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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> University of Cambridge v Revenue & Customs [2008] UKVAT V20610 (12 March 2008)
URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20610.html
Cite as: [2008] UKVAT V20610
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- This is an appeal by The Chancellor, Masters and Scholars of the University of Cambridge ("the Appellant") against a decision of the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") given in their letter of 1 September 2005 to refuse to allow the Appellant to issue a certificate entitling it, under the provisions of Group 1, Schedule 7A to the Value Added Tax Act 1994 ("VATA"), to pay a reduced rate of VAT on supplies made to it of electricity.
- The Appellant's case can be summarised as follows:
- The Commissioners' case can be summarised as follows:
- There are, therefore, essentially three issues requiring our decision:
- As mentioned below, we were asked to give a decision in principle. Our decision is as follows:
- The factual background to this appeal is simple and is not in dispute between the parties. We were in any event asked to give a decision in principle - if the Appellant succeeds in all its legal arguments so that in principle it is entitled to reduced rate VAT on the relevant electricity supplies, there may be issues as to the extent to which or the proportion in which those supplies are made for a "qualifying use", but we were not required to consider such matters in the present appeal.
- The Appellant is a charity and its principal activities are the provision of higher education and the carrying out of research.
- The Appellant constructed a new building to house its Faculty of Education, which it occupied in November 2004. The building is used by the Appellant both for the provision of education at undergraduate and graduate level and also for the carrying out of research (a portion of the research activities comprises activities which in themselves are not a "qualifying use" for the relevant purposes of this appeal).
- Electricity is supplied to the building, and the Appellant applied to the Commissioners for consent to issue a certificate to the electricity supplier requiring the supplier to charge the Appellant VAT at the reduced (rather than the full) rate, under the provisions of paragraph 1, Schedule 7A VATA. On 1 September 2005 the Commissioners wrote to the Appellant with their decision that the Appellant was not entitled to issue such a certificate, and must therefore pay VAT at the full rate on the electricity supplied to the building. It is against that decision that the Appellant appeals in this case.
- At the hearing we heard evidence on behalf of the Appellant from Mr Kerry Sykes, the Deputy-Director of Finance of the Appellant. We had the benefit of a witness statement prepared by Mr Sykes as his evidence-in-chief on which he was cross-examined by Mr Hill for the Commissioners. The evidence of Mr Sykes related to the history of the Appellant, the legislation by which the Appellant is established as a corporation and under which its current Statutes are formulated, and the principal legislation and regulatory framework within which it must operate as a university (including especially the conditions under which it receives substantial funding from the Higher Education Funding Council for England ("HEFCE")).
- We heard evidence on behalf of the Commissioners from Mr Ian Thomas Lewis, the Head of Finance for HEFCE. Again, we had the benefit of a witness statement prepared by Mr Lewis as his evidence-in-chief, and Mr Lewis was cross-examined by Mr Hitchmough for the Appellant. The evidence of Mr Lewis explained the statutory framework for the regulation and funding of English universities and the government's role in the funding of higher education in England. There was appended to Mr Lewis's witness statement documents relating to the funding of HEFCE by the Secretary of State and HEFCE's funding of higher education institutions.
- The evidence of Mr Sykes related to the public law body issue and the special regime issue, and the evidence of Mr Lewis related principally to the special regime issue. We also had in evidence the Statutes of the Appellant and the accounts of the Appellant for the year ended 31 July 2006 together with bundles of documents covering a wide range of matters relating to the provision of higher education to degree-level in England by publicly-funded and privately-funded institutions. Our findings of fact from the witnesses and from the documents is set out below when those issues are considered (see in particular paragraphs 49 to 63).
- Although this appeal principally concerns the scope and application of Community legislation, the immediate domestic legislation giving rise to the appeal is that relating to the reduced rate of VAT charged on the supply of domestic fuel. Section 29A(1) VATA provides:
- There is no dispute between the parties as to these provisions relating to the reduced rate of VAT on supplies of electricity, except, of course, as to whether in the circumstances, and having regard to the Community legislation, the Appellant, as a charity, is to be regarded as using the electricity "otherwise than in the course or furtherance of a business".
- As to the Community legislation, the battleground between the parties is Article 13 of the 2006 VAT Directive. (For convenience the case was argued by reference to Article 13 of the 2006 VAT Directive which is now in force, although at the time of the decision against which the Appellant appeals the relevant provision was Article 4(5) of the Sixth Council Directive. In all material respects the terms of Article 13 are the same as those of Article 4(5).) Article 13 of the 2006 VAT Directive is in the following terms:
- It is also necessary to refer to Article 9 of the 2006 VAT Directive, which defines "taxable person", and paragraph 1 of which is as follows:
- In this case the Appellant accepts that, on general principles of VAT law, its provision of higher education is a business activity: it did not seek to argue before us that it is not carrying on a business if Article 13 of the 2006 VAT Directive does not come to its aid, the Appellant accepts that the electricity supplied to the Faculty of Education building is used in the course or furtherance of a business, and it has no basis for paying the reduced VAT rate.
- In their submissions the parties dealt first with the Article 13 issue that is, assuming the Appellant is within its ambit (by virtue of being a body governed by public law whose provision of higher education is an activity in which it engages as a public authority), does Article 13 have the result that the Appellant is treated as not carrying out an economic activity and therefore cannot be using the electricity in the course or furtherance of a business?
- The parties agree that Article 13 can only have effect where the public law body is carrying on transactions or activities which are business transactions, that is, transactions which would otherwise be taxable. In its terms Article 13 provides that the public law body carrying out such transactions or activities shall not be regarded as a taxable person in respect of such transactions or activities. The dispute is what it means, in context, that it is not to be regarded as a taxable person.
- For the Appellant Mr Hitchmough argued that Article 13 is a deeming provision it takes the case of a public law body which is engaged in an economic or business activity and in respect of that activity treats it in a different way for VAT purposes from what would be the normal consequence. He argued that the deeming must be taken to its logical conclusion, which is that the public law body is to be treated as not carrying on an economic or business activity, since that is consistent with both the scheme of the 2006 VAT Directive and the underlying purpose of Article 13. Article 13.1 states that, notwithstanding that the public law body is a taxable person (and hence within Article 9.1 of the 2006 VAT Directive), it is to be treated as though it were not a taxable person. Since we learn from Article 9.1 that the only reason a person is a taxable person is because it is carrying on an economic activity, if the person is deemed not to be a taxable person it must follow that the person is deemed not to be carrying on an economic activity. He argued that if the effect of Article 13 is limited, as the Commissioners contend, to treating the public law body as not being a taxable person, that is, the public law body is treated so that the supplies it makes in carrying out the relevant activities are not taxable supplies (so that it does not have to charge VAT on making those supplies), and no more, the only consequence is that those supplies are treated as exempt supplies. But this sits oddly with Article 13.2, which gives Member States an option to treat exempt activities under the relevant Articles of the 2006 VAT Directive carried out by public law bodies as falling within Article 13.1. It is difficult to see a purpose for Article 13.2, he argued, if Article 13.1 has the limited effect of treating the supplies made by the public law body as exempt supplies. To give Article 13.2 a purpose, Article 13.1 must have an effect beyond simply exempting the public law body from charging output tax on the supplies it makes.
- Mr Hitchmough argued that the jurisprudence of the European Court of Justice shows that bodies falling within Article 13 are to be regarded as totally excluded from the VAT code, so that they are treated as though they were a private individual consumer: he referred to the opinion of the Attorney-General (Kokott) in the case T-Mobile Austria GmbH and Others v Republik Φsterreich C-284/04 [2007], where, at paragraph 78, under the heading "Preliminary remarks on the structure of Article 4(5) of the Sixth Directive" she says:
- Also, in Finanzamt Augsburg-Stadt v Marktgemeinde Welden C-247/95 [1997] the Attorney-General (La Pergola) comments at paragraph 5 of his opinion on the effect of what is now Article 13.2 (which gives Member States the option to bring exempt transactions carried out by a public law body within Article 13.1):
- Mr Hitchmough submitted that the UK VAT legislation does not, in terms, incorporate Article 13, but takes the different approach of recognising its effect through the concept of "business", consistent with the fundamental concept in the legislation that tax is charged on taxable supplies made by a person in the course or furtherance of carrying on his business. This approach was recognised by Pumfrey J in the case Isle of Wight Council and Others v HMRC [2005] STC 257, at paragraph 13 of his judgment, where he states that whereas Article 13 exempts public law bodies because of who they are, in the domestic legislation public law bodies are not exempted because they are such, but if the supplies they make are not made in the course of business.
- Mr Hitchmough gave as an example section 33 VATA, which gives local authorities and certain other specified public bodies the right to a refund of input tax charged to them where the VAT has been charged on a supply which "is not for the purpose of any business carried on by the body". He pointed out that the relevant VAT Notice (Notice 749 Local Authorities and Similar Bodies) aligns "non-business" purpose in the context of section 33 VATA with activities of the local authority in which it engages as a public authority. The Commissioners thereby acknowledge that Article 13 has effect domestically, at least for the purposes of section 33 VATA, by treating the activities of the public law body as being "non-business" activities. It is illogical for the Commissioners to argue that Article 13 has a more restricted effect when the issue is that of reduced rate on supplies received.
- Mr Hitchmough accepted that the only direct authority on the scope of Article 13.1 is the tribunal decision in the case The Royal Academy of Music v The Commissioners of Customs and Excise VAT Decision 11871 (1994), where the tribunal held that Article 13.1 has the more restricted scope for which the Commissioners contend in the present appeal. The tribunal chairman (Mr Stephen Oliver, QC, as he then was) said this:
- Mr Parker [counsel for the Commissioners] responded, and I agree with him, that Article [13] does not say that the relevant activities of public authorities are not economic activities. What it says is that public authorities are, to the extent that their activities form part of their duties as public authorities, "exempt" from VAT, ie. those activities are excluded from the application of Article [9.1]. See paragraphs 19 22 of the Court of Justice decision in Commission v Netherlands at pages 1489 90. The core educational activities of the Academy remain economic activities; nothing therefore disqualifies them from forming part of the Academy's business in determining whether the Academy building was intended for use for a relevant charitable purpose."
- Mr Hitchmough also referred us to the tribunal decision in the case Riverside Housing Associated Limited v HMRC VAT Decision 19341 where there are remarks about the scope of Article 13, but he invited us to disregard them, first, because the taxpayer abandoned its argument that Article 13 conferred "non-business" treatment (so that the tribunal's remarks on that point are obiter), and secondly because, in his submission, the tribunal's reasoning is confused and pays no regard to the Isle of Wight Council case.
- For the Commissioners, Mr Hill argued that Article 13, properly interpreted, has a more restricted effect: notwithstanding that the public law body is in fact a taxable person in relation to the activities it is engaged in as a public authority, it treats the public law body as not being a taxable person, and that means no more than that the public law body is not required to account for VAT on its output supplies. This deeming effect does not extend so as to treat the public law body as not carrying out an economic activity this is so as a matter both of logic and of the purposive construction of the 2006 VAT Directive.
- As to logic, if the public law body's activities do not constitute an economic activity (or are to be treated as not constituting an economic activity), the public law body cannot be a taxable person within Article 9.1 in relation to those activities, and so why would Article 13 be phrased in terms of treating the public law body as not being a taxable person?
