of National Law, specifically to prevent traders from being able to avoid tax by structuring the transactions in certain ways and thereby distorting competition. Support for that approach can be found in First National Bank of Chicago 1998 ECR 1-4387 1998 STC 850 and Rudolph Maierhofer v Finanzamt Augsburg-Land 2003 ECR 1-563 when one has regard to the objective character of the transaction in question (Cantor Fitzgerald 2001 STC 1453) para 33 and when one identifies the commercial reality of the transaction see HJ Glawe 1994 ECR 1-1679.

The Tribunal therefore requires to concentrate on the underlying nature of the activity of transaction in question Card Protection Plan 1999 ECR 1-973; Faaborg-Gelting [1996] ECR 1-2395, Fischer v Finanzamt Donaueschingen [1998] ECR 1-3369. A similar approach has been adopted in the United Kingdom, see Eastbourne Town Radio Cars [2001] STC 606, per Lord Slynn at paras 14-16 approving Reed Personnel Services [1995] STC 588 at 595. Further support is available from British Telecom [1999] STC 758, per Lord Slynn at page 766. Reference is also made to Bophuthatswana National Commercial Corp Ltd [1993] STC 702 at 708 quoted at FDR Ltd [2000] STC 672 at 692. In Beynon & Partners v Customs & Excise Commissioners [2005] 1WLR 86 Lord Hoffman addressed the question before the House on the basis of "the level of generality which correspondents with social and economic reality" (para 31).

The Respondents contend that the Appellant is attempting to deconstruct a single supply into components which has the effect of distorting the VAT system. The core supply to which all the other supplies are integral or ancillary is one of education.

The Appellant's contention that an exemption applies only once at the point of provision of education is incorrect since there is nothing in UK Law or the Directive which suggests that only supplies of education at the end of a supply chain should be exempt. The fact that there is a further supply by the Company of the same service as is supplied to the Company by the University does not alter the supply to the Company as being education when each transaction is considered individually it is apparent that what is being supplied to the Company is education and that is not altered by a further supply of education by the Company to the Scottish Executive. The character of a particular transaction of the chain cannot be altered by earlier or subsequent events – Advocate General in Optigen Ltd v the Commissioners para 27.

The true characterisation of the supply by the University to the Company when all factors are taken into account is education.

Argument for the Appellant

Exemptions under the Sixth Directive must be strictly construed Stichting Uitvoering Financiele Acties v Staatsecretaris van Financien [1989] ECR 1737 para 13. That principle was applied in the context of supplies of education in EC Commission v Germany [2002] STC 982 paras 42-43. A domestic example is Open University v C&E Commissioners [1982] VATTR 29 where the supply of education by the Open University from the supply of services by the BBC were distinguished. That situation is highly similar to the present.

There is in this case a single stage at which teaching takes place and accordingly there should in principle be only one supply of "education" for VAT purposes. The lecturer is only listened to once and is providing the supply for the Company. In principle the same activity should not constitute two supplies. It would offend against the scheme of VAT if the exemption for education were to be applied to a link in the chain other than the one where consideration was paid for teaching. If two transactions could be created from a single act of teaching that would offend against the neutrality principle. When one asks what was being supplied by the University in exchange for the consideration paid by the Company the answer is not education. The Company is not training to be a nurse. Its business activity consists of training others. In order to do so it contracts with the University to provide it with the staff and other facilities. That is a supply of its services in exchange for consideration. It is not a supply of education. The Scottish Executive is providing consideration to the Company for nurses to be trained. The Executive is not the trainer. The Company is the trainer. The Company does not require supplies of education. It requires supplies of staff in the facilities to enable it to train nurses.

The perception of the customer as to who is supplying training is not relevant to the VAT analysis. The question of what is being supplied must be looked at from the point of view of the person receiving the supply and paying for it, in this case the Company. The question is not what do the students receive or who taught the students or who did the students think was teaching them as the Commissioners have argued. The question is what did the Company pay its money to receive and that is the services specified in the Service Agreement.

Examining as the proper starting point the contractual rights and duties of the parties, the contractual background was in the original contract and assignation in the services agreement.

The 1996 Minute of Agreement (the original contract) between the Secretary of State and RGU had two functions: a transfer of undertakings from Secretary of State to RGU as one of the "Providers" of nursery and midwifery education; and the specification of the future rights and obligations of RGU. The significant provisions are:

Clause 1: services to be provided in future – there is reference to Annex B for these, on the terms and conditions specified in Annex A.

Annex A, Clause 1.18: definition of "The Services", again by reference to Annex B. (which definition is used in the Assignation.

Clause 2.1 – obligation on RGU to provide and perform the Services.

Remainder of Annex A – in so far as imposing obligations, concerned with Equipment and transfer of employees to RGU.

For present purposes we are primarily concerned with Annex B, because in 2002 all obligations in relation to provision of a service to the Executive were assigned to Univation. This Annex details the obligations of the Provider to the Secretary of State in relation to provision of courses, recruitment of students etc.

