CHURCH SCHOOLS FOUNDATION LIMITED v COMMISIONERS OF CUSTOMS & EXCISE [2001] EWCA Civ 1745

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR. JUSTICE NEUBERGER
[2001] EWCA Civ 1745Case No Case No: A3/2000/2814Venue Royal Courts of Justice, Strand,, London, WC2A 2LL, Wednesday 20th November 2001
Between
CHURCH SCHOOLS FOUNDATION LIMITEDAppellantCOMMISIONERS OF CUSTOMS & EXCISERespondent
Before
Lord Justice BuxtonLady Justice ArdenMr. David Milne QC and Mr. Richard Vallat (instructed by Messrs Nabarro Nathanson for the Appellants)Ms Melanie Hall (instructed by Customs & Excise for the Respondents)Date 20 November 2001
[1]THE VICE CHANCELLOR : Introduction Both the appellant, Church Schools Foundation Ltd ("the Foundation"), and its parent company, Church Schools Company Ltd ("the Company"), are companies incorporated for charitable purposes only and are registered for VAT. They have not elected under s.43 VAT Act 1994 to be treated as members of a group of companies so that supplies of goods or services by one to the other are liable for VAT in the normal way. On 14th December 1994 the Council of the Company, taking into account its available reserves and continuing requirements, approved a grant of £1m to the Foundation. The money was used by the Foundation, as intended by both the Foundation and the Company, in acquiring or carrying out improvements to properties let by the Foundation to the Company in which the Company carried on the business of its schools.[2]On 4th September 1998 the respondent Commissioners for Customs and Excise ("Customs") assessed the Foundation to VAT on that sum at the standard rate in the amount of £148,936. The Foundation appealed against that assessment to the VAT and Duties Tribunal. The Tribunal (Mr Stuart Lightman) allowed the appeal. He considered that the relationship between the companies was one of informal, optional co-operation not giving rise to any transaction capable of recognition as the supply of a service by the Foundation to the Company or, if there was such a supply, any direct link between that supply and the payment by the Company to the Foundation.[3]Customs appealed from the determination of the VAT and Duties Tribunal. Neuberger J allowed the appeal. His decision is reported at [2000] STC 651. He considered that in the circumstances of the case there was a supply of services by the Foundation to the Company, namely the execution of the improvements to the properties, for which the grant was consideration.[4]This is the appeal of the Foundation from the order of Neuberger J brought with the permission of Aldous LJ. Though it directly concerns only the donation to the Foundation approved by the Company on 14th December 1994 there were three further donations amounting in all to £3.8m paid in January and December 1996 and December 1997. It was not suggested that there is any relevant distinction to be drawn between one donation and any other and both the Tribunal and the judge dealt with all four donations without distinction.[5]The proper determination of the appeal depends on a close examination of the facts and, as VAT Act 1994 is intended to give effect within the United Kingdom to the 6th Council Directive, of a number of decisions of the European Court of Justice. We were not asked to refer any question to the European Court of Justice. Both parties considered that the relevant principles of EU law have been fully expounded by that court, the problem for the national court being the application of those principles to the facts. The Facts[6]The Foundation was incorporated in or before 1951 as a company limited by guarantee having a share capital. Its principal object was and is the establishment and maintenance of schools to provide a liberal, practical and general education including religious instruction in accordance with the doctrine of the Church of England. It is registered as a charity with the Charity Commissioners and with Customs as a taxable person for the purposes of VAT. Its governing body was and is a Council constituted in accordance with its articles of association for the time being. Until March 1993 the Foundation both owned and ran seven schools in England. It had offices in London from which its permanent staff operated.[7]In 1990 Mr Ewan Harper became the chief executive of the Foundation. It appeared to him that the school properties needed substantial capital investment if they were to continue and prosper and that the Council, though of a size and composition appropriate to a company running schools, was too large for the efficient management of the properties. Mr Harper recommended and the Council of the Foundation agreed that the Foundation should be restructured. The restructure involved the incorporation of a new company to run the schools, a lease of the school properties from the Foundation to that company and differently constituted governing bodies, albeit with some members in common, for the Foundation and the company.