United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20122

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Birkdale School, Sheffield v Revenue & Customs [2007] UKVAT V20122 (03 April 2007)

20122

VAT— exemption — private school providing education services to pupils of parents paying fees — scheme for refunding fees where pupils unable to attend classes due to illness, accident, etc — whether additional payment for joining scheme part of exempt supplies of education or separate supplies standard-rated in their own right — held not to be part of exempt supply of education but separate supply — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BIRKDALE SCHOOL, SHEFFIELD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Demack (Chairman)

Sitting in public in Manchester on 29 January 2007

Roderick Cordara QC and Jern-Fei Ng, junior counsel, instructed by Clifford Chance LLP, solicitors, London for the Appellant

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

© CROWN COPYRIGHT 2007

DECISION

Introduction

1. Since at least the 1920s, independent schools such as the appellant, Birkdale School, Sheffield ("the School"), have been operating what they describe as refund schemes whereby parents or others with parental responsibility ("parents") are entitled to repayment of school fees in certain circumstances. And until now, the Commissioners for Her Majesty's Revenue & Customs ("HMRC") have accepted that the charges paid by parents for joining such schemes have been part of the exempt supplies of education schools are making. But HMRC have now reviewed their position and concluded that such schemes are standard rated supplies in their own right.
2. In accordance with that conclusion, by letter to the School of 1 December 2005, HMRC informed it that its fees refund arrangement ("the Scheme") was a separate supply, as it "is taken up at the discretion of parents and is governed by the terms and conditions particular to it". Not surprisingly, the School requested HMRC to review their decision. They did so, and on 7 April 2006 reiterated their view that the Scheme appeared to be a separate supply, saying in their letter "It is possible to take the supply of education without the refund scheme and the refund scheme does not therefore appear to be part of that contract for education", and that "The scheme appears to be a separate product that has its own terms and conditions and for which a separate consideration is paid". The decision on review was preceded by a notice of assessments to VAT in the sum of £20,279, plus interest, covering the accounting periods 03/03, 06/03, 09/03, 03/04, 06/04, 09/04, 03/05, 06/05 and 09/05.
3. The School appeals against both decision letters and the notice of assessments claiming that the position as recognised by HMRC until December 2005 is the correct one. Its appeal is being treated as a test case for all the independent schools operating fees refund schemes.
4. The case for the School was presented by Mr Roderick Cordara QC and Mr Jeru-Fei Ng of counsel, and that for HMRC by Mr James Puzey of counsel. I was presented with a joint bundle of copy documents and took oral evidence from Mr Nicholas Charles Munday, a partner in Clifford Chance LLP who specialises in insurance / reinsurance litigation, and Miss Katherine Chapman, an officer of HMRC. From the whole of that evidence, I find the following facts to have been established.

The Facts

5. The School is an independent day school providing education at primary and secondary school levels and is a registered charity constituted as a company limited by guarantee. To deal with sales of clothing and tuck shop sales, it originally registered for VAT on 1 May 1989 as a partnership, and the registration was transferred to the limited company on 1 April 1993. Prior to the commencement of each school term, and pursuant to a contract entered into between the School and the parents, parents are required to pay fees. The parents and the School make but one written contract in the case of each child. It is entered into on a child first becoming a pupil at the School and is a contract for the provision of education in consideration of the payment of fees. The following are the terms and conditions of contract relevant to the appeal:

"TERMS AND CONDITIONS:

INTRODUCTION

These Terms and Conditions deal with such matters as admission and entry to the School, education and pastoral care, behaviour and discipline, fees, medical matters, important provisions about notice and general contractual matters. The Terms and Conditions reflect the custom and practice of independent schools for may generations and they form the basis of the contract for educational services between the School and Parents.

…

[2] Fee levels will be reviewed each year and there will be reasonable increases from time to time.

[3] … these Terms and Conditions, may undergo reasonable change from time to time.

TERMINOLOGY

"The School" / "We" means the Birkdale School, an independent day School for boys aged 4-18 with a co-educational sixth form.