- As to the construction of the Directive, the approach required by Community law is that Community legislation must be interpreted on a purposive basis, that is to say, in a way that ensures that the legislation fulfils its purpose. In the present case there is a clear purpose on the part of the EU Council in legislating to the effect that the public law body is treated as not being a taxable person (the purpose being that it does not charge VAT on its output supplies, unless that distorts competition), but the Appellant can show no purpose in legislating to the effect that the public law body is treated as not carrying out economic activities: there can certainly be no such purpose in relation to reduced rate input tax on fuel supplies, since the 2006 VAT Directive gives Member States the right to charge such a reduced rate even if the recipient is a public law body acting under a special regime (see Article 102).
- As for the Appellant's arguments that Article 13.2 requires that Article 13.1 has an effect beyond simply requiring that the public law body does not charge VAT on its outputs (see paragraph 20 above), there are some differences between being treated as exempt and being treated as falling within Article 13: for example, in certain circumstances an exempt person can opt to tax (in order to recover input tax), but a public law body within Article 13.1, as a "non-taxable person", has no such option. Article 13.2 has a purpose in that it gives Member States the choice whether to allow a public law body to opt to tax in the case of an exempt supply under the normal rules, or deny that right by bringing the transaction within Article 13.1, whereby the public law body cannot be a taxable person in relation to the transaction. The self-supply rules in relation to services supplied from another Member State also operate differently depending upon whether the public law body is a "non-taxable person" or a person making exempt supplies. Thus Article 13.2, which is a recognition that there are differences between being exempt and being treated as a "non-taxable person", is consistent with the limited scope for Article 13.1 for which the Commissioners contend.
- In Mr Hill's submission the cases relating to Article 13 which have come before the European Court of Justice have treated Article 13 status as analogous to exemption they have all been concerned with the question of whether the public law body is required to charge output tax: see Commission v The Netherlands C 235/85 [1987] ECR 1471; Ayuntamiento de Sevilla v Recaudadores de Tributos de las Zonas primera y Segunda C 202/90 [1991] ECR I-4247; Comune di Carpaneto Piacentino C 4/89 [1990] ECR I-1869; Commission v United Kingdom C 359/97 [2000] ECR I-6355; Fazenda Publica v Camara Municipal do Porto C 446/98 [2000] ECR I-11435; Finanzamt Augsburg-Stadt v Marktgemeinde C 247/95 [1997] ECR I-779. There is no case law authority supporting the Appellant's proposition that the deeming effect of Article 13 results in the public law body being treated as not carrying out an economic activity.
- As for section 33 VATA, as a national provision it cannot influence the correct interpretation of a Community provision such as Article 13. It is not relevant in any event, since it predates the introduction of the Community provision which is now Article 13 section 33 VATA was enacted in 1972 on the introduction of VAT in the United Kingdom, and had the purpose of ensuring that local authorities and certain other public bodies could recover what would otherwise be irrecoverable input tax so that such tax would not be an item of cost indirectly recovered through rates, council tax and other levies made on the public: see R v HM Treasury and another, .ex parte Service Authority for the National Crime Squad and others [2000] STC 638 at [9] and [10].
- Mr Hill submitted that the tribunal decisions in both the Royal Academy of Music and the Riverside Housing Association cases were correct in relation to the scope of Article 13, and those decisions are not called into question by later decisions of the European Court or by the Isle of Wight Council case. The tribunal decision in Riverside Housing Association was the subject of appeal, and in the High Court the Commissioners argued, as in the present case, that Article 13 does not have the effect that the public law body is deemed not to be carrying on an economic activity. This argument was implicitly accepted by the decision of the High Court, which referred to Article 13 providing exemption: Riverside Housing Association v The Commissioners for her Majesty's Revenue and Customs [2006] EWHC 2383 (Ch) at [86].
- We find the arguments of the Commissioners to be more compelling than those of the Appellant, and conclude that, if in principle the Appellant is within Article 13 as a public law body engaged in activities as a public authority, Article 13 does not have the effect that, in respect of those activities (the provision of higher education), the Appellant is treated as not carrying on economic activities. Accordingly the Appellant cannot succeed in its argument that it is entitled to pay VAT at a reduced rate on electricity supplied to it on the grounds that it is using the electricity otherwise than in the course or furtherance of a business.
- We start from the position that, as a matter of fact, the Appellant is carrying on an economic activity or business, and is using the electricity for the purposes of that economic activity or business, and so clearly is not, by reference to what is actually happening, entitled to the reduced rate of input tax. The Appellant therefore has to have a convincing case to show that it can claim the benefit of legislation which turns that factual position on its head, treating the Appellant as though the electricity were not used for the purposes of an economic activity or business. The Appellant's burden is made the greater by the fact that in framing Article 13 the EU Council did not choose as it easily could have done so language which would have given a clear and unambiguous statement of the topsy-turvy state of affairs which the Appellant needs to establish. Mr Hitchmough put forward extensive, thoughtful and even ingenious arguments, but they fell short of that convincing case which is required if the Appellant is to succeed.
- The Appellant has to rely on the terms of Article 13 neither of the parties pointed us to any domestic provision or series of provisions together which directly give effect to Article 13 or, more particularly, give it effect so as to enable the Appellant to claim reduced rate input tax. Mr Hitchmough argued that Article 13 is recognised (albeit to a limited extent) in UK domestic law through the concept of "business" in his phrase, domestic law effectively "delivers" Article 13 (to the extent it does so) by treating the activities of public law bodies, where they are acting as public authorities, as being non-business activities. He cited dicta of Pumfrey J in the Isle of Wight Council case in support of this. But even if this is so the terms and interpretation of Article 13 are fundamental to the Appellant's case. It is clear that if the Appellant is a body governed by public law then Article 13 in its entirety is directly applicable as between the Appellant and the Commissioners: this follows from the Isle of Wight Council case (which was principally concerned with what is now the second paragraph of Article 13.1, relating to the distortion of competition, but Pumfrey J's comments on direct applicability at [30] [33] relate to the whole of Article 13).
- We have set out in some detail above the arguments of the parties as to the proper interpretation and the scope and effect of Article 13 as they relate to this appeal. In part we have done so because there appears to be little case law authority on how it is to be interpreted and what its scope and effect is; and in part we have done so because Mr Hitchmough asserts that in previous tribunal cases the issue has seemingly not been fully argued. The only case in the domestic jurisprudence directly on the point as to whether Article 13 permits a public law body to a reduced rate of input tax (in that case, a zero rate), and where it is the ratio of the case, is the tribunal decision The Royal Academy of Music, the relevant passage from which is set out in paragraph 25 above. As mentioned, that decision is in favour of the view of the Commissioners put forward in this case also. For the reasons mentioned, Mr Hitchmough invites us not to follow that decision. In the Riverside Housing Association cases (tribunal and High Court), where the taxpayer was also asserting a claim to zero rate input tax as a body purporting to be a public law body acting under a special legal regime, the taxpayer accepted the Commissioners' views on the effect of Article 13, and so any comments on the interpretation or effect of Article 13 are obiter. Although in the High Court Lawrence Collins J records the views advanced by counsel for the Commissioners, and does not express any dissent from them, his only pertinent remark on the point is limited: " Article [13] does not assist Riverside, either directly or by way of analogy. It provides an exemption only for bodies governed by public law and even then only for the activities or transaction in which they are engaged as public authorities ." (at [86]).
- As to the European Court case law, although we were referred to a number of cases, none of them examine, as the principal concern of the case, the scope of Article 13 in terms of its effect: for the most part they are concerned with whether particular persons, or the activities they are carrying out, are within its ambit. It is true, as Mr Hill pointed out, that all the cases relate to the question of whether the entity in question is required to charge tax on its output supplies as a taxable person, and none relate to the question of whether the entity is to be regarded as not carrying out an economic activity, but although that might be some indication of the main concerns and issues thrown up by Article 13, in itself it does not supply a conclusive answer as to the scope of Article 13. Both parties clutched for support at various statements made in opinions prepared for the Court or actual judgments of the Court, and it is perhaps symptomatic of the lack of real guidance from those sources that, for example, both parties claimed support for their respective positions from the same paragraph of the Opinion of the Attorney-General in the T Mobile Austria case, set out in paragraph 21 above, the Appellant referring us to the sentence: "The exercise of public authority is therefore equated with the act of a private-individual consumer", and the Commissioners referring us to the sentence: "The provision therefore exempts public authorities from general liability to tax even where they pursue an economic activity". A reading of the cases cited to us shows that the Court, in referring to the scope or consequence of Article 13 refers, apparently without distinction, to Article 13 resulting in a body being exempt from VAT or to its being "outside the scope of VAT".
- Without real guidance, therefore, from either domestic or European jurisprudence, we must look to the interpretation of Article 13 as to its scope and effect for the purposes of this appeal. Both parties looked to what they respectively saw as the internal logic of the provision. The Appellant argued, as set out above, that the terms of Article 13.2 in relation to exempt activities meant that, logically, Article 13.1 must have scope beyond treating the public law body as a "non-taxable person" in the sense of making supplies outside the scope of VAT. Mr Hill was able to show, however, by reference to commentaries on the Community legislation, that there are distinctions between a person making exempt supplies and a "non-taxable person", and that Article 13.2 has a purpose consistent with the scope of Article 13 for which the Commissioners contend. The Commissioners argued that Article 13 can only apply where the activities of the public law body amount to an economic activity if there were no economic activity there would be no requirement for Article 13 to treat the public law body as a "non-taxable person", and therefore it would be illogical for Article 13 to use the mechanism of the definition of "taxable person" in Article 9 as the means of achieving the result that there is no economic activity. We see the force of that argument, which is a more reasoned and elegant statement of the proposition that if the EU Council had intended that the public law body should be treated as not carrying an economic activity, they would have framed the legislation to say so explicitly.
- In more general terms of interpreting Article 13 the parties took different approaches. The Appellant referred us to the well-known dictum of Lord Asquith in the case of East End Dwellings v Finsbury BC [1952] AC 109 setting out the approach to take when dealing with the effect of a deeming provision (at p 132) that,
- The Commissioners' approach, as mentioned above, was to interpret Article 13 by having regard to its purpose: there is a clear purpose and a clear effect in treating the public law body as a "non-taxable person", but no discernible purpose, in the context of the 2006 VAT Directive, in going beyond that to treat the public law body as not carrying on an economic activity.
- On this point we agree with the Commissioners. Article 13 requires that public law bodies "shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities". It seems to us that the consequence, or purpose, of that is to be found in Article 2 of the 2006 VAT Directive, rather than in Article 9. Article 2 provides, so far as relevant:
- Finally, in interpreting Article 13, the Appellant relied on what it claimed is the limited way it is recognised in UK VAT law, that is to say through the concept of "business". Mr Hitchmough referred us to section 33 VATA, which entitles local authorities and certain other specified bodies to a refund of input tax on supplies to them where the supplies are not for the purpose of any business carried on by them. He pointed out that the current VAT Notice 749, in dealing with section 33 refunds, is couched in part in the language of Article 13 (referring, as it does, to the public body acting under a special legal regime, that being the test of whether its activities are business or non-business). He argued that this shows that, when applied in the UK, Article 13 should be consistently applied so that the activities of a public law body acting under a special legal regime should be regarded as non-business activities. But as Mr Hill pointed out, not only does section 33 VATA have a more limited ambit than Article 13 (it extends only to local authorities and certain specified other bodies), but it was part of the original UK VAT legislation and as such pre-dates by some years the introduction by the EU Council of what is now Article 13. It's purpose was to ensure that local authorities and other bodies which recover their costs from levies on the public (such as the BBC) did not pass on such input tax as part of those costs. It is not, therefore, an implementation of Article 13, but a provision which stands alone. It does not avail the Appellant (which is not one of the specified bodies) and in any event is not relevant to the eligibility or otherwise of a person to the reduced input rate of VAT. The Appellant has to rely on Article 13 itself, and section 33 VATA cannot tell us how Article 13, Community legislation, is to be interpreted.