[8]The restructure was carried out in 1993. The Company was incorporated on 18th January 1993 as a company limited by guarantee not having a share capital. Its principal object is the same as that of the Foundation. In addition it is authorised to acquire in whole or in part the undertaking of the Foundation. The Company is registered with the Charity Commissioners as a charity and with Customs as a taxable person for the purposes of VAT. Its only member is the Foundation. The issued shares in the Foundation are held by trustees for the Company. Thus each controls the other. The Council of both the Foundation and of the Company were reconstituted in accordance with the recommendation of Mr Harper.[9]By a lease dated 18th March 1993 the Foundation demised the school properties situate in Southampton, Caterham, Guildford, Hull, Sunderland, Surbiton and York to the Company for a term of 18.5 years at a rent of £372,500. The rent was an open market rent fixed in accordance with professional advice. As it was difficult to value school premises the principle adopted was that of a profit sharing rental whereby the landlord would share in the success of the schools.[10]The lease contains two material provisions. First, there is a triennial rent review. The basis for the review requires there to be disregarded the value of improvements effected by the tenant at his expense but with the landlord's consent. The rent review has been operated twice so that the rent payable since March 1999 has been £636,727. The Foundation exercised the option to tax conferred by VAT Act 1994 Sch.10 para 2 with the result that the Company is required to pay VAT on the rent. Second, the lease contains provision (clause 7) whereby if the tenant wishes to carry out alterations, improvements or developments at any of the schools it must give notice thereof to the Foundation. The landlord may then elect to do the works itself. But the landlord is under no obligation to do so and if he does not so elect then the tenant may carry them out himself but only with the landlord's prior written consent. The commercial effect of these provisions is that the value of alterations, improvements or developments at the schools will be reflected in the next rent review either because they have been carried out by the landlord at his expense or by the tenant but on terms that they should be disregarded.[11]In addition to the lease of the school properties by the Foundation to the Company arrangements were made, in March 1993, by their respective Councils for cash surpluses arising in the Company to be transferred from time to time to the Foundation. It is clear from the minutes of both Councils that the Foundation had arranged a loan facility with National Westminster Bank to finance the Foundation's building programmes as agreed with the Company. To minimise the need to borrow at commercial rates of interest it was agreed that cash surpluses arising from time to time in the Company should be transferred to the Foundation. The minute of the meeting of the Council of the Company held on 18th March 1993 records that "These transfers were dependent upon the directors of the.... Foundation agreeing that they were payments on account towards any final grants of surpluses to be made at the year end, and until such time as these grants of surpluses were agreed, may be refundable..."[12]Later on the same day the Council of the Foundation specifically accepted the basis on which the surpluses were to be transferred and authorised transfers back to the Company if and when necessary to secure its working capital requirements even though that might increase the Foundation's borrowing requirements. The Company wrote to the Foundation on 18th March 1993 stating "Surpluses We write to confirm that it is the intention of the Trustees of this charitable company, where cash surpluses arise in this company, to grant those surpluses to your company in so far as to do so will be consistent with, and conducive to the attainment of, the objects of this charitable company."[13]This policy was duly implemented. The minutes of the meeting of the Council of the Company for 14th December 1994 record that:
"Taking into account the available reserves and the continuing requirements of the Company, it was agreed to approve a grant of £1 million to the Church Schools Foundation Ltd."