"The Parents" / "You" means those who have signed the Acceptance Form and/or who have accepted responsibilities for the Pupil's attendance at the School. The Parents are legally responsible, individually and jointly, for complying with their obligations under these terms and conditions.

"The Pupil" is the child who has been admitted to the School at the request of the Parents …

ADMISSION AND ENTRY TO THE SCHOOL

Registration and Admission: Pupils will be considered as candidates for admission and entry to the School when the Registration Form has been completed and returned to us and the Registration Fee which is only returnable if the Pupil enters the School. Admission will be subject to the availability of a place and the Pupil's satisfying the admission requirements at the same time. "Admission" occurs when Parents accept the offer of a place. "Entry" is the date when the Pupil attends the School for the first time under this contract.

Offer of a Place and Deposit: A deposit ("Acceptance Deposit") as shown on the Fees List for the relevant year will be payable when Parents accept the offer of a place. The deposit will be repaid by means of a credit without interest to the final payment of Fees or other sums due to the School on leaving. Until credited, the deposit will form part of the general funds of the School.

EDUCATIONAL MATTERS

Our Commitment: Within the published range of the School's provision, we will do all that is reasonable to provide an educational environment and teaching of a range, standard and quality which is suitable for each Pupil and to provide education to at least the standard required by law, and often to a much higher standard.

FEES

Meaning: "Fee" and "Fees" where used in these terms and conditions include each of the following charges where applicable: Registration Fee, Acceptance Deposit, Overseas Deposit, Tuition Fees, Fees for extra tuition; …

Payment: The Parents undertake to pay the Fees which apply and are due and owing from time to time. Fees are due and payable before the commencement of the relevant school term. If one or more items on the bill are under query, the balance of the bill must be paid.

Refund/Waiver: Fees will not be refunded or waived for absence through sickness; or if a term is shortened or a vacation extended; or if a Pupil is released home after public examinations or otherwise before the normal end of term (provided that the School remains open to a pupil who wishes to stay at school during that period); or for any other cause except at the discretion of the Head or where there is a legal liability to make a refund. This rule is necessary so that the School can properly budget for its own expenditure and to ensure that the cost of individual default does not fall on other Parents. Separate rules (set out above) apply when a Pupil is expelled or removed, i.e. asked to leave.

GENERAL CONTRACTUAL MATTERS

Legal Contract: The offer of a place and its acceptance by the Parents give rise to a legally binding contract on the terms of these Terms and Conditions subject as below.

Third Party Rights: Only the School and the Parents are parties to this contract … The acts and omissions of Parents are binding on the Pupil and vice versa as to any matter of behaviour, discipline and Fees."