- Even if we accept Mr Hitchmough's wider point that Article 13 is "delivered" in the UK domestic legislation by the concept of carrying on a business, that cannot in itself effect a wider scope for Article 13 than the interpretation of its own terms will sustain if the UK approach effectively equates "non-taxable person" with "person not carrying out an economic activity", and that is not what Article 13 means, then a person such as the Appellant who has to rely on Article 13 cannot seek help from the domestic approach which gives a different and wider result (quite apart from any question as to whether the domestic legislation is valid in such circumstances).
- For these reasons we do not think that the Appellant made out the convincing case which, as we said, is required if it is to establish that Article 13 deems it not to be carrying on a business when in fact it is. Therefore on the Article 13 issue we decide in favour of the Commissioners.
- Our decision on the Article 13 issue means that we must dismiss the Appellant's appeal without consideration of any further argument. However, should we be wrong in our decision on the Article 13 issue, so that Article 13 has the wider scope and effect for which the Appellant argues, we then have to consider whether the Appellant is within its ambit.
- It is clear that in considering whether a taxpayer is within the ambit of Article 13, two conditions have to be complied with. The point was expressed in the following way by the European Court of Justice in the case Fzenda Pϊblica v Cβmara Municipal do Porto (Case C-446/98) [2001] STC 560 at paragraph 15:
- First, then, we are required to decide whether the Appellant is a body governed by public law: as mentioned, the question of what is a body governed by public law is a question of law, and it is a question of fact whether the Appellant is a body of the kind which in law is regarded as governed by public law. In summary, the Appellant's case is that it is a body governed by public law first, because it is a creature of statute whose constitution, powers, governance and activities are enshrined in primary and secondary legislation; and secondly because it is entrusted with the exercise of public powers and in such exercise is subject to public duties. The Commissioners' case is that for an entity to be a body governed by public law for Article 13 purposes, its form of creation or incorporation is irrelevant; instead, the question is whether it is part of the public administration of the United Kingdom, and the Appellant, as an autonomous and independent body does not form part of the public administration of the United Kingdom, notwithstanding that it is to an extent regulated by the State and, in accepting State funding as to part of its income, must comply with the conditions of that funding.
- Although the Appellant traces its origins back to the early thirteenth century, its formal legal origin as a corporation dates from the Oxford and Cambridge Act 1571, by which the Appellant was incorporated with its formal title, "The Chancellor, Masters and Scholars of the University of Cambridge", and by which its historic powers, privileges and liberties were ratified and confirmed, all for the purpose of "the better increase of learning and the suppressing of vice".
- The current legislation governing the Appellant is the Universities of Oxford and Cambridge Act 1923, which was essentially consolidating legislation. Under this Act a body of commissioners, "the University of Cambridge Commissioners" was empowered to make statutes and regulations under the Act for the Appellant, by way of implementation of the findings of a prior Royal Commission. The current Statutes and Ordinances of the Appellant date in their origin from this time. The Act confers on the Appellant itself the power to make further Statutes, in effect by way of amendment to the Statutes and regulations instituted by the University of Cambridge Commissioners in 1926 1928 pursuant to the Act. The procedure for the making of Statutes and regulations by the University of Cambridge Commissioners (and for subsequent amendments by the Appellant) is set out in the Schedule to the Act. In essence, a Statute must be submitted to Her Majesty in Council for approval, with a procedure first for colleges or other relevant persons to petition for disallowance of the Statute, and then (after resolution or dismissal of any such objection) for the Statute to be laid before both Houses of Parliament, subject to a negative resolution procedure, so that it is approved by Her Majesty in Council if neither House petitions for approval to be withheld. If so approved by Order in Council, the Statute is binding on the Appellant and every college, notwithstanding any other legislation or instrument of foundation otherwise regulating the Appellant or a college. Thus the procedure for creating the current Statutes and Ordinances (that is, those originally established by the University of Cambridge Commissioners, as amended subsequently by the Appellant itself) follows the procedure for creating a statutory instrument.
- The Statutes established in this way (together with the Ordinances made pursuant to the Statutes) are a complete code for the powers, governance and administration of the Appellant. Statute A provides for the office of the Chancellor of the University and his powers, the Senate and its powers (the Senate is the wide body of those holding a Master's degree or doctorate, and its principal function is to elect the Chancellor), the Regent House ("the governing body of the University") and its powers (which include the power of making, altering or repealing Statutes pursuant to the 1923 Act), the Council ("the principal executive and policy-making body of the University") and its powers (which relate to "the general responsibility for the administration of the University; for the planning of its work, and for the management of its resources"), and certain other bodies within the University's organisation. Statute A provides for the powers of the University, which include the power "for the encouragement of learning, the maintenance of good order and discipline, and the management of its affairs, to enact Ordinances and to issue Orders ; provided always that no such Ordinance or Order shall contravene any provision of the Statutes." Statute B deals with matriculation (that is, admission to the University), the awarding of degrees, and discipline procedures. Other Statutes deal with the Schools and Faculties of the University, and responsibility for the academic and educational policy of the University, which is vested in the General Board of the Faculties, with each Faculty Board having responsibility for ensuring the provision of appropriate instruction and adequate facilities for research in the subjects of its Faculty, and also with the appointment, responsibilities and powers of University officers, including the Vice-Chancellor (the principal executive officer of the University) and the University professors.
- The Statutes are supplemented by extensive Ordinances made by the University under the powers vested in it by Statute A.
- Thus the scheme is that the Statutes are a form of secondary legislation of the State made by Order in Council (subject to a negative resolution procedure) and form what may be seen as the primary legislation or constitution of the University which can be amended or repealed only by further Order in Council, whilst the University can enact what may be seen as its secondary legislation in the form of the Ordinances, which must not contravene the Statutes.
- In addition to this principal legislation affecting the Appellant, over the centuries an abundance of statutory and prescriptive rights have accreted to the Appellant, conferring special privileges or regulating aspects of its historic activities or assets and property rights.
- More generally, the Appellant, like any other university in England, requires the consent of the Privy Council to use the word "university" in its title, by virtue of provisions in the Further and Higher Education Act 1998 and the Teaching and Higher Education Act 1998.
- Mr Lewis told us that universities other than Oxford and Cambridge may be established in a number of ways: those created before 1992 were established by Royal Charter granted through the Privy Council or, in the case of some universities, incorporated under the Companies Act as companies limited by guarantee. In the case of those created since 1992, which changed status from polytechnics under local authority control to universities, they derive their university status and degree-awarding powers under the Further and Higher Education Act 1992. The University of Buckingham is a private university (that is, not funded by the State), and is incorporated as a non-profit-making company with degree-awarding powers granted by the Privy Council.
- Degree-awarding powers are conferred in a number of ways, related to the manner in which the university is established. It is a criminal offence under the Education Reform Act 1988 for a body to award a UK degree unless it is authorised to do so.
- Mr Lewis described English universities as legally independent bodies responsible for the governance, management and direction of their own affairs which are funded from a range of public and private sources. They are not regarded as part of the public sector in the way that, say, a maintained school or NHS hospital is so regarded thus, for example, their accounts are not classified to the public sector for National Accounts purposes, and they are not subject to direction from the government except to the extent that they receive public funding and thereby render themselves subject to any conditions attaching to such funding.
- Mr Lewis gave us a full account of the statutory framework for the regulation and funding of English universities and of how such regulation and funding works in practice. In the course of this account he explained the State's role in the provision of higher education in England. His account can be summarised as follows:
- Mr Sykes explained the funding of the Appellant: for the year ended 31 July 2006 the total income of the Appellant was £890m, of which £142m was income from Cambridge University Press, and £169m was income from its public examination and assessment services. Of the balance of its income for its higher education and research functions, £59m was from academic fees (UK and overseas students), £204m from research grants and contracts, £47m from endowment and investment income, £91m from a variety of sources (donations, for other services supplied, from health and hospital authorities), and £178m from government funding (of which £175m was funding by HEFCE approximately 20% of total funding, or 30% of income disregarding Cambridge University Press and public examination income).
- As to HEFCE funding of the Appellant, Mr Sykes explained that the greater part of the funding is a block grant for teaching based simply on the number of students, and under current policy no conditions are attached to such per capita funding beyond standard conditions such as accounting for the spending of the funds and submitting to quality assurance supervision if requested. The Appellant has full liberty to allocate the block grant funding as it sees fit. The Appellant may be funded for a specific purpose beyond the block grant in which case, of course, the funding must be applied for that purpose and the Appellant must comply with any special conditions imposed by HEFCE relating to the relevant project or funding.
- Mr Sykes was asked his views as to the practicality of the Appellant functioning without government funding by HEFCE. He said that the point was discussed from time to time within the academic community of the University, and he acknowledged that, in relation to Oxford University, the possibility had been publicly raised by the Chancellor of Oxford University. In relation to the Appellant, it is entirely a matter within the discretion of the Appellant as to whether or not to accept HEFCE funding. Foregoing HEFCE funding would reduce teaching funds by approximately £60m per annum, and the resulting shortfall would have to be made good from other sources, principally by increasing student fees (from the current upper limit of £3,000 per annum to approximately £9,000 per annum for UK/EU students); such action to increase student fees might call into question the charitable status of the Appellant, and if its charitable status were lost, that could affect the use of endowment funds. Withdrawal of HEFCE funding would also result in the repayment of certain capital funding previously granted by HEFCE, which Mr Sykes estimated at £110m. His conclusion therefore was that whilst legally the Appellant could refuse HEFCE funding, the Appellant is so embedded in the regime of government funding as to make such refusal impractical. He acknowledged that the Appellant is striving to increase its endowments (with its forthcoming 800th anniversary as a focus for its fundraising), but he said that was to improve its financial security, not with a view to obtaining independence from HEFCE funding. He accepted that if the Appellant did not take HEFCE funding its legal rights to function as a university (including the right to call itself a university and to award degrees) would be unaffected.
- Mr Sykes was cross-examined on the subject of the autonomy of the Appellant. He agreed that the Appellant is self-governing, and decides for itself who is appointed to its Council (its executive body) any external members are appointed by the Regent House, which itself is largely comprised of academics working for the Appellant. He agreed that the Appellant resists outside interference and to that end asserts its autonomy, but it takes account of and responds to government policy either generally or by compliance with conditions of HEFCE funding. All academic and executive appointments of the Appellant are made by the appropriate body (Senate, Regent House, Council, Board of Electors, Faculty Boards, etc) of the Appellant without external interference or influence, with the exception of the four Regius Professors who, exceptionally, are Crown appointments. Similarly, all decisions relating to teaching (including which courses are taught, and the content of courses), academic standards and the awarding of degrees are made by the Appellant alone. There could possibly be some influence of courses and content from the Secretary of State through HEFCE funding if the government chose to pursue such a policy, but to date that has not been the case.