What is assigned by the assignation is the obligation to provide services as defined in Annex A for the purposes of Annex B, and the right to receive payment for these services. This assignation was effective as a matter of law in transferring RGU's rights and duties to Univation. The Scottish Executive was a party to the assignation. Univation has, of course, no staff, but by now everyone knew that there would be an agreement with University. It was not critical to the effectiveness of the assignation that there was no transfer of the undertaking – and no transfer of staff. For present purposes it suffices that there was here an assignation with the consent of the debtor/creditor which was capable of being put into effect, provided that Univation could engage the appropriate staff, and obtain the necessary facilities and equipment. And they knew where these would come from.

In the services agreement the core terms are the following

Clause 2.1: agreement to provide the Services

Definition of Services

Administration Services listed

(No Additional Services.)

Staff Services: RGU to make available such staff as the parties shall from time to time consider appropriate. The context for this is the recital to the Agreement – the reference to the contract with the Scottish Executive, defined.

The terms of the contract make clear that the services were to be provided, and the staff made available, to Univation, and not to any other party. This is a contract which was written for the parties, not for the Commissioners. It was clear to parties what was required in order for the Agreement to be implemented.

It is not contended by the Respondents that what was in fact provided and made available differed from the terms of the Service Agreement. The evidence was that the relationship operated in practice in accordance with the agreement (see proposed additional finding in fact (1) above). The contract may therefore be regarded as affording an accurate description of what was supplied in implement of the parties' respective contractual obligations, namely staff and administrative services, and not education.

The assignation was thus effective to create another link in the contractual chain. The Executive must now look to Univation to fulfil its obligations, and must sue Univation if the terms of Annex B are not met.

In the circumstances there was created another link in the VAT chain. There are 2 supplies, one by the University Dean to the Company and the other by the Company to the Executive under the assignation. While the terms of the parties contract may not be determinative they are of considerable significance. The Decision of the Court of Appeal in HMRC v Debenhams Retail Plc forms an illustration of circumstances in which the contractual analysis was determinative for the VAT Analysis. Mance LJ at paragraph 50 said "the domestic contractual position is not just the starting point but also the finishing point on the Court's hypotheses". There is no reason in the present case to depart from the terms of the parties contractual rights and obligations since the contractual arrangements were neither a sham nor a dissimulation. There was ample evidence from Mrs Briggs and in the documentation that the University supplied staff the administrative services not education to the Company. Examples are:

Both academic and non-academic staff were made available; page 15

If the Scottish Executive were not satisfied in any respect they would look to the Univation Board to improve matters; page 18

In relation to the teaching of nursing and midwifery, as opposed to where a person attended a course already on offer, Univation buys in staff to develop and deliver the provision of education services, as opposed to buying education services; page 20

Supervision and management of services was delegated to the Board of Univation; page 40

The sum paid by the Scottish Executive to Univation is different from that paid by Univation to RGU; the sum paid by Univation is as specified in the Service Agreement; page 43

Univation makes a profit; page 43.

With regard to the Respondents' contention that it is necessary to have regard to "commercial or economic" reality in determining what is truly supplied and that the University has sought "artificially to convert" an exempt supply by the "simple device" of inserting a wholly owned subsidiary into the contractual chain the following observations apply.

In relation to the complaint of "artificiality", it should be observed that the increasing of the University's VAT recovery percentage was not, according to the evidence of Mrs Briggs, the only reason for the use of Univation. Even if it had been, there is nothing wrong with that as such. As has been said in the House of Lords in another context MacNiven v Westmorland Investments [2003] 1AC311 or per Lord Hoffmann: at 335.

"The fact that steps for the avoidance of tax are acceptable or unacceptable is the conclusion at which one arrives by applying the statutory language to the facts of the case. It is not a test for deciding whether it applies or not …. If [tax avoidance schemes] do not work, the reason, as my noble and learned friend, Lord Steyn, pointed out in IRC v McGuckian [1997] 1 WLR 991, 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes".

Applying that approach here, the questions to be answered are: is there a supply by the University to the Company. And if so, is it to be characterised as a supply of education or not? The VAT consequences flow from the answers to those questions and not from the fact that the arrangements were partly driven by a tax avoidance motive. The Scottish Executive were happy with the proposal, so far as its VAT saving was concerned. Pejorative references by the Respondents to "artificially" should be disregarded, instead it is necessary to address the Respondents' reliance upon having regard to "economic or commercial reality".

The Respondents treatment of the expressions "commercial reality" and "economic reality" as if they were interchangeable is flawed. If the true commercial reality of a transaction were different from the terms of the written contract then the commercial reality would prevail. In the present case commercial reality accords with the Appellant's analysis.