Thus, to the extent of that sum, the previous periodic transfers of surpluses by the Company to the Foundation were no longer repayable. This is the donation the subject of the assessment now under appeal. Similar resolutions were passed with regard to the other donations.[14]It is also necessary to describe briefly certain specific transactions recorded in the minutes of the meetings of the Councils of the Foundation and the Company to which both the Tribunal and the judge referred. a) On 17th June 1993 both the Foundation and the Company agreed to an accelerated building programme. The agreement of the Foundation was conditional on the Company confirming that it would enter into the necessary financial obligations. The Company resolved to give the necessary financial support. b) On 26th November 1993 the Company approved a tender for £1.6m for work to Guildford High School, recommended its acceptance by the Foundation and resolved to support the Foundation financially if it decided to proceed with the contract. On the same day the Foundation accepted the tender, noting that the Company had resolved to provide financial support for that project. c) On 8th June 1994 the Foundation, assuming the financial support of the Company, resolved to buy some playing fields at Hinchley Wood for £670,000. On the same day the Company duly resolved to support that purchase. d) Likewise on 16th June 1994 the Company resolved to support financially the purchase by the Foundation of the assets and goodwill of Northcliffe School for up to £500,000 and the Foundation authorised Mr Harper to increase the Foundation's offer to that amount. The increased offer was accepted and Northcliffe School was duly acquired by the Foundation. e) On 7th June 1995 formal approval was given to a project, which had been under discussion for some time, whereby the Foundation would acquire another school in Caterham to which the Company would transfer its existing school at Eothen. Following the transfer the assets and goodwill of the Eothen School would be sold by the Foundation and the Company respectively. The Company resolved to make a grant to the Foundation equal to the proceeds of sale of the goodwill of Eothen. The running of the school at Caterham would remain in the hands of its trustees four of which would be appointed by the Company. It should be noted that in the case of the purchases of the playing fields and Northcliffe School the Foundation let them to the Company on 31st August 1995 on the same terms as the lease dated 18th March 1993. In the case of the school at Caterham the lease from the Foundation was not to the Company but to the trustees of the Caterham School.[15]The effect of all these transactions, and others, was summarised in the evidence of Mr Harper, which the Tribunal accepted, in the following terms:
"16. Since 1993, the Appellant has spent £25m (including VAT) on capital works on the various school properties owned by it and leased to The Church Schools Company. These works have been funded from a variety of sources. First, as stated earlier, it was recognised that a number of the school properties had surplus land which had development potential. For example, land at Eothen was sold for £2.75m and reinvested in the schools. In addition, when in 1996 The Church Schools Company decided that the School in York could no longer be viably operated, the sale of the York building generated £1.7m. Further proceeds of £6.1m were received from the sale of surplus sites at Surbiton, Southampton and Sutherland. In all, these sales raised the considerable sum of just over £10.5m (excluding VAT). Secondly, the Appellant received various charitable grants from The Church Schools Company. These grants [the first of which being the subject of this appeal] were made as follows: From Church Schools Company Date Amount June 1995 £1m January 1996 £1.4m December 1996 £1.4m December 1997 £1m [In paragraph 16 of his witness statement Mr Harper referred also to two grants from Caterham School totalling £1,041,000 but this was omitted by the Tribunal] Other financing was supplied by the Bankers to the Appellant on commercial terms, and also from rental income from the Church Schools Company as mentioned above."
[16]In addition Mr Harper explained the rationale behind the restructuring of the Foundation and the transfer of the surpluses in terms which the Tribunal also accepted. In paragraph 19 of his witness statement he said "From the outset of the restructuring it was recognised that actively managing the surplus property assets of the Appellant and Bank borrowings alone would not generate sufficient funds for the carrying out of the capital works needed within the schools at the desired pace. It was hoped that if The Church Schools Company prospered it would make charitable grants to the Appellant. However it was also recognised the Appellant could not, for a variety of reasons, be certain of receiving any charitable grants from the Church Schools Company. For example, no surpluses might be generated or any surpluses might be needed to be spent within the educational business of the Church Schools Company. Obviously the Council of The Church Schools Company is keen that the Appellant continues to improve the fabric of the schools it occupies and therefore both companies work closely together. However, when the Appellant contracts for a major building project, which can be spread over a significant period of time, it is likely that they will only have received an indication that The Church Schools Company hopes to make a future grant rather than having actually received the grant or having a right to demand the payment of such a grant. If no grants were forthcoming this would mean that the Appellant would either need to call upon its existing banking facilities or, longer term, dispose of further surplus property in order to fund the contracted development. To date, this has not happened but it is a risk of which the Board of the Appellant is conscious."[17]Mr Harper gave oral evidence to the Tribunal. The Tribunal recorded (paragraph 4) that:
"The following additional facts were derived from Mr. Harper's oral evidence. The reorganisation put into effect a strategic plan which inter alia was designed to address the fact that some schools were making profits and some losses. The bank operated an offset arrangement whereby the interest payable by the borrower was offset by the interest at the same rate which would have been paid to the creditor company. The long term objective was to build up the Appellant by paying it surplus cash and for the Appellant to improve the whole quality of the schools. The grants to the Appellant were not refundable. The £1 million was not attributable to anything in particular."