- For the Appellant, Mr Hitchmough opened his submissions in his argument that the Appellant is a body governed by public law by stating that there is little, if any, guidance from the European Court of Justice cases as to what comprises a body governed by public law most of the Article 13 cases are concerned with the second requirement, that the public law body is acting under a special legal regime. It is clear from the Netherlands case that a private individual (in that case a notary appointed to that position by the State) does not fall within Article 13 because he operates under a special legal regime. He submitted that in so far as one can draw out any principles from the European cases, it seems that one looks not to the function of the body, but its characteristics: this was the approach of the court in the Carpaneto case, which admittedly is dealing with the special legal regime question, but logically the same reasoning must apply to the public law body question. Taking this approach, the Appellant is a body governed by public law, not because of what it does, but because it is constituted by, and derives it powers from, statute, so that (unlike, say, a body incorporated under the Companies Acts, or by Royal Charter) intervention on the part of the State is required to amend its constitution and powers. The Appellant is thus a creature of statute which is required by statute to educate students and all its activities to achieve that purpose are conducted within the framework imposed on it by the Universities of Oxford and Cambridge Act 1923.
- Mr Hitchmough's second principal submission was that the Appellant is a body governed by public law (and he pointed out that this is the terminology of Article 13, rather than "a public body") because it is entrusted by the State to carry out public powers in respect of the provision of education and, in relation to the exercise of those powers and the concomitant public duties, it is governed by public law, as is demonstrated by the fact that such exercise can be scrutinised under the public law remedy of judicial review. He referred to the case of R v Disciplinary Committee of the Jockey Club, ex parte Aga Khan [1993] 1 WLR 909. That case is authority for the proposition that a body may be amenable to judicial review either where a body's powers and duties derive from legislation, or where that is not the case, but the body exercises public powers conferred on that body by statute in the public interest, then in relation to the exercise of such powers. The applicant in that case failed as he could not bring the Jockey Club and its activities within either count; by contrast, the Appellant is amenable to judicial review on both counts. As to the exercise of public powers, the provision of higher education is underpinned by the State, not only because there is on general principles a clear government interest in the provision of higher education, but more specifically because of direct government involvement achieved through the mechanism of funding made available through HEFCE through that mechanism the State entrusts the Appellant (in common with all universities) with the powers of providing higher education and ensures that those powers are exercised to implement government policy in that field. Accordingly, when exercising those powers the Appellant is acting as a body governed by public law.
- This can be seen from case law: there is a long line of cases where decisions of the Appellant relating to its powers and duties to provide higher education have been amenable to judicial review: for example R v Cambridge University (1723) 8 Mod Rep 148 at 151 (an order of mandamus to restore a degree); R v University of Cambridge, ex parte Persaud [2001] EWCA Civ 534 (an order quashing a decision to terminate a research degree). By contrast, where the function exercised is of a private law nature, such as an employment contract dispute as to promotion, no public powers are being exercised, and any dispute as to the exercise of that function must be resolved by private law remedies, rather than public law remedies: Dr Gillian Evans v University of Cambridge [2002] EWHC 1382.
- Mr Hitchmough turned next to the tribunal decision in the Riverside Housing Association case, where the taxpayer housing association argued that it was a body governed by public law within what is now Article 13 the only case in domestic law directly on the point. The tribunal's decision on this issue was in these terms:
- Though English law lacks the concept of public law familiar in continental jurisdictions, it is in my view clear from the legislation itself, interpreted in accordance with the jurisprudence of the Court of Justice, that the "other bodies" contemplated by the article are those of a kind similar to government bodies, carrying out quasi-governmental functions, of which examples might be the Financial Services Authority and the Housing Corporation itself, with organisations such as the Institute of Chartered Accountants when undertaking its regulatory role. Riverside, by contrast, does not have a regulatory or similar role; it is itself the subject of regulation. It is a private sector organization which happens to undertake functions on behalf of the state, but that does not make it a public body."
- In Mr Hitchmough's view this decision was wrong (it was also obiter, since the taxpayer had conceded that it wasn't within Article 13). In his view the tribunal, by looking to the function of a body as the test as to whether or not it was governed by public law, had in fact focused on the second requirement of Article 13, namely whether such a body was engaged in its activities as a public authority. The tribunal then allowed an overly-restrictive approach to the question of whether it was acting as a public body to influence its decision as to whether that body was governed by public law. A proper reading of the authorities cited in the decision did not support the tribunal's conclusion, and the tribunal was not taken to the case of Commission v United Kingdom C-359/97 [2000] ECR I-6355 (infraction proceedings relating to private body concessionaires operating toll bridges). The conclusion to be drawn from the United Kingdom case is that the scope of Article 13 goes beyond the core functions of the State, and the concept of a body governed by public law should be applied accordingly.
- The Commissioners' case, as argued by Mr Hill, is that the Appellant does not form part of the public administration of the United Kingdom, and therefore cannot be a "body governed by public law" for the purposes of Article 13. He relied on the Netherlands and Ayuntamiento de Sevilla cases on the basis that they hold that a third party, which is not part of the public administration, is not a body governed by public law, even though it is appointed by the State to carry out duties of public administration (duties of notaries and tax collection respectively). He argued that the tribunal in the Riverside Housing Association case had correctly applied the decisions in these cases, and that, at least implicitly, the High Court had accepted this aspect of the tribunal's decision on appeal.
- Mr Hill submitted that the concept of "a body governed by public law" must be given a strict interpretation for three reasons: first, because the concept must be seen in context; secondly because the European Court has consistently applied a strict interpretation; and thirdly because of the legislative purpose of the provision which is now Article 13.
- As to context, Article 13 refers to, "States, regional and local government authorities and other bodies governed by public law " the general expression "other bodies governed by public law" must be read in the light of the particularised bodies.
- As to the European Court jurisprudence, in addition to the Netherlands and Ayuntamiento de Sevilla cases, the United Kingdom case and the recent decision in the case CO.GE.P. Srl v Ministero delle Finanze-Ufficio IVA di Milano C-174/06 support the case that, to be a "body governed by public law" for Article 13 purposes, the entity must be part of the public administration.
- As to the legislative purpose of Article 13, the Explanatory Memorandum issued by the Commission at the time of the introduction of what is now Article 13 made it clear that Article 13 was intended to cover "the basic functions and powers of the States, provinces, communes and other public law bodies in general administration, the administration of justice, or national security or defence" (see paragraph IV.6.1 of the commentary by Terra and Kajus, "A Guide to the Sixth VAT Directive").
- The question, therefore, is whether the Appellant can be regarded as forming a "part of the public administration" of the United Kingdom. In the Commissioners' submission it cannot, because it is a legally independent institution which acts autonomously in that it is responsible for the management and direction of its own affairs. This is so notwithstanding its statutory constitution and powers, and its autonomy is not restricted by the actions of any other person such conditions as are imposed on it by HEFCE do not materially interfere with the way the Appellant governs itself or provides higher education or carries out research, and it is a guiding principle of HEFCE to maintain the autonomy of the higher education institutions it funds. In any event, the Appellant is free to dispense with funding from HEFCE and any other public funding, which would be a major step, but is not inconceivable. Were the Appellant to take that course, it would continue being governed as now, set its policies as now and manage its affairs as now, subject only to finding additional income from its students or elsewhere in the private sector. It would remain a university and entitled to call itself such and to award degrees.
- The Commissioners included in their documents as evidence on this point a range of speeches by government ministers referring to the autonomy of universities, the White Paper on Higher Education of 2003 which refers to the importance of universities being free to take responsibility for their own strategic and financial future and to use to the full the freedoms they have as autonomous institutions, and comments on that White Paper by the House of Commons Education and Skills Committee, which pressed for further action to entrench the autonomy and independence of the universities. The government's policies allowing universities to charge student fees at the increased levels introduced in 2006 are explained by government ministers and in the White Paper of 2003 as a process of increasing the independence of universities as well as making them more responsive to the market of their "consumers", that is, the student and prospective student body.
- We are of the view that the Appellant is not "a body governed by public law" for the purposes of Article 13, and for that reason also its appeal must be dismissed.
- Our starting point is that the relevant expression, "States, regional and local government and other bodies governed by public law" must be understood in its proper context, namely as Community law which must apply fairly, uniformly and sensibly across the range of Community states and the diverse entities and organisations which are to be found in those states and through which those states organise their affairs.
- This presents a problem for the Appellant's first submission, that as a body constituted by statute the Appellant is for that reason to be regarded as "a body governed by public law" for Article 13 purposes. The obvious objection to this, which of course Mr Hill was quick to point out, is that it leads to entirely capricious results, since it is little more than a consequence of history which determined that the two ancient English universities were incorporated by statute (that being the only means of incorporation in the sixteenth century, and, indeed, for several centuries thereafter). (It may also be a consequence of their especial influence upon the government of the day: by way of digression it is interesting to note from the preamble to the statute of 1571 that the then Chancellor of the University of Oxford was Robert Dudley, Earl of Leicester, and the then Chancellor of the University of Cambridge was William Cecil, both of whom, in their different ways, could be regarded as having the ear of the monarch when it came to enshrining and protecting the ancient privileges of their respective universities.) Later universities have been incorporated in a variety of different ways, including by Royal Charter and under the Companies Acts, and therefore on this test would not be regarded as bodies governed by public law. It is difficult to see that a Community law provision should have effect in such a random and anomalous way. In this connection Mr Hill made the related point that certain ancient organizations of a purely commercial nature (he instanced the Bank of Scotland) are creatures of statute in like manner to the Appellant, and on the Appellant's view would be bodies governed by public law and prospectively within the scope of Article 13. This points up further the anomalies which flow from the Appellant's case.
- To bolster his case on this point Mr Hitchmough argued that Community law looks to the domestic law of the individual Member States to determine what is a body governed by public law, so that if under English law the Appellant is, by virtue of its incorporation by statute and its constitution being enshrined in legislation, regarded as governed by public law, that holds good for Community law. He argued the point by reference to statements in the Porto case which indicate that the identification of a special legal regime is a matter which should be left to individual Member States. It does not seem to us, however, that, even if Article 13 has effect so that a Member State determines whether or not, under its domestic law, there is a special legal regime under which the public law body is operating, it follows that Article 13 requires the Member State to determine what is a body governed by public law by reference to its domestic law: the two issues are distinct, the one looking to the bodies which are within Article 13, and the other to the way those bodies carry out functions within the domestic law.
- Mr Hill argued that the approach of Community law generally in a case such as this, in relation to a particular exemption or other special provision conferred by Community law, is to require the relevant Member State to identify those bodies within that Member State which have the relevant attributes required for such exemption or other special provision or which accord with the concept of such exemption or special provision identifying a body by its attributes or its conformity to a concept, rather than its legal form, ensures that the exemption or other special provision can be applied consistently and uniformly across all Member States in compliance with the principle of fiscal neutrality. For a recent example of this he referred us to the decision of the European Court in the case J P Morgan Fleming Claverhouse Investment Trust plc v Commissioners of HM Revenue and Customs Case C-363/05, where the issue was whether a Member State could, by reference to its domestic provisions, determine whether certain types of investment vehicle were "special investment funds" for the purposes of Article 13B of the Sixth Directive: the Court held that the Member State, in determining whether an undertaking should be classified as a special investment fund within Article 13B of the Sixth Directive, must first determine whether the undertaking falls within the concept of special investment fund as determined from the meaning and purpose of the Article 13B provision, and secondly must take account of the general principles underlying the Sixth Directive, such as, in particular, the principle of the neutrality of VAT (see paragraph 17 of the judgment).