6. At the beginning of each term, parents are sent an invoice by the School for the fees due from them for that term. The invoice offers the Scheme to them on an "opt-out" basis, in that the additional charge relating thereto is included in the invoice. Those parents who choose not to participate in it are invited to delete the additional charge from their invoice, and to pay only the resultant fees.
7. The terms of the Scheme are stated to take effect as an amendment and / or variation to clause 62 of the standard terms – see the "Birkdale School Fees Refund Scheme" leaflet, the relevant parts of which are set out in the Schedule to my decision. Whilst there is nothing to prevent the parties effecting a variation of the contract by modifying or altering its terms by mutual agreement, see e.g. Robinson v Page (1826) 3 Russ 114, and the terms of a written instrument may be varied by a subsequent agreement, whether written or oral, (Berry v Berry [1929] 2 KB 316), I find that the standard terms are not varied when parents join the Scheme by paying the fees due from them: there is a separate and additional consideration for the Scheme.
8. In operating the Scheme, the School allows parents participating in it to receive a pro-rata refund of the fees which they have paid if and to the extent that their child is unable to attend classes by reason of illness, accident, contact with infection, or closure of the school or house through an epidemic among pupils for a continuous period of at least five days. Parents who elect to take advantage of the Scheme are required to pay an additional termly charge equal to 1.5 per cent of the fees for which they are otherwise liable. It is the additional charge which forms the subject-matter of the present appeal.
9. The School is able to operate the Scheme by virtue of its having purchased an insurance policy effected through HSBC Insurance Brokers Ltd ("HSBC") under which it is indemnified for any fees it has to refund. The policy provides the right for the insurer to decline to allow the name of any pupil of the School to be included in the cover provided, or to require the removal of his or her name from cover. The School has given an assurance to HSBC that it will refund fees paid in the circumstances prescribed in clause 7 of the policy, i.e. in the event of moneys becoming payable to it under the policy. The insurance policy is underwritten by HSBC (Insurance) UK Limited and the Ecclesiastical Insurance Co. Limited, and all documents are issued in their names. The underwriters charge a premium for the cover effected which is inclusive of any brokerage owed to an intermediary. The School is the insured under the policy and is consequently liable for the premiums due under it from time to time. HSBC introduced the School to the underwriters, and continues to arrange and administer the policy. It receives and retains brokerage out of the premiums due to the underwriters. Premiums under the policy are due and payable on a termly basis. The School is sent a termly return which it completes and returns with a list of pupils and the fees due from the parents. On receipt of each return HSBC (Insurance) UK Limited issues an invoice on which is shown the discount due to the School as its commission on the premiums. The discount is reviewed periodically, for the Scheme is dependent on the level of participation of parents in the Scheme. A pupil participation rate of between 25 and 40 per cent attracts a 15 per cent discount and a rate of 41 per cent or over attracts a 20 per cent discount.
10. No evidence was adduced of any parents being denied access to the Scheme for any reason, and, in its absence, while I accept that there may be circumstances in which the School's insurers may not be prepared to grant cover in relation to individual pupils, I proceed on the basis that essentially the Scheme is of general application.

Submissions for the School

(a) The Primary case for the School – one supply of education

11. Having opened by claiming that the sole objective of parents was to obtain an education for their children, Mr Cordara submitted that HMRC's claim that the School made two supplies for VAT purposes was flawed. He maintained that there was in reality a single supply of education of which the provision of the Scheme simply formed a part. There was no difference for VAT purposes between the nature of the supply made to parents who availed themselves of the Scheme, and those who did not: each group still received an education for their child. One group had decided to bear the commercial risk of paying for educational services being made available but remaining unused (e.g. when their child was sick) whereas the other had chosen not to take that risk by amending the terms of the consideration provision in the contract for educational services. Overall, however, he contended that there was no difference whatsoever in the nature of the supply made by the School; it was a service of exempt education.
12. Mr Cordara maintained that the terms of the Scheme were expressed to be, and took effect as, an amendment and / or variation of clause 62 of the standard terms. In other words, he submitted, where the parents elected for refundable, as opposed to non-refundable, fees, the terms of the Scheme were incorporated into the standard terms and constituted a replacement of clause 62 thereof. The fact that parents who chose to avail themselves of refundable fees paid an additional specified termly charge was hardly surprising, and did not alter the character of the supply that was being made, or the number of such supplies: parties often agreed to a price amendment in the course of their relationships.
13. Furthermore, Mr Cordara contended, any terms concerning fees (whether they related to amount, time of payment, method of payment etc) were an integral part of, and could not be divorced from, the contract for the supply of education. For instance, clause 62 of the standard terms, which prescribed that fees paid to the School were generally non-refundable, was clearly part of the contract for the supply of education. It therefore followed that a term replacing clause 62 and setting out the conditions under which fees would be refunded was similarly part of the contract for the supply of education.
14. HMRC's case was that parents entered into the main contract with the School and then on payment of the charge for the Scheme, they became entitled to a refund of fees in prescribed circumstances. HMRC put their case as the waiver of a right to school fees. Mr Cordara submitted that that was wrong: the description on its face was incorrect; there was no waiver of the right to fees for they were paid gross. If HMRC were right, all that would be necessary to "put things right" would be to redraft the main clause slightly so that it referred to the Scheme in such terms such as, "I wish to participate in the Scheme".
15. The fact that the parents were given a choice as to whether fees were refundable did not alter the character of the supply that was being made: it simply altered the level of consideration for the supply. In the circumstances, there was therefore only a single supply, namely that of education, which was exempt. The connection between the obligation to supply education and the remaining obligation was so intimate that the latter could not have a separate existence.