[18]As I have already mentioned, Customs assessed the grant of £1m resolved on by the Company on 14th December 1994 as liable to VAT. In a letter dated 29th September 1998 Customs explained that the donation was regarded as made by the Company to fund the Foundation in its building programme. In the case of property let by the Foundation to the Company Customs contended that the Company was making a payment against costs incurred by the Foundation in making its supply under the lease so that the payment was directly linked to the supply under that lease and formed part of the consideration for it. In the case of the Caterham school Customs contended that the Company was making a third party payment against the costs incurred by the Foundation in undertaking the building project. Customs claimed that the payment was directly linked to the provision of construction services but that as the land did not belong to the Foundation at the time it was either a supply of construction services or a prepayment under the subsequent lease. Counsel for Customs did not support those contentions before us.[19]In the decision of the Tribunal the facts were set out with the various findings which I have quoted already. Reference was made to 5 decisions of the European Court of Justice and the submissions for the parties were summarised. It is to be noted that Customs did not contend and the Tribunal did not find that there was any enforceable contract between the Foundation and the Company on terms that the Foundation would provide services for the Company in exchange for the promise of the Company to pay its surpluses to the Foundation.[20]The Tribunal considered (para. 32) that "It may be helpful to ask what is the nature of the relationship (other than as landlord and tenant) between the Two Companies? Is it a partnership? - No. Is it a commercial relationship? - No. Is it some form of joint venture? No, in my opinion this requires a commercial relationship. It can be argued that the background and the minutes of the Companies show that the relationship is some informal kind of co-operation rather than a joint venture, where the parties have the same short and long term objectives - the improvement of the schools. They have no objective independent of the other, and it could be said to be unrealistic to view payments by one to the other as being other than in the nature of optional co-operation, and it could be argued that there is a direct link between payments and receipts." The Tribunal then set out a summary of the opposing view that the sum of £1m was paid on the basis, and in the virtual certainty, that some equivalent amount would be applied towards the development of the building stock of schools run by the Company. The Tribunal concluded, in paragraph 34, that, on balance the view expressed in paragraph 32 was the right approach in the light of the serious doubt whether there was a direct link between that payment and any service rendered by the Foundation.[21]Neuberger J took a different view. I shall consider his reasons for doing so in more detail after I have referred to the relevant decisions of the European Court of Justice. But there is one point which it is convenient to deal with now. In paragraph 34 of his judgment he said "....It appears to me that an agreement under which A agrees to provide services for B, on terms that B will pay A such sums as it retains by way of surplus is an enforceable contract as a matter of English law. The fact that there may be arguments as to whether, on certain facts, B has a surplus, what that surplus is, or whether that surplus is payable to A where, for instance, B is required by law to devote it to another purpose, and that those arguments may lead to litigation, that does not alter the fact that such an agreement would be legally enforceable. In the present case, it seems to me that the arrangement between the Company and the Foundation, as embodied in the Letter, can fairly be characterised as being of such a nature. That view is reinforced when one considers the minutes of meetings in 1993 and 1994 from which I have quoted. It seems clear that the Foundation would not, or at the very lowest would probably not, have committed itself to some contracts involving works of improvement to the school properties, unless it had had a clear statement from the Company that it would provide financial support."[22]Counsel for the Foundation accepted the proposition of law with which the judge started. But, he contended, the conclusion was not open to the judge. He pointed out that the findings of the Tribunal in paragraph 34 were inconsistent with any intention to create legal relations and without such an intention there could have been no contract. The existence of such a contract was not an essential element in the argument of Counsel for Customs but she loyally supported the judge's decision on this point.