- This latter approach seems to us to be self-evidently correct in applying a Community law provision such as Article 13 of the 2006 VAT Directive, as it ensures a uniformity of treatment within each Member State and across all Member States. It results in all bodies which have the same broad function and attributes (in this case, in the domestic context, English universities) having equal standing and treatment in relation to the application of Article 13 it is true that they differ in one attribute or characteristic, namely the method by which they were incorporated or formed, but that in itself is not relevant to their essential nature as an English university.
- Furthermore, this approach resolves the difficulties presented by the Appellant's wider argument, that it is a body governed by public law by reason that it is entrusted with public powers and duties and is therefore, but only in relation to certain matters, governed by public law as its decisions in relation to those matters are subject to review by the courts under the judicial review process. Those difficulties are twofold.
- First there is the difficulty that, on this argument, the same entity is both a body governed by public law and a body not governed by public law, depending upon the powers being exercised. This appears to be acceptable under English law, where the Appellant is amenable to judicial review in relation to certain matters (a dispute as to the awarding of degrees) but not in relation to others (a dispute as to employment). In these cases English law looks to the powers or function being exercised and determines the remedy accordingly. For this particular purpose there is no difficulty that an entity should be governed by public law (in the sense of amenable to judicial review) in some instances but not others. However, Article 13 has a wider purpose, since it is looking to determine whether a particular entity should be subject to a particular VAT exemption if it acts in a particular way. What may be regarded as the "function" test (which is the concern as to the availability or otherwise of the remedy of judicial review) is the subject of the second limb whether or not the public law body is carrying out its activities as a public authority. In looking to the first limb as to whether or not the entity is a body governed by public law it is difficult to see how Article 13 can apply to an entity which is both a body governed by public law and a body not governed by public law, depending upon what function it is exercising, especially where the function is not inherently relevant to the VAT treatment. The approach of identifying a body by its attributes or conformity with a particular concept avoids the difficulties of having a body which oscillates in its status by reference to factors which have no significance for VAT purposes.
- The second difficulty relates particularly to English universities. In the case of those universities which are incorporated by Royal Charter, the public law remedy of judicial review is not available, since the aggrieved party (for example in relation to a claim that a degree has wrongly been denied) must seek redress from the Visitor, the authority appointed for the purpose by the founding Charter, who has exclusive jurisdiction in such a case which relates to the exercise of the university's powers under its rules and regulations: see, for example, R v University of Nottingham, ex parte Ktorides (1998) COD 26. If Article 13 is to be applied by reference to whether or not the body is amenable to judicial review, it cannot be applied consistently or uniformly or in accordance with the principle of fiscal neutrality as between English universities. This difficulty is overcome where the body governed by public law is identified objectively by reference to its attributes.
- If the correct approach for Article 13 purposes is to identify the entity by its attributes or essential nature or conformity to a particular concept, the question is what is that essential nature or the concept to which the entity has to conform if for those purposes it is to be a body governed by public law. In the Netherlands case the European Court held that the notaries and bailiffs in the Netherlands, although they performed official services for which they were appointed by the State (and thus, pursuant to that appointment, exercised the powers of a public authority), they were not bodies governed by public law, "since they are not part of the public administration", and hence could not enjoy the exemption provided for in Article 13 (paragraph 22). The same reasoning was applied in the Ayuntamiento de Sevilla case, where an independent third party which was entrusted with the function of collecting tax was not entitled to be exempted under Article 13 for the reason that it was not a public authority, and therefore the activity was not carried on by a body governed by public law (see paragraphs 17 to 21). The United Kingdom case concerned the operation of toll roads and bridges, in some cases by central and local government directly and in others by private company concessionaires operating under government regulation through a comprehensive statutory scheme. The European Court held that, notwithstanding the strict regulation under which the concessionaires carried out their activities, they were not bodies governed by public law and were therefore outside the scope of Article 13; by contrast, where the toll roads and bridges were operated (on substantially the same basis) by central or local government authorities, that activity was carried out by a body governed by public law (see paragraphs 56 and 57). In the CO.GE.P. Srl case the Independent Consortium of the Port of Genoa (described as "a public economic entity"), which granted a concession of land to the oil refining company taxpayer (in circumstances where the ultimate ownership of the land was vested in the State), was held not to be acting in the name of and on behalf of the State in the management of the land entrusted to it by the State, but on its own account after making independent decisions, so that it was not a body governed by public law and the conditions of Article 13 were not fulfilled
- We take from these cases the principle that, for Article 13 purposes, an entity, to be a body governed by public law, must be "part of the public administration", in the phrase used in the Netherlands case. It is not sufficient that it is carrying out by delegation a public function which could be, and sometimes is, carried out by the State itself. It is not sufficient that it is entrusted with powers and duties of a public nature in the performance of which it is amenable to judicial review in the English law context (no doubt, in such a context, the exercise of powers by notaries, sub-contracted tax collectors and toll bridge operators, would be so amenable). It is not sufficient that it is highly regulated by the State and operates within a comprehensive statutory regime. If it is a body which is inherently and by its nature not a creature or extension of the State it is not part of the public administration and is not a body governed by public law for these purposes. We agree with Mr Hill that this is consistent with the language of Article 13 itself, and the Explanatory Memorandum on the Sixth Directive (see paragraphs 71 and 73 above).
- Does the Appellant form part of the public administration in England? (It seems right to pose the question by reference to England, rather than the United Kingdom, since we understand that higher education is organised differently in Scotland at least.) We agree with the Commissioners that it does not. The proposition that the Appellant is an arm of the State scarcely needs discussing.
- The Appellant is a legally independent and autonomous institution, and this is so notwithstanding that its incorporation, constitution and powers are statute-based. Whilst it can change its constitution and powers only with the consent, and by the direction, of the State, it is self-governing and independent in every way in which it operates and manages its affairs the evidence of Mr Sykes was quite clear on this point (see paragraph 63 above).
- The fact that the Appellant receives State funding from HEFCE under the arrangements described in detail by Mr Lewis (see paragraph 59 above) does not, in our view, cause the Appellant to be part of the public administration. In principle, as Mr Lewis explained, such funding is structured through HEFCE so as to maintain the independence of English universities from central government. The "block grant" system of funding for teaching and research preserves the autonomy of the university in managing its teaching and research and providing the education for which it has obtained funding. Funding from HEFCE may come with certain conditions some of which are designed to ensure that certain government policies are implemented (most recently and strikingly in relation to the level of fees to be charged to students, and providing fair access), but that in itself cannot result in the university becoming part of the public administration. In any event, funding from HEFCE is, for the Appellant, less than a third of its "academic" income, and any conditions imposed cannot impinge on activities funded from other sources.
- Finally the Appellant, like all English universities (including those which receive no State funding) is regulated as regards the use of the title "University" and the use of degree awarding powers for taught and research degrees, under the Further and Higher Education Act 1992 and the Education Reform Act 1988. Such regulation requires the involvement of the QAA to ensure that academic standards are met. Such regulation does not, in our view, have the result that the Appellant is part of the public administration.
- We therefore conclude on this issue that the Appellant is not part of the public administration and accordingly is not a body governed by public law for the purposes of Article 13.
- If we are wrong in our conclusion on the public law body issue, and the Appellant is a body governed by public law, in order to succeed the Appellant must satisfy the second condition of Article 13 by showing that in carrying out its activities it is acting as a public authority.
- The parties were in broad agreement as to what it means that an entity should be acting as a public authority their difference was as to whether, on the facts, the Appellant, in the provision of higher education to degree-level, was acting as a public authority.
- For the Appellant Mr Hitchmough, by reference to the European jurisprudence, considered that the essential question is whether the legal regime governing the public law body in carrying out its activities is the same legal regime which applies to a private trader carrying out the same activity. He referred to the following extracts from the decision in the Porto case:
- In his submission, the only question for enquiry is the way in which the activity which is carried on is regulated: it is irrelevant whether the activity is carried out by a transaction governed by private law (as in Isle of Wight Council v The Commissioners of Customs & Excise (VAT Decision 18557), where there was a private law contract between the public authority and each driver parking his car, but the public authority was held to be acting under a special legal regime in its provision of off-street parking because in so doing it was subject to regulations not applicable to a private operator providing a similar facility); it is also irrelevant whether the public authority is carrying out the activity under a statutory duty or otherwise: West Devon Borough Council v The Commissioners of Customs & Excise [2001] STC 1282 (where the public authority was not acting under a special legal regime in granting a lease, since it did so under the same legal rules as governed lettings by private landlords).
- Mr Hitchmough placed special reliance on the case of Edinburgh Telford College v The Commissioners for HM Revenue & Customs [2006] STC 1291, a decision of the Court of Session in Scotland. In that case (unlike the present appeal) the Commissioners had conceded that the appellant college was a body governed by public law for the purposes of Article 13, so that the case related only to whether the college, in providing its "core" activity of further education courses which were funded by the Scottish Executive, was acting under a special legal regime. The court held that, having regard to all the provisions of the relevant legislation relating to the provision of further education in Scotland and the funding of that provision by the State, the college was subject to a special legal regime which governed its provision of the funded courses, and therefore was within Article 13. Lord Clarke, who delivered the opinion of the court, said as follows (at [25]):
- In the Appellant's submission, in providing degree-level education it is subject to a special legal regime at three levels: by reason of its Statutes; by reason of its regulation as a recipient of funding from HEFCE; and by reason of its regulation as a body entitled to use the title "University".
- As to its Statutes, the Appellant points to the comprehensive code which provides for its establishment, governance, organisation and administration, dealing with every aspect of the way it educates students to degree-level and conducts its business as a university. The Statutes impose upon the General Board of Faculties of the Appellant the obligation to ensure that adequate facilities for teaching and research are available, that appropriate courses of study and instruction are provided and that the teaching given is of the highest standard: Statute C, Chapter I. Thus the provision of teaching is regulated by a code which is secondary legislation of the State and which is special to the Appellant.
- As to the special legal regime applicable to the Appellant by reason of its receipt of public funding, the Appellant points to the Further and Higher Education Act 1992 and the nature of the funding by the Secretary of State of HEFCE and the basis on which HEFCE in turn funds the Appellant. Under the relevant provisions in sections 62 81 of that Act the Secretary of State may make grants to HEFCE on such terms and conditions as he determines provided that those terms and conditions apply generally to all higher education institutions and are not framed by reference to particular courses of study or programmes of research or to the criteria for the selection and appointment of academic staff and for the admission of students. (These provisions were modified subsequently so as to entitle the Secretary of State to impose conditions on its funding of HEFCE in connection with student tuition fees and fair access.) HEFCE is to use funds made available to it by the Secretary of State for funding the provision of education and the undertaking of research by higher education institutions subject to such terms and conditions as HEFCE thinks fit and to take account of any funding conditions imposed upon HEFCE by the Secretary of State. HEFCE uses its position as a funder not only to impose policy set by the Secretary of State (for example in relation to tuition fees and fair access), but also to ensure that quality standards are maintained, that best practice governance is exercised, and that universities are accountable for funds received, all as described in the evidence of Mr Lewis (see paragraph 59 above), so that generally universities apply standards appropriate to bodies in receipt of public funds. This statutory framework under which HEFCE operates and under which the Appellant and other universities receive funding is a special legal regime imposed by the conditions under which grants are made in turn to HEFCE and then to the universities. Such level of regulation does not apply to "private" universities, who are not concerned with levels of student fees and other matters of government policy. The situation of the Appellant is therefore directly to be compared with that of the appellant college in the Edinburgh Telford College case.