(b) The alternative case for the School – a composite supply

16. Alternatively, if I were to find that the transaction which formed the subject-matter of the appeal comprised two elements, Mr Cordara submitted that there was a composite supply, with the supply of education being the principal supply and the provision of some kind of "scheme" being an ancillary element. There was no restriction on how something had to be ancillary to something else and could lead to the better enjoyment for that reason; the provision of the Scheme was an ancillary supply.
17. As is usual in cases such as this, Mr Cordara started his analysis as to whether there was for VAT purposes a composite supply or economically distinct multiple supplies by turning to the guidance offered by the Court of Justice of the European Communities ("the ECJ") in Card Protection Plan Ltd v Commissioners of Customs and Excise (Case C-349/96) [1999] STC 270 at paragraphs 28, 29 and 30, namely:

(1) where the transaction in question comprised a bundle of features or acts, regard must be had to all the circumstances in which the relevant transaction took place (paragraph 28);

(2) every supply must normally be regarded as distinct and independent; a single economic supply should not be artificially split so as not to distort the functioning of the VAT system (paragraph 29); and

(3) the essential features of the transaction must be ascertained in order to determine whether there were several distinct principal supplies or a single supply (paragraph 29).

(4) there was a single supply in cases where one or more elements were to be regarded as the principal service, whilst one or more elements were, by contrast, to be regarded as an ancillary service which shared the tax treatment of the principal service (paragraph 30).

(5) a service must be regarded as ancillary to a principal service if it did not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (paragraph 30, and see Commissioners of Customs and Excise v Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, paragraph 24).

18. In passing, Mr Cordara noted that at paragraph 36 of his opinion in Madgett and Baldwin, Advocate General Léger considered "that a service is ancillary if, first, it contributes to the proper performance of the principal service and, second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service".
19. Mr Cordara maintained that the determination of whether there was a composite supply or there were multiple supplies did not require an overly complex legal analysis. As stated by Laws LJ in Commissioners of Customs and Excise v FDR Limited [2000] STC 672 at paragraph 54:

"We are not here concerned with deep legal principle, but with the articulation of a fair and reasonable approach to those cases where there is a question how should the consideration given by a supplier for his reward be categorised for the purposes of VAT, when there are multiple acts of supply involved. The simpler it is the better, so long as it is kept consistent with the doing of justice. With respect, I apprehend (but I by no means propose to lay down any rule) that where this sort of issue arises, the first question to be asked may be couched as Nolan LJ put it: what is 'the true and substantial nature of the consideration given for the payment'. That will identify the apex or tabletop. The second question will be whether there are other supplies which are ancillary to the core".

20. In reliance on Dr Beynon and Partners v Commissioners of Customs and Excise [2005] STC 55, Mr Cordara further submitted that it was important not to engage in an artificial dissection of the transaction in question and to take into account the reality of the situation. He also relied on the following observations of Lord Walker of Gestingthorpe in paragraph 29 of his speech in College of Estate Management v Commissioners of Customs and Excise [2005] STC 1597:

"In Card Protection Plan Lord Slynn, in paragraphs which I have already quoted ([2001] STC 174 at [22] and [25], [2002] 1 AC 202 at [22] and [25]) emphasised the need to take an overall view, without 'over-zealous dissection', and to look for the essential purpose (objectively assessed) of a transaction. In Commissioners of Customs and Excise v British Telecommunications plc [1999] STC 758 at 768, [1999] 1 WLR 1376 at 1384 he referred to the need to look at the commercial reality. In the same case Lord Hope of Craighead said ([1999] STC 758 at 768, [1999] 1 WLR 1476 at 1386) that a supply which comprises a single service from an economic point of view should not be artificially split. In Beynon ([2005] STC 55 at [20], [2005] 1 WLR 86) Lord Hoffman explained:

'The Court of Justice observed ([1999] STC 270, [1999] 2 AC 601, paras 27-29), that the diversity of commercial operations made it impossible to give exhaustive guidance as to how to approach the problem correctly in all cases. Regard should always be had to the circumstances in which the transaction took place. Every supply of "a service" is by definition distinct and independent but a supply which "from an economic point of view" comprises a single service should not be artificially split into separate 'services'. What matters is 'the essential features of the transaction'."

