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College of Estate Management (Respondents) v. Her Majesty's Commissioners of Customs and Excise (Appellants)
1. I have read the opinion of my noble and learned friend Lord Walker of Gestingthorpe. I agree with his analysis of the case. I would also allow the appeal.
2. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Walker of Gestingthorpe. I agree with it and for the reasons which he gives I would also allow the appeal.
LORD RODGER OF EARLSFERRY
3. I have had the advantage of considering in draft the speech which my noble and learned friend, Lord Walker of Gestingthorpe, is to deliver. I agree with it but add some short observations of my own since the House is to allow the appeal while rejecting one of the main planks in the Commissioners' argument in support of it.
4. Article 13A(1)(i) of Council Directive 77/388/EEC ("the Sixth Directive") requires member states to exempt from value added tax inter alia young people's education and vocational training, including the supply of services and of goods closely related thereto, if provided by certain bodies. The United Kingdom has complied with this obligation by enacting section 31(1) of, and Group 6 in schedule 9 to, the Value Added Tax Act 1994 ("the Act") which make the provision by an eligible body of education an exempt supply (item no 1(a)). Also exempt (item no 4) is the supply by the eligible body of any goods or services, other than examination services, which are closely related to the provision of education, provided that the goods or services are for the direct use of the student receiving the principal supply. If, therefore, the only issue in a given case were whether the supply by an eligible body of printed course materials to its students was an exempt supply, a satisfactory answer might well be found simply by applying these provisions without analysing the situation more deeply. The issue in the present case is somewhat more complex, however.
5. Article 17 of the Second VAT Directive (67/228/EEC) and article 28 of the Sixth Directive permit member states to provide for exemptions, with refund of the tax paid at the preceding stage, for clearly defined social reasons and for the benefit of the final consumer. The United Kingdom has taken advantage of this permission by enacting section 30(1) and (2) of the Act, which introduce the concept of zero-rated supplies into our domestic law. Section 30(1) provides that where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from that section, no VAT is to be charged on the supply but it is to be treated in all other respects as a taxable supply, and the rate at which VAT is treated as charged on the supply is to be nil. In effect, therefore, if a taxable person makes a supply which is exempt but also zero-rated, the supply is to be treated as a taxable supply. The result is that the taxable person is entitled to deduct input tax which is attributable to that supply, whereas he would not be entitled to do so if the supply were merely an exempt supply. By virtue of section 30(2) and schedule 8, Group 3, a supply of books (item no 1) is zero-rated.
6. In the present case it is agreed that the College are an eligible body for the purposes of Group 6 in schedule 9 and that they provide education. It is also not in dispute that, as a matter of fact, the College send their students printed materials which they are expected to study. The College contend, accordingly, that they supply education in terms of section 31(1) and schedule 9, but that they also supply the students with books (comprising the printed materials), in terms of section 30(2) and schedule 8. By virtue of section 30(1), the supply of the printed materials should therefore be treated as a taxable supply and the College should be entitled to deduct the input tax attributable to that supply. The Commissioners do not dispute that the printed materials could constitute "books" for the purposes of schedule 8. They contend, however, that the College make only a single supply, viz a supply of education. That supply is exempt. Since there is accordingly no taxable supply, there is no basis for the College to recover input tax. The core issue in the appeal is, therefore, whether the College make a single (exempt) supply of education or whether they also make a distinct zero-rated supply of books to their students.
7. Broadly similar questions have come before the courts on many occasions and have generated a considerable number of reported decisions. Recently, however, in Beynon & Partners v Commissioners of Customs & Excise  1 WLR 86, 90-91, para 19, Lord Hoffmann drew attention to the restatement of principle by the Court of Justice in Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96)  2 AC 601 and suggested that, in future, it would not be necessary to go back any further. He went on to cite paras 27-29 of the judgment of the Court of Justice and to quote para 30. Precisely because of the importance of the Court's statement of principle, the terms of those paragraphs require careful scrutiny.