[23]I accept the submission for the Foundation. It was never the case for Customs that there was such a contract. There is no indication that Mr Harper was cross-examined to that effect. The Tribunal did not make findings of fact adequate to support the inference the judge drew. Indeed that inference is contrary to the findings of fact of the Tribunal in so far as paragraphs 32 and 34 are or include findings of fact. Further the point was not taken in Custom's notice of appeal to the High Court. In my view it was not a finding open to the judge. Accordingly I proceed on the basis that there was no such contract as found by the judge. But that is by no means the end of the matter. The Law[24]The Sixth Council Directive (77/388/EEC) superseded the first and second directives on the harmonisation of the laws of Member States relating to turnover taxes. It set up a common system of value added tax and a uniform basis of assessment. Thus it is the starting point for a consideration of the meaning and application of VAT Act 1994 not only because that Act was enacted to give effect to the Sixth Directive but also because most of the leading authorities are decisions of the European Court of Justice on the provisions of the Directives.[25]The following are the relevant provisions of the Sixth Directive:
"Article 2 The following shall be subject to value added tax: 1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such." "
Article 6 1 "Supply of services" shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5." "Article 11 A... 1 The taxable amount shall be: (a) in respect of supplies of goods and services....everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies."[26]Effect has been given to those, and other, provisions by VAT Act 1994. So far as relevant it provides:
"1. Value added tax (1) Value added tax shall be charged, in accordance with the provisions of this Act – (a) on the supply of goods and services in the United Kingdom... (2) VAT on any supply of goods or services is a liability of the person making the supply and...becomes due at the time of supply." "4. Scope of VAT on taxable supplies (1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. (2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply. 5. Meaning of supply... (1)... (2)... (a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration; (b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services."
[27]The relevant provisions of the Directive have been considered in a number of decisions of the European Court of Justice to which I should refer. I will do so in chronological order.[28]The first is Staatssecretaris van Financiën v Cooperatieve Aardappelenbewaarplaats GA [1981] ECR 445 . In that case the defendant was a cooperative association for potato growers. Each grower owning shares in the cooperative was entitled against payment of a storage charge to deposit in the store 1,000 kgs of potatoes each year. In the years 1975 and 1976 the Cooperative made no storage charge. The consequence was to reduce the value of the shares owned by the growers. It was alleged that the cooperative was supplying a service to its members in permitting them to store their potatoes for which the consideration was the reduction in the value of the growers' shares. The issue arose in the context of the provisions in the Second Directive which were, so far as relevant, in substantially the same terms as the Sixth. The judgment of the Court established two propositions which have been applied in all subsequent cases. The first, as expounded in paragraph 12, is that ".... there must.... be a direct link between the service provided and the consideration received which does not occur in the case where the consideration consists of an unascertained reduction in the value of the shares possessed by members of the cooperative and such a loss of value may not be regarded as a payment received by the cooperative providing the services." The second proposition appears in paragraphs 13 and 14 in these terms "such consideration is a subjective value since the basis of assessment for the provision of services is the consideration actually received and not a value assessed according to objective criteria. Consequently a provision of services for which no definite subjective consideration is received does not constitute a provision of services "against payment" and is therefore not taxable..."