Lord Hoffman then went on to cite paragraph 30 of the ECJ's judgment in Card Protection Plan.

21. Mr Cordara observed that HMRC had never dealt with the point that the Scheme could never have a life separate from the exempt supply of education. In every other "multiple" case to come before the courts, the ancillary supply could have been a separate supply. In his submission, the notion that there were economically distinct multiple supplies in the instant case was commercially absurd, for:

(1) no parents would have elected to take advantage of the Scheme if they had not also concluded a contract with the School for the supply of education.

(2) to put it differently, no parents would have contracted for an entitlement to ask for a refund of fees if they had not, in the first place, entered into a contract with the School for the supply of education, pursuant to which fees were paid.

(3) the entry by parents into the Scheme was therefore conditional upon and only made sense in the context of the parents having concluded a contract with the School for the supply of education. It was not a stand-alone supply which the parents could, or would, purchase separately and could not, therefore, be an aim in itself.

22. The fact that an additional charge was made for one constituent element of a composite supply did not, in Mr Cordara's further submission, alter the tax position of that element – the incidence of VAT depended upon the nature and aggregate value of the compound supply – see Rowe and Maw (a firm) v Commissioners of Customs and Excise [1975] STC 340 at 343-344, per Wien J (with whom Eveleigh and Bridge JJ agreed).
23. Applying a "fair and reasonable" approach, Mr Cordara maintained that it was clear that the provision of the Scheme did not constitute an aim in itself, since it had no free-standing utility to the parents. As a matter of fact, it constituted "a means of better enjoying the principal service supplied" in that it added value to, and enhanced, the package of educational services which the parents had purchased from the School. In any event, applying the approach adopted by Lord Hoffman in Dr Beynon, it was readily apparent that the economic reality was to regard the transaction as one of a supply of a package of educational services.
24. Mr Cordara maintained that the instant case was a typical Pippa-Dee case (Commissioners of Customs and Excise v Pippa-Dee Parties Limited) [1981] STC 495, where Ralph Gibson J indicated that a VAT analysis had to be conducted on the basis of the whole transaction), and claimed that HMRC had fallen into the classic Pippa-Dee error of trying to subdivide the overall contract entered into by the parties, rather than looking at the transaction when all the contractual arrangements were in place. The provision of the Scheme was economically indissociable from the principal exempt supply of education, and therefore took its fiscal character from the dominant supply in the package.
25. Furthermore, Mr Cordara questioned whether refunding consideration could ever be a supply per se: one could hardly make a taxable supply of receiving less consideration for an exempt supply. The option, if taken up, was simply an adjustment of consideration for the exempt supply and, as such, was covered by Article 11 of the EC Sixth Directive (recast as Articles 73-75, 77-82, 85-92 of the Sixth Directive 2006/112/EC) and section 19 of the Value Added Tax Act 1994.
26. If that were wrong, and there could somehow be an independent supply of receiving or making different levels of payment, then, in Mr Cordara's submission, it was likely in any event to be an exempt supply under Article 13B(d)(3) of the Sixth Directive (Article 135(1)(d) of the Sixth Directive), being a transaction concerning payments, debts, etc, so that no additional output tax would have been due from the School.
27. In any event, if all the foregoing were wrong, and there was a potential liability on the part of the School, in principle, for output tax, he submitted that it could not be calculated simply by reference to the gross sums paid by the parents, without taking into account sums refunded, either individually or globally.