8. In the English translation,  2 AC 601, 627, paras 29 and 30 read:
The last part of para 29 is a little surprising because it suddenly talks about the taxable person supplying several distinct "services" or a single "service", when up until then the question has been whether there has been more than one supply or just a single supply. Then, at the beginning of para 30, the court goes on to give, as one particular situation in which there is a single "supply", the case where one or more elements are to be regarded as constituting the principal "service", while one or more elements are to be regarded as ancillary "services" which share the tax treatment of the principal "service". Again, consistency, and the very nature of the legal problem, would suggest that, strictly speaking, the question is what constitutes a single "supply".
9. These slight anomalies in the analysis and language are not to be found in the French text, Recueil, p I-1013, points 29 et 30, which is, of course, the text drafted by the Court:
Here the usage is consistent and, at all stages, the question is identified as being whether the taxable person is making several distinct principal "supplies" (prestations) or a single "supply" (prestation). At the beginning of para 30 the Court says that it is useful to emphasise that there is a single supply (prestation) where one or more elements are to be regarded as constituting the principal "supply" (prestation) while one or more (other) elements are to be regarded as an ancillary supply or as ancillary "supplies" (prestations) which share the tax treatment of the principal service.
10. Many, perhaps most, situations will be straightforward and it will be possible to identify a single supply which the taxpayer makes. The appropriate tax treatment is determined accordingly. In paras 29 and 30 the Court of Justice is not concerned with simple situations of that kind but with more complex situations where the transaction involves more than one element: then the question is whether, for tax purposes, there is a single supply or more than one supply. As the Court points out in para 29, every supply of a service must normally be regarded as distinct and independent. Nevertheless, in the opening sentence of para 30, the Court makes clear that there are cases where the taxpayer is to be regarded as making a single supply even though it comprises more than one element. The Court chooses to highlight the case where there is a principal supply and an ancillary, or accessory, supply. But, since the Court envisages that the principal supply may itself comprise more than one element, plainly, in cases where there is no ancillary supply, a single supply may still be made up of more than one element. So where a taxpayer is involved in a transaction in which he performs several services, none of which can be singled out as the dominant or principal supply, it may nevertheless be necessary to consider whether, for tax purposes, they are properly to be regarded as elements of a single supply. The supply of restaurant services is one example: Faaborg-Gelting Linie A/S v Finanzamt Flensburg (Case C-231/94)  ECR I-2395.
11. The point would scarcely be worth re-emphasising, were it not for the position adopted by the Commissioners in this case. They persuaded both the tribunal and Lightman J that the supply of the printed materials by the College was ancillary to the College's principal supply of education. They advanced an argument to that effect in support of their appeal to your Lordships' House. But it is hard to swallow. After all, the tribunal found as a fact that the average student was expected to spend about 94% of his time using the printed materials. Taken together, the remaining elements, including face-to-face teaching and sitting examinations, counted for only 6% of the average student's time. Supplying the printed materials for the students to study was therefore, by far, the main method by which the College provided them with an education. By contrast, as the Court indicated in Card Protection, at para 30, an element is properly to be regarded as ancillary where it is not the principal supply but is accessory to it and so shares the tax treatment of the principal supply. Not surprisingly, in Commissioners of Customs and Excise v Madgett and Baldwin (C-308/96 and C-94/97)  ECR I-6229, 6259, para 24, the Court envisaged that the ancillary supply would account for a small proportion of the price of the transaction as a whole and would not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied by the trader. In the present case, however - leaving aside any allocation of a proportion of the price - it would be highly artificial, to say the least, to describe the printed materials as nothing more than a means for the students the better to enjoy the education supplied by the College. In reality, those materials were the means by which the students obtained most of their education.