The notion of economic reality was submitted to the Court of Appeal in Telewest Communications Plc v the Commissioners [2005] STC 481. Reliance was placed upon artificiality and tax avoidance motivation. Amongst other things Arden LJ at paragraph 82 explained that there was an objection in principle in this field of law to taxing transactions according to their economic reality. The notion of the economic reality of a transaction is antithetical to legal certainty, a principle recognised and applied by the Court of Justice in eg, the Cantor Fitzgerald case. Her Ladyship continued at paragraph 87 to state that the authorities did not support the proposition that the doctrine of neutrality entails a proposition that the Court should treat two separate supplies as a single supply because the suppliers are related parties and the supplies are linked. Economic reality is to be distinguished from the economic neutrality principle of VAT Law. She stated at paragraph 86 "the mere fact that the Court seeks to find the commercial reality of a transaction does not mean that it would seek to apply the economic reality of the transaction. The economic reality of the transaction may have nothing to do with either the essential features of what the parties agreed or the legal structure of their transaction."

In Temco the phase "economic reality" does not appear in the Court's Decision which refers to the "reality of the contractual relations". The Respondents in the present case are attempting to do what was held to be wrong in BLP and in Robert Gordon's College i.e. to have regard to the overall effect of the supplies by the University to the Company and the Company to the Scottish Executive and so take a global view of a chain of supplies. That is erroneous. It is not legitimate to search for some different "economic reality" in order to re-characterise a transaction which was genuine which created enforceable rights and obligations and involved the making of supplies for VAT purposes. As Sir Christopher Staughton said in Telewest at paragraph 33 "the Tribunal should not try to defeat (the transaction) for the good of the Commissioners".

Commercial reality is as contended for by the Appellants. The commercial reality for the Company was that it required to enter into a contract with the University to be provided with personnel and other services which would enable it to fulfil its contractual responsibilities. That it did. It entered into a lease of premises imposed charges and made a profit. The administrative services only arise out of a relationship between the University the Company and did not occur "before".

The control and direction of Univation is not determinative of the characterisation of the VAT supply. Although the Company has no employees it has a Board of Directors, including a Managing Director, and has the services of the staff who perform services and functions. In terms of the Service Agreement direction is provided by the Dean, Professor Harper, and Mrs Briggs. It is of no significance in the circumstances whether Univation has employees of its own or not, there is in place a structure of direction and control which enables it to secure that its responsibilities are met. The evidence to support that proposition is:

Between 20 and 30 people work almost full time for Univation, from the managing director down. (Mrs Briggs also mentioned that there is also a pool of staff within the University which is provided on an "as required" basis to enable Univation to fulfil its contracts); page 5.

The managing director (Vivienne McKinley) takes primary responsibility for the day to day management of the company; page 6.

The Board meets regularly to receive reports including an operational report from the managing director; page 6.

Professor Harper, a director of Univation, is the contracts manager in the eyes of the Scottish Executive; page 17.

Jennie Parry is responsible for the day to day running of teaching. She reports to Professor Harper on the day to day operation of the contract. She attends Board meetings and presents reports to the Board; page 34.

The appeal should be allowed.

Decision

The Tribunal is not moved to depart from the original decision it made.

There was nothing unreal or inessential about any of the features here. There is indeed no artificiality created by the Company structure. The artificiality if any is introduced by the concept of exempt supplies of education being supplied and only supplied by selected "eligible" bodies.

The Tribunal considered the statement by the Commissioners that they did not contend that they were attacking an avoidance scheme to be basic and fundamental. If it is accepted that there was no artificiality about the economic activity said to be undertaken and that supplies were in fact made by the Appellant to the Company and by the Company to the Scottish Executive "artificiality" plays little part in the analysis of the transaction itself.

If by organising transactions in a particular way an overall benefit in relation to taxation can be achieved that does not make these transactions unreal or artificial. "Commercial reality" would demand that the most tax efficient method of operation should be adopted. In any event plenty good sound commercial reasons can be envisaged for a division between the University and the Company. There is significantly an advantage in relation to liability for legal proceedings. The liability of the Company is limited. The liability of the University, probably not. That consideration applies to the whole of the commercial enterprises undertaken by Univation.

Further the Company does not "supplant" the Appellant in the teaching of nursing studies and granting of degrees and plays no part therein. Its function is to provide training to the Scottish Executive in fulfilment of the contract with the Scottish Executive. It also provides intellectual services to other entities as and when required.

The analysis of the Appellant is in our view correct. We follow their argument. There is no supply of education to the Company. In other words the supply to the Company is that for which they pay their consideration, which is administration and staff services. The supply by the Company to the Scottish Executive, although not strictly relevant, is of training and would be and is education albeit that has no tax effect since the Company is not an eligible provider. It might even be said that constructed in this way the true concept of VAT is followed through. The University supplies a taxable service, the Company supplies a taxable service. These are not distorted by any considerations of exempt supplies and the Company accounts for the VAT it receives and deducts the VAT it pays. Nothing is artificial in that.

Result

In the result the Tribunal answer the issue which was put before it by determining that the supply by the Appellant to the Company was a taxable supply of administration and staff services and was not an exempt supply of education.

Counsel stressed to the Tribunal that the consequences of such a decision required to be applied and worked out and accordingly it is only to that extent that the appeal is upheld. No determination is made as to amount and if that matter cannot be agreed or resolved parties may apply to the Tribunal for a decision upon it.

No motion was made about expenses.

T GORDON COUTTS, QC CHAIRMAN
RELEASE: 1 NOVEMBER 2005

EDN/02/179