Submissions for HMRC

(a) The primary case for the School – one supply of education

28. Mr Puzey submitted that in the factual circumstances the School made two supplies for tax purposes:

(a) one supply of education; and

(b) another of the Scheme, which HMRC characterised as the waiver of a right to school fees in return for consideration.

29. He maintained that on the facts there were two separate supplies, rather than one composite supply, because the Scheme was not ancillary to the supply of education or integral to it, but an independent and distinct transaction. He further contended that there was no basis for a claim by the School that the Scheme was either an adjustment of consideration under article 11 of the Sixth Directive or a transaction under article 13B(d)(3) i.e. one relating to money transfers.
30. Mr Puzey contended that there were two contracts between the School and parents who participated in the Scheme, and whilst that might not matter in determining whether there was one supply, it might explain why the School analysed the supplies as it did. In his submission, the following four factors indicated the existence of two contracts:

(a) The written contract for the provision of education by the School comprising the terms and conditions and the acceptance form did not refer to the Scheme at all.

(b) The contract at (a) was signed once – at or before the time a pupil started his or her education at the School. The Scheme was entered into on each occasion that fees were paid, because on each occasion parents had a choice whether to pay to participate in the Scheme.

(c) The terms and conditions of the Scheme were entirely separate and distinct from the contract for provision of education, notwithstanding the statement in the Scheme that it operated to vary the contract for the provision of education services. The latter contract was not dependent on compliance with the terms of the Scheme.

(d) The Scheme had been drafted by, was administered by, and claims were determined by HSBC. That firm could determine which pupils were accepted into the Scheme, and might require the removal of the name of any pupil therefrom. Those matters were inconsistent with the School's claim that the Scheme was part of one contract for education between the School and parents.

31. Mr Puzey rejected the School's case that it was making one supply of education, claiming it to be flawed as resting on the proposition that one contract equalled one supply. Parents might or might not opt to pay the premium required to participate in the Scheme, but the education provided remained the same: that was the supply of education. However, if the premium for the Scheme was paid the School waived its contractual right to require payment of fees where the child was ill in return for a separate and additional consideration. In those circumstances, section 5(2)(b) of the Value Added Tax Act 1994 ("VATA 1994") provided as follows:

"5. Meaning of supply: alteration by Treasury order

(2) Subject to any provision made by that Schedule to Treasury orders under subsections (3) to (6) below- …

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

32. The Scheme was entirely optional, and over and above the contract for education. It could not be described as a supply of education in itself and whilst it must perforce refer to the education contract that did not mean there was only one supply. If the Scheme had been provided direct by HSBC to the parents there would have been no question but that it was a separate supply.
33. The School's assertion that the Scheme simply amended the consideration payable for education and the conditions for a refund of fees was, in Mr Puzey's submission, disingenuous. It ignored the fact that one party to an agreement had in return for a separate, additional consideration, agreed not to insist on compliance with the terms of that agreement in certain specified circumstances. That went much further than an adjustment of consideration (see AA Insurance Services Limited v Commissioners of Customs and Excise [1999] V and DR 361).

(b) The secondary case for the School – a composite supply

34. In relation to the School's secondary case, that alternatively the supply was a composite one, Mr Puzey disclosed that HMRC did not dissent from the School's analysis of the law, but submitted that the facts of the instant case did not reveal the Scheme to be an ancillary supply. In support of that submission, he considered the following matters relevant:

(a) European law did not expressly provide a method for determining whether two or more supplies comprised a composite transaction or multiple transactions. Besides the general guidance in the case of Card Protection Plan Ltd, each case would be strongly fact sensitive.

(b) The exemptions provided for in Article 13 of the Sixth Directive, of which education was one, were to be construed strictly (Card Protection Plan v Commissioners of Customs and Excise [1999] 2 AC 601 at page 626B). Nothing in Article 13, or Schedule 8, Group 6, item 4 of VATA 1994 suggested that a service of the type provided in the instant case could be viewed as "closely related" to the supply of education. In fact, the supply concerned the financial consequences of absence from education.