- Mr Hitchmough's final submission on the special legal regime issue was that any organisation which designates itself as a "university" can do so only with the consent of the Privy Council, as provided in section 7, Further and Higher Education Act 1992 and section 39, Teaching and Higher Education Act 1998. That in itself can be seen as an indication of special regulatory provision, and hence of a special legal regime subject to which the Appellant provides degree-level education.
- For the Commissioners Mr Hill submitted that the rationale for the "special legal regime" condition in Article 13 is to ensure fiscal neutrality so that a public law body has the benefit of Article 13 exemption only if it is carrying on its activities in a way which is not available to a private trader (and even if it is, the distortion of competition principle may nevertheless exclude it from the benefits of Article 13 under the second paragraph of Article 13). In this regard he referred to the opinion of Attorney-General Kokott in the T-Mobile Austria case:
- In more detail, Mr Hill submitted that the Appellant has to identify the particular "special legal regime" to which it is subject there is no concept in the jurisprudence of layers or levels of legal regimes. As to the special legal regime for which the Appellant contended by reference to the use of the title "university", that cannot be "special" since private universities (such as the University of Buckingham) (that is, universities which on no basis whether by reference to their manner of incorporation or by reference to receipt of state funding can be said to be public law bodies) are subject to that regime also.
- As to the special legal regime by reference to its Statutes, Mr Hill argued that since all other universities (with the exception of Oxford University) could not claim to be subject to such a regime, but were nevertheless providing higher education as a comparable activity, to recognise the Statutes as a special legal regime would be to distort fiscal neutrality and competition.
- Mr Hill's principal case was directed at the Appellant's argument that it was subject to a special legal regime by virtue of the terms under which it receives funding by HEFCE. Mr Hill pointed to four private bodies which are entitled to provide higher education and award degrees in England and which receive no public funding by HEFCE: the University of Buckingham, the College of Law, BPP Holdings plc, and Henley Management College. Their degree-awarding powers are conferred under the same procedures as is the case with universities which receive public funding. Mr Hill acknowledged that these non-public funded institutions are granted taught and research degree-awarding powers for a fixed term of six years (with renewal subject to satisfactory audit by the QAA), whereas publicly-funded universities are granted such powers on an indefinite basis, but their suitability to continue to award degrees is similarly subject to compliance with QAA standards effectively "policed" through the mechanism of HEFCE funding (see the evidence of Mr Lewis at paragraph 59 above). There is no legal impediment to a university such as the Appellant in receipt of HEFCE funding deciding to proceed without such funding it would still be entitled to provide higher education and award degrees. Thus in England the provision of higher education and the awarding of degrees as such is not an activity governed by a special legal regime.
- The question therefore is whether by reason of the receipt of public funds those who receive such funds provide higher education under a special legal regime. In Mr Hill's submission there is no special legal regime by reason of HEFCE funding. It is true that such funding comes with terms and conditions, but taken as a whole they relate to accountability the recipient university is required to show that the funds received have properly been expended upon the matters for which the public funding has been provided. That is a common feature or requirement of any type of public funding and cannot be said to be a special legal regime under which the Appellant and other publicly-funded universities carry out their activities of providing degree-level education. Mr Hill submitted that the Edinburgh Telford College case is distinguishable since it would appear from the opinion delivered in the case that the circumstances and the statutory framework of further education in Scotland are different from those in England relating to higher education: thus there appear to be no private or privately-funded providers of further education in Scotland, and further education institutions provide education in a system where the Scottish Executive has a statutory duty to provide further education (see [25] at e). In England neither the Secretary of State nor HEFCE are under a statutory duty to ensure that higher education is provided universities are at liberty to provide higher education, and the State will make some public funding available to them if they apply for it.
- It is our decision that, if the Appellant is a body governed by public law for the purposes of Article 13, it does not engage in its activities of providing higher education as a public authority.
- In reaching our decision we are required, as made clear in the Porto case, to analyse the requirements and conditions of domestic law relating to the provision of higher education to determine whether such activity is carried out under a special legal regime applicable only to public law bodies or, instead, under the same legal conditions as apply to private bodies carrying out the same activity.
- We deal first with the Appellant's argument that it provides higher education under a special legal regime by virtue of the regulation attaching to degree-awarding powers and use of the title "university". Mr Lewis, in his comprehensive witness statement and the substantial documentation appended to it, took us to both the legislation and the practice. The Privy Council has the right, under section 76, Further and Higher Education Act 1992, to specify which higher education institutions are competent to grant taught and research degrees. The Privy Council also has the power to consent to an institution using the word "university" in its name: section 77, Further and Higher Education Act 1992; section 39, Teaching and Higher Education Act 1998. Institutions which have the word "university" in their name by virtue of founding statute or Royal Charter retain that right without need for the consent of the Privy Council. It is a criminal offence for an institution which is not authorised to award degrees to do so: section 214, Education Reform Act 1988. The process by which the Privy Council exercises these powers was described to us by Mr Lewis: the institution concerned applies to the Privy Council, which seeks advice from the Department for Innovation, Universities and Skills, which in turn seeks advice from the QAA (which has an Advisory Committee on Degree Awarding Powers for the purpose). The QAA, in making its recommendation, takes into account criteria which it has agreed with the Department, which are published in its guidance notes and which include organisational governance and management; quality assurance and academic standards; arrangements for supporting student learning; staffing; and administrative infrastructure. The Privy Council may also seek advice from HEFCE as to the financial stability of the applicant institution.
- Whilst it might be argued that this system of regulation comprises a legal regime, what is clear is that if it is, it applies on the same basis to both public law bodies (assuming them to be such) which provide higher education and to the growing number of private entities referred to in Mr Lewis's evidence which provide higher education and award degrees and use the word "university" in their title. We therefore agree with the Commissioners' case that even if this is a system of regulation, it cannot be a special legal regime governing only public law bodies and not private traders in respect of the provision of higher education.
- We deal next with the Appellant's submission that the conditions and terms imposed on a university as a stipulation of its receiving public funding comprise a system of regulation which is a special legal regime for Article 13 purposes. We note first that this argument can succeed, if at all, only where the institution is a public law body by virtue of its receipt of public funding: if, say, the Appellant is a public law body only by virtue of its statutory incorporation (so that all, or most, other publicly-funded universities are private bodies), the Appellant's case on this point falls away, since any such system of regulation by reason of public funding is no longer "special" to public law bodies.
- The legislative basis for public funding of universities in England, and the process by which the Secretary of State funds HEFCE and it in turn funds individual universities was set out by Mr Lewis in his evidence and is noted above at paragraph 59. As we understand it, the system is designed to balance, on the one hand, the need to maintain the autonomy of the university with, on the other hand, the need for accountability for the use of public funds and the implementation of government policy.
- The legislation does not in its terms apply to universities in the sense of imposing obligations upon them or granting them powers it authorises the Secretary of State to make grants to HEFCE (without imposing an obligation upon him to do so) and permits him to do so upon terms and conditions he determines, but subject to specific and important limitations upon such terms and conditions. It then makes HEFCE responsible for administering the funds received as grants from the Secretary of State for the purpose of providing financial support to individual universities for eligible activities, authorising HEFCE to make its grants subject to such terms and conditions as it thinks fit, provided such terms and conditions relate only to the use of funds received from HEFCE. The legislation does not require HEFCE, in making its grants to universities, to give effect to any conditions the Secretary of State imposes upon HEFCE: that is left as a matter for the Secretary of State to deal with by way of such conditions themselves. The legislation does not impose upon the Secretary of State any obligation to ensure the provision of higher education (there might be a more general responsibility of this kind, for example under the UN Convention on the Rights of the Child or the European Convention on Human Rights), nor does it impose any such obligation upon HEFCE.
- The nature and scope of the regulation (if such it is) imposed by HEFCE funding is found in the financial memorandum which forms the basis on which the university and HEFCE agree that funding should be provided for the year in question. Any breach by the university of the terms of that memorandum will be a matter to be resolved between HEFCE and the university (principally by HEFCE withdrawing its funding, but it might have other rights in contract): any such breach is not a breach of any statutory provision or a failure to comply with any statutory obligation.
- We were shown the financial memorandum between the Appellant and HEFCE for the year to 31 July 2008. It is in two parts, the first being the "model" financial memorandum, common to HEFCE's dealings with all English universities, and the second being the short agreement specific to the Appellant.
- The "model" financial memorandum provides that HEFCE will make payments in support of activities specified in the Further and Higher Education Act 1992, and may impose conditions attaching to such payments in accordance with that Act. The university agrees to use the funds only in accordance with the Act and the conditions imposed by HEFCE, and to use any funds provided for a specific purpose (i.e. outside the block grant) for that purpose only. There is a requirement that the university has sound financial management and there is specific provision as to maintaining a level of reserves with a view to its remaining solvent, and the university is also required to ensure that it does not undertake long-term financial commitments which might jeopardise the public investment represented by HEFCE grants. The university is required to maintain proper accounting records and to prepare financial statements complying with law and accountancy practice and standards, and to submit itself to audit by HEFCE. As a general principle the university is required to deliver value for money in its use of public funds. It is required to provide information to HEFCE relating to HEFCE's statutory functions, to meet legislative requirements as to equal opportunities and similar matters, and to have an effective policy of risk management. The university is required to subscribe to the QAA, the Higher Education Statistics Agency and the information technology joint academic network. The university is required to manage and develop its estate of land and buildings with regard to any guidance generally issued on that subject by HEFCE. Special accounting treatment is required in the case of funding by way of capital grants to enable the amount of such grants to be repaid to be quantified upon the contingency (such as insolvency, or dissolution, or the university deciding to go "independent" of HEFCE funding) that they become repayable.
- The agreement specific to the Appellant sets out the detail of the funding to be provided for the year in question related to the targets as to student numbers and resource levels which form the basis of the agreed amount of funding. HEFCE states that it expects the Appellant to meet the various targets, and reserves the right to adjust the funding if, beyond a permitted range of tolerances, those targets are not met. Specific reference is made to funding of additional student numbers as part of the process by which HEFCE is able to deliver the overall student number increases sought by the government, and the targets agreed for this purpose. It is specified that the Appellant is expected not to charge UK/EU students on relevant courses tuition fees at a level higher than the prescribed amount specified in the regulations made under the Higher Education Act 2004. Similarly, the Appellant is required to comply with the student access agreement as approved by the Director of Fair Access.
- Whilst this is an extensive list of conditions, we consider that it does not of itself amount to a system of regulation by which or under which the Appellant pursues the activity of providing degree-level education. The Appellant as a recipient of funds from HEFCE is largely at liberty to provide such education in the manner it best thinks fit, and not subject to, or by way of implementation of, a special code or other regime of regulation. It is not the case that the law requires or empowers the Appellant to provide higher education and specifies the way in which it carries out that responsibility. Instead (and subject, possibly, to the issues of tuition fees and access) the conditions imposed by HEFCE essentially pertain to the question of accountability ensuring that the public funds it provides are used for the broad purpose for which they are made available and that they will not be at risk from poor financial management. In relation to the "block grant", the Appellant has entire discretion as to how to use the funds within the general requirement that they are used for teaching degree-level courses. Those conditions do extend to the maintenance of academic teaching standards, achieved through the requirement that the Appellant subscribes to the quality assurance methods instigated and monitored by the QAA, but as Mr Hill pointed out, similar conditions are imposed and monitored by the QAA through a different route on the private degree-awarding bodies, so that this feature cannot be said to be "special" to any universities which are public law bodies.