12. But the mere fact that the supply of the printed materials cannot be described as ancillary does not mean that it is to be regarded as a separate supply for tax purposes. One has still to decide whether, as a matter of statutory interpretation, the College should properly be regarded as making a separate supply of the printed materials or, rather, a single supply of education, of which the provision of the printed materials is merely one element. Only in the latter event is there a single exempt supply, to which section 31(1) of the Act applies and section 30(1) does not apply. The answer to that question is not to be found simply by looking at what the taxable person actually did since ex hypothesi, in any case where this kind of question arises, on the physical plane the taxable person will have made a number of supplies. The question is whether, for tax purposes, these are to be treated as separate supplies or merely as elements in some over-arching single supply. According to the Court of Justice in Card Protection, at para 29, for the purposes of the directive the criterion to be applied is whether there is a single supply "from an economic point of view". If so, that supply should not be artificially split, so as not to distort (altérer) the functioning of the value added tax system. The answer will accordingly be found by ascertaining the essential features of the transaction under which the taxable person is operating when supplying the consumer, regarded as a typical consumer. Since the 1994 Act has not adopted any different mechanism to give effect to this aspect of the directive, the same approach must be applied in interpreting the provisions of the Act. The key lies in analysing the transaction.
13. In the present case the tribunal, having taken into account all the factors, concluded that the College made one supply, the provision of education. In my view, the tribunal were entitled to reach that conclusion on the basis of the findings which they made - especially their finding that the students took the courses in order to obtain the relevant qualification offered by the College. The transaction was therefore one which gave the students the opportunity, by successfully studying the printed materials and completing the other necessary steps, to obtain a valuable qualification. That was what the students were purchasing. For the reasons given by Lord Walker, I am accordingly satisfied that the Court of Appeal erred in disturbing the tribunal's conclusion. On that basis the College made no zero-rated supply of books in terms of section 30(1) of the Act. The appeal should accordingly be allowed.
LORD WALKER OF GESTINGTHORPE
14. This appeal raises yet again the issue of how a transaction should be characterised for the purposes of value added tax ("VAT"). The respondent, the College of Estate Management ("the College") is a well-respected incorporated charity which teaches professional skills by distance-learningthat is, largely by providing its students with specially-prepared written material for them to study on their own. (That is a most inadequate summary of the facts, and I shall have to set out the Tribunal's careful findings of fact in much more detail; but it gives a rough idea of the point at issue.) The appellants, the Commissioners for HM Revenue and Customs ("the Commissioners") contend that the College made to each of its students a single supply of educational services, and that those services were exempt under section 31 of, and Group 6 of Schedule 9 to, the Value Added Tax Act 1994 ("VATA 1994"), giving effect to article 13A(1)(i) of the Sixth Directive (77/388/EEC). The College contends that it made to each student separate supplies of goods (the written material) and services (the remainder of the educational package) and that the supply of goods was zero-rated under section 30 of, and Group 3 of Schedule 8 to VATA 1994, giving effect to the derogation permitted by article 17 of the Second Directive (67/228/EEC) and article 28 of the Sixth Directive (both of which use the expression "exemptions with refund of tax" for what the United Kingdom legislation calls zero-rating).
15. The practical importance of this issue is apparent from the Community expression "exemption with refund of tax." If an enterprise makes no supplies except exempt supplies, it receives no output tax against which to set the input tax which it has paid in carrying on its activities, and it is in the position of a consumer which has to bear the burden of the input tax itself. If an enterprise makes no supplies except zero-rated supplies, it receives no output tax but is nevertheless able to treat each supply which it makes as a taxable supply and obtain a refund of the input tax which it has paid to its own suppliers. That is the effect of sections 25(3) and 30(1) of VATA 1994. If an enterprise makes both exempt and zero-rated supplies it will be in an intermediate position. The details of this are complicated and it is unnecessary to go into them, but the enterprise will almost always be better off financially if it can establish that some of its supplies are zero-rated, and that is what the College has been trying to achieve in this litigation.