(c) As was noted at paragraph 29 of the ECJ judgment in Card Protection Plan "every supply of a service must normally be regarded as distinct and independent". Whilst the ECJ noted that single services should not be artificially split, HMRC maintained that there were two separate services in the instant case.

(d) "The fact that a single price is charged is not decisive" (paragraph 31 of the ECJ judgment in Card Protection Plan); yet in the instant case the price was split into distinct elements for education and the Scheme on a term-by-term basis. Thus, the two supplies were readily dissociable in financial terms. The price charged to parents for the Scheme bore a direct correlation to that charged by HSBC Insurance Brokers to the School.

(e) The Scheme was the type of product that could be readily supplied by a third party to parents without any effect on the contract for education. That was relevant to the issue of whether the Scheme was ancillary to the latter contract.

35. Mr Puzey accepted and agreed with the dicta in UK authorities which warned against "complex legal analysis", and "over-zealous dissection" of transactions and which supported "a fair and reasonable" approach, but not that they could be used to merge two supplies which were separate and distinct. In his submission, it was not simply a question of characterising a minor supply with the same VAT treatment as a major supply to which it was associated because there was not one transaction in the instant case but two. Parents had the option at the beginning of each term of entering the Scheme or not. There was a choice to be made which existed outside and independently of the obligation to pay School fees. It was not artificial to view the arrangements in that way because the supplies were separate and distinct.
36. He further submitted that the Scheme was not ancillary to the provision of education because it was not a means of better enjoying that service. The quantity and quality of education was not affected by the Scheme; whether the Scheme was entered or not each group of parents still received an education of their children. The Scheme simply compensated parents, whose child did not receive education when ill, for fees that would otherwise be lost. That was quite a different matter. Of course the Scheme was not entered into unless education was being provided, but that was not the test. Mr Puzey contended that the true test was whether one service was a means of better enjoying another and that was not the case here. The educational services were not enhanced by the Scheme – it was not part of an educational package.

(d) Alternative arguments for the School

37. Mr Puzey dealt with the School's alternative arguments quite shortly. First, he maintained that there was a supply under section 5(2)(b) VATA 1994 so that it was not a case of the School receiving less consideration for an exempt supply that was simply an adjustment of consideration. In return for an agreed consideration the School agreed to waive its contractual right to the payment of fees – a perfectly valid taxable supply.
38. As to the School's argument that the Scheme might amount to a supply under Article 13B(d)(3) of the Sixth Directive, Mr Puzey explained that HMRC's position was that parents had contracted for the right to receive a refund of fees upon the occurrence of specified events, e.g. the illness of a pupil, in return for payment of a consideration. He submitted that that did not appear to fit the type of transaction contemplated in Article 13B(d)(3).
39. As the School had failed to prove that there was either one exempt supply or a composite exempt supply, Mr Puzey submitted that its appeal should be dismissed.