- The conditions as to tuition fees and access are of a different order, and this is evidenced by the fact that they are the subject of special legislation. Section 23 of the Higher Education Act 2004 (replacing an earlier provision in the Teaching and Higher Education Act 1998 dealing only with tuition fees) requires the Secretary of State, when making a grant to HEFCE, to impose an obligation upon HEFCE to the effect that HEFCE will itself require as a condition of the grants it makes that the individual higher education institutions in receipt of grants will (i) limit tuition fees in the case of UK/EU students to the specified maximum amounts and (ii) comply with an approved plan as to fair and equal opportunity access to higher education (in terms of awarding places to students) made between the university and the Director of Fair Access to Higher Education. As with other HEFCE-imposed conditions, failure to comply can result in grants being withdrawn or withheld in future years. Such restriction on fees which can be charged and on procedures for the selection of students go beyond what might be regarded as mere accountability for the use of grants received (although they do broadly accord with terms (as to charges and access) imposed by other grant-making bodies, such as the Arts Council of England and the Lottery Commission). Such restriction is not imposed by any means on private degree-awarding bodies. It might therefore be possible to identify this particular feature of the HEFCE funding arrangements as regulatory in nature and "special" to higher education institutions which are in receipt of public funding. However, we consider that the HEFCE funding arrangements should be viewed in their entirety, and on that basis we remain of the view that they are not such as constitute a special legal regime.
- In this connection we need to refer to the Edinburgh Telford College case. We had no evidence as to the scheme and effect of the legislation in Scotland relating to further education and in particular as to the way it differs from the legislation applicable to English higher education institutions. Mr Hill pointed out what he considered to be key differences from a reading of the case. That is as may be. As mentioned, our duty is to analyse the conditions laid down by national law for the provision of education, which in this case is the law as it relates to English higher education institutions, and our analysis of that law has led us to the conclusion we have reached.
- Finally we come to the Appellant's submissions that its Statues, being in the form of secondary legislation of Parliament, comprise a special legal regime for Article 13 purposes. On its face this argument has its merits. But we are of the view that it should be rejected on broadly the same grounds as we rejected the related submission that the Appellant should be regarded as a public law body because it happens to be a creature of statute, namely that it gives an anomalous result which cannot be consistent with the purpose or intended effect of Article 13. In all material ways the Appellant pursues its activity of providing higher education in the same manner and subject to the same law as any other university in England, and in applying Community law it should not be a consequence of its particular historic foundation a factor which both legally and practically is largely, if not entirely, irrelevant to the way it carries on that activity that its activities enjoy the benefits available through Article 13. This line of argument by the Appellant requires that all such other universities are to be regarded as the "private traders", and it is clear that they carry on comparable activities on materially the same legal basis as the Appellant.
- Mr Hill expressed the point differently, referring to the principle of fiscal neutrality as being at the heart of Article 13, and referring to the opinion of the Attorney-General in the T-Mobile Austria case. Mr Hitchmough countered this in his reply by pointing to the second paragraph of Article 13 and the express exception in cases of distortion of competition, arguing that such an exception is otiose if the principle of fiscal neutrality is used as a tool in applying the first paragraph of Article 13. That is too stark a view. The broad principles of Community law (and in applying the terms of a VAT Directive fiscal neutrality is undoubtedly one such principle) can be applied generally in looking to the purpose of the Community legislation. To apply Article 13 on the grounds that the Appellant's Statutes comprise a special legal regime unique to the Appellant, distinguishing it from every (or nearly every) other English university and so bringing it alone within the scope of Article 13 would be to apply it in a manner contrary to its purpose.
- We therefore conclude on this issue that, even if the Appellant is a body governed by public law for Article 13 purposes, it does not engage as a public authority in providing higher education.
- For these reasons we dismiss the Appellant's appeal.
- The Commissioners made no application for an award of costs, and therefore we make no direction as to costs.
20610
Value added tax Article 13, Council Directive of 28 November 2006 (2006/112/EC) whether Article 13 has effect to treat the Appellant as not carrying on an economic activity no whether the Appellant is a body governed by public law for the purposes of Article 13 no whether the Appellant engages in activities as a public authority in providing higher education no whether the Appellant, as a charity, uses fuel or power otherwise than in the course or furtherance of a business within Group 1 of Schedule 7A, Value Added Taxes Act 1994 no - appeal dismissed
LONDON TRIBUNAL CENTRE
THE CHANCELLOR, MASTERS AND SCHOLARS
OF THE UNIVERSITY OF CAMBRIDGE
Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS Respondents
Tribunal: EDWARD SADLER (Chairman)
MISS SHEILA WONG CHONG FRICS
Sitting in public in London on 10 12 December 2007
Andrew Hitchmough and James Rivett, counsel, instructed by the Appellant
Raymond Hill, counsel, instructed by the General Counsel and Solicitor for HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2008
DECISION
Introduction
(1) As a charity it is entitled to pay the reduced rate of VAT on electricity supplies made to it if it uses the electricity "otherwise than in the course or furtherance of a business";
(2) In the present case the electricity was used by the Appellant in the course or furtherance of providing higher education to degree level;
(3) The Appellant is a body governed by public law by reason of its statutory foundation and the public powers entrusted to it and, in providing education, is acting as a public authority by reason of the statutory regime under which it is governed and the funding and other regulations with which it must comply, so that it is not to be regarded as a taxable person in relation to its activities of providing education, by reason of Article 13 of the Council Directive of 28 November 2006 ("the 2006 VAT Directive");
(4) If the Appellant is not a taxable person, then it is not (by reason of the definition of "taxable person" in Article 9 of the 2006 VAT Directive) carrying out any economic activity;
(5) If in providing higher education the Appellant is not carrying out any economic activity, it is not then acting in the course or furtherance of a business;
(6) Accordingly, the electricity used by the Appellant in the course or furtherance of providing higher education is used "otherwise than in the course or furtherance of a business", and the Appellant is entitled to pay the reduced rate of VAT on the supplies of such electricity made to it.
(1) Article 13 of the 2006 VAT Directive has more limited scope than the Appellant asserts: by providing that a body governed by public law is not regarded as a taxable person in respect of activities in which it is engaged as a public authority Article 13 looks only to the question of the supplies made by the public body when it is so engaged in effect it treats them as outside the scope of VAT, or as exempt; specifically, Article 13 does not look to the question of whether the activities in which the public body is engaged are economic activities and is therefore not relevant to the entitlement of the public body to recover VAT at a reduced rate on input supplies; accordingly, Article 13 does not have effect to entitle the Appellant to claim reduced rate VAT on electricity supplies it receives on the ground that the electricity is used "otherwise than in the course or furtherance of a business";
(2) Notwithstanding its statutory foundation, the Appellant is not a "body governed by public law" as that expression is to be understood for the purposes of Article 13 of the 2006 VAT Directive, so that even if Article 13 were in point, the Appellant would not be within its ambit;
(3) The Appellant, in providing education, does not engage in activities "as a public authority" since it does not operate under a special legal regime, so for that reason also the Appellant is outside the ambit of Article 13.
(1) Is it correct to interpret and apply Article 13 of the 2006 VAT Directive so that a body within its ambit engaged in activities within its ambit is treated for VAT purposes as not carrying on an economic activity when it engages in those activities? This is a question of law. We refer to it as "the Article 13 issue".
(2) Is the Appellant a "body governed by public law" for the purposes of Article 13 of the 2006 VAT Directive, and hence within the ambit of Article 13? It is a question of law as to what comprises a "body governed by public law" for the purposes of Article 13, and a question of fact as to whether the Appellant has the required characteristics. We refer to this as "the public law body issue".
(3) Is the Appellant, in providing higher education, engaging in activities "as a public authority" for the purposes of Article 13 of the 2006 VAT Directive, and hence engaging in activities within the ambit of Article 13? It is a question of law as to what comprises engaging in activities "as a public authority" for the purposes of Article 13, and a question of fact as to whether, in providing higher education in its particular manner and circumstances, the Appellant meets the relevant requirements. We refer to this as "the special legal regime issue".
If the Appellant fails on the Article 13 issue its appeal must be dismissed. If the Appellant succeeds on the Article 13 issue, then in order to succeed in its appeal it must succeed on both the public law body issue and the special regime issue.
(1) The Appellant is not a "body governed by public law" for the purposes of Article 13 of the 2006 VAT Directive;
(2) If, contrary to our decision, the Appellant is a "body governed by public law" for such purposes, it is not, in providing higher education, engaging in activities "as a public authority" for the purposes of Article 13 of the 2006 VAT Directive;
(3) If, contrary to our decision, the Appellant is a "body governed by public law" which, in providing higher education, is engaging in activities "as a public authority" for the purposes of Article 13 of the 2006 VAT Directive, Article 13 does not have the effect that, when it engages in such activities, the Appellant is to be treated for VAT purposes as not carrying on an economic activity;
(4) Therefore in providing higher education the Appellant is acting "in the course or furtherance of a business", and in consequence supplies of electricity or other fuel which it uses in providing higher education are not supplies for use "otherwise than in the course or furtherance of a business", and therefore do not quality as supplies at the reduced rate of VAT within Group 1 of Schedule 7A, VATA;
(5) The Appellant's appeal against the decision of the Commissioners to refuse to grant the Appellant a certificate that electricity supplies made to it should be made at the reduced rate of VAT is therefore dismissed.
The background facts
Witnesses and evidence
The principal Directive and UK domestic legislative provisions relevant to the appeal
"VAT charged on
(a) any supply that is of a description for the time being specified in Schedule 7A, or
(b) any equivalent acquisition or importation
shall be charged at the rate of 5 per cent."
Schedule 7A to VATA sets out in Groups the supplies on which VAT is to be charged at the reduced rate. Group 1 is headed: Supplies of Domestic Fuel or Power, and the following are the provisions of Group 1 relevant to this appeal:
"Item No.
1 Supplies for qualifying use of
(e) electricity, heat or air-conditioning.
NOTES
Meaning of "qualifying use"
3 In this Group "qualifying use" means
(a) domestic use; or
(b) use by a charity otherwise than in the course or furtherance of a business."
"Article 13
1. States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.
However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition.
In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a small scale as to be negligible.
2. Member States may regard activities, exempt under Articles 132, 135, 136, 371, 374 to 377, and Article 378(2), Article 379(2), or Articles 380 to 390, engaged in by bodies governed by public law as activities in which those bodies engage as public authorities."
"Article 9
1. 'Taxable person' shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as 'economic activity'. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity."
The Article 13 issue the parties' submissions
"According to the basic rule contained in the first subparagraph of Article 4(5) of the Sixth Directive [i.e. Article 13.1], States, regional and local government authorities and other bodies governed by public law are not to be considered taxable persons in respect of the activities or transactions in which they engage as public authorities. The provision therefore exempts public authorities from general liability to tax even where they pursue an economic activity within the meaning of Article 4(1) and (2) of the Sixth Directive. The exercise of public authority is therefore equated with the act of a private-individual consumer."
(The issue is not dealt with in the decision of the court, which held that the activity of the taxpayer was not on general principles an economic activity, so Article 13 was not in point.)