Conclusion

40. In my judgment, the Scheme provides for the supply of an entitlement by parents to a refund of school fees in prescribed circumstances. It does not, however, provide for a waiver of fees, as Mr Puzey claimed, for the fees are paid gross.
41. Despite the persuasive nature of the primary case for the School as advanced by Mr Cordara, I am unable to accept his submission that there is in reality a single supply of education of which the provision of the Scheme simply forms part: there is a difference for VAT purposes between the nature of the supply made to parents who avail themselves of the Scheme, and those who do not. Certainly, each group receives an education for their children but those who do join it also receive the separate supply referred to in the last preceding paragraph, which has no effect on that education. As I mentioned earlier, I am unable to accept that the terms of the Scheme take effect as an amendment and / or variation of clause 62 of the School's standard terms and conditions. I further disagree with Mr Cordara's contention that any terms concerning fees are an integral part of, and cannot be divorced from, the contract for education: the fees for the Scheme are identified on the School's invoices and are charged separately from those for education.
42. Whilst the Scheme necessarily relates to the supply of education made by the School, it cannot itself be described as a supply of education. I hold that there are two separate supplies: a supply of education, and a supply of the entitlement to the refund of school fees in prescribed circumstances.
43. I then turn to consider the alternative case for the School. In doing so, I adopt the submissions of Mr Puzey in their entirety. As Advocate-General Léger opined in Madgett and Baldwin, for a service to be ancillary it must both contribute to the proper performance of the principal service and take up no more than a marginal proportion of the package price compared to the principal service; it must also be a means of better enjoying the principal service. Whilst the charges for the Scheme may only constitute a "marginal proportion" of the total fees payable by parents, I cannot accept Mr Cordara's contention that the Scheme itself is an integral part of the "proper performance of the principal service" of education. Nor does the Scheme provide a means of better enjoying that principal service: it does not, in my judgment, add value to and enhance the package of educational services, as Mr Cordara would also have me accept. Indeed, it makes no difference whatsoever to the supply of education.
44. I accept that the Scheme could never have a life separate from that of the principal service, as Mr Cordara also submitted, but do not consider that fact to help the School in any way.
45. It follows that I hold that the Scheme is not ancillary to the principal service of education provided by the School.
46. In relation to the alternative arguments for the School, again, but on this occasion with the exception that in my judgment the Scheme constitutes a supply of an entitlement by parents to a refund of school fees in prescribed circumstances, rather than a waiver of fees, I adopt the submissions of Mr Puzey as contained in paragraphs 34 to 36 of my decision. In my judgment, Mr Puzey correctly characterises the Scheme as a standard rated supply.
47. Having rejected both the School's primary and secondary cases, and dealt with its alternative arguments, it follows that I dismiss the appeal. However, I observe that it should be possible for the School to continue to operate the Scheme as part of an exempt supply of education by making what would appear to be relatively minor changes to it.
48. Mr Puzey made no application for HMRC's costs in the event of my dismissing the appeal, and I make no direction in that behalf.

DAVID DEMACK

CHAIRMAN
Release Date: 3 April 2007

MAN/06/0319

THE SCHEDULE

"BIRKDALE SCHOOL FEES REFUND SCHEME

Effective from September 2005

The absence of a pupil does not lessen the cost of running the school and fees are not refundable if a pupil is unable to attend classes due to sickness, accident or quarantine. The school is however, able to make refunds through the Fees Refund Scheme outlined below.

Operation of the Scheme

The contract you have with the school is for the provision of educational services. Participation in this Scheme alters that contract and entitles you to receive a refund of school fees in certain circumstances as detailed on this sheet. The school is able to refund such fees as it has taken out an insurance policy under which it can claim.

To extend the benefits of this Scheme to you in the simplest and most economical way, a termly charge is included on your school fee account. The termly charge is not an insurance premium and you are not entitled to claim directly from the school's policy.

IF YOU DO NOT WISH TO PARTICIPATE IN THE FEES REFUND SCHEME PLEASE DELETE THE TERMLY CHARGE FROM YOUR ACCOUNT.

The school reserves the right to vary the termly charge by giving advance notice to you.

Commencement of the Scheme

Your participation in the Scheme commences on the first day of term, or the date the first termly charge is paid to the school, whichever is the latter. Refunds are provided for absences during term time only including weekends and half term breaks.

Refunds of fees are made for:

49. Absence from school due to illness, accident, contact with infection or closure of the school or house through an epidemic among the pupils for a continuous period of at least 5 days for Day Pupils (including weekends). A Medical Practitioner must certify the necessity of any absence of 15 days or over.

No refund will be made if a pupil is kept from school owing to:

a) a physical or mental condition that existed prior to the pupil's first inclusion in the Scheme;

b) congenital abnormality;

c) injury sustained through war, invasion, hostility or acts of foreign enemies (whether war be declared or not); or

d) nuclear, chemical or biological terrorism or the threat thereof.

This means that the amount payable for each day of absence is calculated by dividing the termly fee by the actual number of days in the term.

The maximum refund under the Scheme for any one pupil for any one medical condition is limited to three terms' fees calculated from the first day of absence.

Cancellation

You can discontinue your participation with effect from any anniversary of your joining the Scheme by giving advance written notification to the school."