"I therefore consider that [Article 13.2] should be interpreted as meaning that, with reference to exempt activities, it gives Member States the option of excluding public bodies carrying out such activities from being subject to the system of the [VAT] Directive."
This is relevant, in the UK's domestic legislation, to the scheme for reduced rate VAT on electricity and other fuel, where the reduced rate is available on supplies to private individual consumers or charities who effectively have that status because they are using the fuel otherwise than in the course of a business.
"31. It was argued for the Academy that Article [13] applies here to treat its educational activities as not carried on in the course or furtherance of a business .
Mr Hitchmough argued that we should not feel bound to follow this decision, since no reasoned argument on the point on the part of the appellant taxpayer is recorded in the decision, and the Netherlands case given as supporting authority is concerned with whether certain persons (notaries and bailiffs in the Netherlands) fell within the scope of Article 13, not with the effect of Article 13 had the court concluded that they did fall within its scope.
Decision on the Article 13 issue
"if you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it."
In relation to Article 13, the Appellant argued, the imaginary state of affairs which has to be treated as real is that the public law body is not a "taxable person"; the consequence which flows from this (and which has to be regarded as real) is that it is not carrying on an economic activity - Article 9 tells us that a taxable person can only be a person carrying out an economic activity, so a person who is not a taxable person is not carrying on an economic activity.
"1 The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by (i) a taxable person acting as such ;
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such ."
Therefore the consequence of a public law body being deemed not to be a taxable person in respect of the relevant transactions is that those transactions are not subject to VAT, as they do not comprise a supply of goods or services by a taxable person acting as a taxable person. Article 13 has a clear purpose as seen in this consequence. For what it is worth, that is how Article 13 has been applied in the cases which have come before the European Court. The Appellant, to sustain its interpretation, has to go a step further, and does so by claiming that since Article 9 says, in effect, "'Taxable person' equals 'person carrying out an economic activity'", then it is a consequence of the public law body not being a taxable person that it is not carrying out an economic activity. But that further step is founded only on a definition and is not supported by a consequence or purpose which is apparent from the Directive the Appellant cannot point to what one might call an operative provision in the Directive and say, "This is why it must be the case that Article 13 treats the public law body as not carrying on an economic activity, and this is the consequence of not so carrying on an economic activity".
The public law body issue the evidence and the parties' submissions
"On this point [the meaning of the first sub-paragraph of what is now Article 13] it should be noted that, as the Court of Justice has held on numerous occasions, it is clear from that provision, when examined in the light of the aims of the [2006 VAT Directive], that two conditions must be fulfilled for the rule of treatment as a non-taxable person to apply: the activities must be carried on by a body governed by public law and they must be carried out by that body acting as a public authority (see in particular Ayuntamiento de Sevilla v Recaudadores de las Zonas Primera y Segunda (Case C-202/90))."
Thus, first, the body carrying on the relevant activities must be a body governed by public law, and then that body so governed must carry out the activities acting as a public authority.
(1) The principal legislation relating to the funding of universities in England is found in the Further and Higher Education Act 1992. This defines higher education institutions which may receive financial support from the funding bodies (which for English universities is HEFCE). It does not as such require the Secretary of State to provide higher education nor to ensure that it is provided instead it empowers him to provide funding to HEFCE to support higher education in England and to attach conditions to any such funding;
(2) HEFCE is a non-departmental public body created by section 62, Further and Higher Education Act 1992. It is not part of the Department for Innovation, Universities and Skills. The Secretary of State appoints its Chairman and Board members. The Secretary of State is authorised to make grants to HEFCE for the purpose of providing teaching, research and related activities, and to make those grants subject to terms and conditions provided those conditions do not curtail academic freedom or relate to individual higher education institutions. HEFCE administers those funds its distinct statutory duties are free from direct political control, and it is regarded as an intermediary or "buffer" between the higher education institutions and the government, whereby those two parties are kept at arm's length;
(3) HEFCE is required to act in support of the wider strategic aims of the Department, and its key performance targets, policy and performance framework must be approved by the Secretary of State. It agrees with the Department the basis of its relationship with universities on financial matters and the terms and conditions on which it will make grants to universities. As a separate matter it gives advice to the Secretary of State on higher education funding matters. It works in partnership with universities to develop its funding policies, consulting widely with them;
(4) Each year the Secretary of State issues to HEFCE a grant letter informing HEFCE of the Department's priorities and policies for higher education: for example, the annual grant letter was the means by which the Secretary of State imposed the condition of funding relating to variable tuition fees (the Secretary of State's power to impose such conditions is the subject of special legislation);
(5) HEFCE decides how much funding each university receives, using formulae for teaching and research funding taking into account, in the case of teaching funding, the number and type of students at the university, the courses provided etc. The funding for research is highly selective, taking account of the quality of the research projects. For each university the funding for teaching and research is added together and provided as a "block grant" to the university. In addition HEFCE may provide special funding and capital funding for special projects and buildings and equipment. Typically the "block grant" will comprise about 80% of the total funding in any year;
(6) The funding is made to a university pursuant to a financial memorandum between HEFCE and the university. This sets out the terms and conditions for payment of HEFCE grants to the university, for example, specifying the educational provision the university is required to deliver in return for the funds; requiring that "block grant" funds are used only for teaching and research and that specific grants are used for the purpose for which they are made; and requiring that proper financial records are maintained and audit procedures complied with;
(7) In addition, the financial memorandum will include any conditions imposed on universities generally which reflect the conditions made by the Secretary of State in his funding of HEFCE: for example, to implement its policy of fair access, the Department imposed a condition requiring HEFCE to ensure each university had a fair access plan, and in turn HEFCE imposed a corresponding condition on each university through the financial memorandum;
(8) Once block grant funding is made, the university is free to spend the funds according to its priorities within the broad guidelines specified by HEFCE. However, the university is, by way of accountability, expected to deliver the education provision implicit in the amount of funding, and therefore if a university has fewer students than anticipated (within certain tolerances) funding may be clawed back or adjustments made in subsequent years. In order to ensure proper accountability, the university is required to meet certain audit standards and practices;
(9) HEFCE's role extends to quality assurance: it has a statutory duty to ensure that the quality of teaching provision that it funds is assessed to ensure compliance with certain standards. It fulfils this duty by engaging the services of the Quality Assurance Agency ("QAA"), which is an independent agency primarily funded by the higher education institutions themselves, and which audits quality in every higher education institution on a periodic basis. Each university funded by HEFCE is required to subscribe to the QAA as a condition of its funding;
(10) HEFCE does not impose any conditions as to governance or the composition of the governing body of a university, although it would normally expect a university to comply, by way of good practice, with the guidance on such matters given by the Committee of University Chairmen;
(11) HEFCE is the largest single source of public funding for the English higher education sector as a whole, but the proportion of the funding of each university which comes from HEFCE will vary as between each university, depending on its size, activities, access to other sources of income etc. Each university, as an independent body, is free to seek income from other sources, for example by setting its own level of tuition fees for overseas, post-graduate and other students paying full fees (tuition fees charged to UK/EU undergraduates are, as a condition of funding, capped, currently at £3,000 per year). In 2005/6 HEFCE funding accounted for 38% of the total income received by the higher education sector as a whole in England, the largest proportion (tuition fees accounted for 24%). With the increase in domestic tuition fees from 2006/7 it is anticipated that HEFCE funding will account for a reduced proportion of overall income.
"30. It does not seem to me that [the provisions of section 33, VATA] are of any direct relevance. First, though I accept that Riverside carries on activities which are in the public interest and which are supported by public money, I do not think it can be said that it is a public authority in the sense meant by Article [13]. The provision clearly contemplates government organisations which are institutions of a democratic state and the European jurisprudence on the topic shows that the concept of a public body is to be narrowly construed. I was referred to a large number of judgments, but I think I need mention only two [the Netherlands case and the Ayuntamiento de Sevilla case].
Decision on the public law body issue
The special legal regime issue the parties' submissions
"17 It is thus clear from the settled case law of the court that activities pursued as public authorities within the meaning of the first sub-paragraph of [Article 13] are those engaged in by bodies governed by public law under the special legal regime applicable to them and do not include activities pursued by them under the same legal conditions as those that apply to private economic operators (see in particular EC Commission v France (Case C-276/97), EC Commission v Ireland (Case C-358/97), EC Commission v United Kingdom (Case C-359/97)).
21 The national court must, in accordance with the case law referred to in paras. 16 and 17 above, analyse all the conditions laid down by national law for the pursuit of the activity at issue in the main proceedings, to determine whether that activity is being engaged in under a special legal regime applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators."
" .Having regard to the plethora of statutory provisions we have set out above which, both directly and indirectly, in our judgment, impact on the way in which the College may provide funded courses, emanating initially from the Executive's statutory duty to provide further education, we consider that, having regard to the language of [Article 13], the College, in providing funded courses, was acting as a public authority and not as a private trader. Some of the case law of the European Court of Justice has, of course, provided authoritative guidance as to how the wording of [Article 13] should be interpreted, and applied, by reference to the need to identify a special legal regime under which the public authority in question engages in the activity or transaction in question. We do not consider that there is any real difficulty in identifying the existence of such a special legal regime arising from the provisions of the [Further and Higher Education (Scotland) Act 1992] itself and its implementation in the documents and directions given by the Scottish Ministers and Funding Council. As noted previously it was conceded on behalf of the Commissioners that these features of the present case could be regarded as constituting a legal regime although the argument for the Commissioners was that it was not 'special'. In our judgment the legal regime in question is special. It is special to the colleges which provide the courses in question. If there were private traders, which there are not in Scotland, who provided such courses, they would not do so under that legal regime ."
"The Court has considered the manner in which activities are carried out to be crucial, but it would not be enough to construe this as just meaning the manner in which the transaction is to be conducted, that is to say its form. It also depends primarily on whether private individuals can engage in any comparable activity at all on the basis of the relevant legislation. If that were to be the case the State would have to be treated as a taxable person so as not to jeopardise the neutrality of imposing value added tax. The fact that, when exercising the powers exclusively afforded to it, the State makes use of procedures available under the civil law does not, however, have any effect on fiscal neutrality."
The basis of Mr Hill's case was that there are private bodies which engage in the activity of the provision of higher education, and do so on comparable terms to those applicable to the Appellant. Any terms imposed by HEFCE funding do not, in context, amount to a "special legal regime".
Decision on the special legal regime issue
EDWARD SADLER
CHAIRMAN
Authorities cited but not referred to in the Decision
Rhondda Cynon Taff County Borough Council v Commissioners of Customs & Excise VAT Tribunal Decision 16496 (2000)
Clark v University of Lincolnshire and Humberside [2000] 1 WLR 1988
R v Manchester Metropolitan University ex parte Nolan [1994] ELR 380
R v Vice-Chancellor of Cambridge 91765) 3 Burr 1647
R v University of Cambridge ex parte Beg [1999] ELR 404
Jenkin v Pharmaceutical Society of Great Britain [1921] 1 Ch 392
Wollny v Finanzamt Landshut C-72/05 [2006]
Commission v Ireland C-358/97 [2000] ECR I-6301
Hutchinson 3G v HM Commissioners for Customs and Excise C-369/04
Sherlock v Morris [1996] NIJB 80
Commission v Germany C-287/00 [2002] ECR I-5811
RELEASE DATE: 12 March 2008
LON/2005/0958