[29]Those principles were applied in Naturally Yours Cosmetics Ltd v Customs and Excise [1988] STC 879 and Apple and Pear Development Council v Customs and Excise [1988] STC 221 . In both those cases the Sixth Directive applied. The latter case concerned a statutory body constituted by the Minister of Agriculture, Fisheries and Food for research and the promotional activities concerning the commercial production of apples and pears. Registration with that body by growers of the relevant description was compulsory. The body was entitled to levy a charge on registered growers, the amount of which varied in accordance with the weight of apples or pears marketed by him, to cover its administration costs. The issue arose whether the compulsory charge was consideration of the discharge of its functions by the statutory body. The Court held that it was not so that the discharge of the functions of the statutory body did not constitute the supply of services effected for consideration. It said"13. The question then arises whether there is a direct link between the exercise of its functions by the Council and the mandatory charges which it imposes on growers.14. It is apparent from the order for reference that the Council's functions relate to the common interests of the growers. In so far as the Council is a provider of services, the benefits deriving from those services accrue to the whole industry. If individual apple and pear growers receive benefits, they derive them indirectly from those accruing generally to the industry as a whole. In that connection, it must be stated that the possibility cannot be ruled out that, in certain circumstances, only apple growers or else only pear growers can derive benefit from the exercise of specific activities by the Council.15. Moreover, no relationship exists between the level of benefits which individual growers obtain from the services provided by the Council and the amount of the mandatory charges which they are obliged to pay under the 1980 Order. The charges, which are imposed by virtue not of a contractual but of a statutory obligation, are always recoverable from each individual grower as a debt due to the Council, whether or not a given service of the Council confers a benefit upon him.16. It follows that mandatory charges of the kind imposed on the growers in this case do not constitute consideration having a direct link with the benefits accruing to individual growers as a result of the exercise of the Council's functions. In those circumstances, the exercise of those functions does not therefore constitute a supply of services effected for consideration within the meaning of art 2(1) of the Sixth Directive." The Court thereby agreed with the view of the Advocate General (Sir Gordon Slynn at page 235c) that the necessary reciprocity or direct link had not been established between the payment and the services.[30]Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509 concerned the liability to VAT of sums given by passers-by to the player of a barrel organ on the public highway. The European Court of Justice considered that there was no such liability. It stated13. In its judgments in Staatssecretaris van Financiëen v Coöperatieve Aardappelenbewaarplatts (Case 154/80) [1981] ECR 445 at 454, para 12 and Naturally Yours Cosmetics Ltd v Customs and Excise Comrs (Case 230/87)[1988] STC 879 at 886, [1988] ECR 6365 at 6389, para 11, the court stated on this point that the basis of assessment for a provision of services is everything which makes up the consideration for the service and that a provision of services is therefore taxable only if there is a direct link between the service provided and the consideration received (see also the judgment in Apple and Pear Development Council v Customs and Excise Comrs (Case 102/86) [1988] STC 221 at 237, [1988] ECR 1443 at 1468, para 11, 12).14. It follows that a supply of services is effected 'for consideration' within the meaning of art 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.15. In a case such as that which is the subject of the main proceedings, it is clear that those conditions are not fulfilled.16. If a musician who performs on the public highway receives donations from passers-by, those receipts cannot be regarded as the consideration for a service supplied to them.17. First, there is no agreement between the parties, since the passers-by voluntarily make a donation, whose amount they determine as they wish. Second, there is no necessary link between the musical service and the payments to which it gives rise. The passers-by do not request music to be played for them; moreover, they pay sums which depend not only on the musical service but on subjective motives which may bring feelings of sympathy into play. Indeed some persons place money, sometimes a considerable sum, in the musician's collecting tin without lingering, whereas others listen to the music for some time without making any donation at all.18. In addition, contrary to the arguments of the German and Netherlands governments, the fact that the musician plays in public with a view to collecting money and actually receives certain sums in so doing is of no relevance for the purpose of determining whether the activity in question constitutes a supply of services for consideration within the meaning of the Sixth Directive.19. That interpretation is not affected by the fact that a musician such as Mr. Tolsma solicits money and can in fact expect to receive money by playing music on the public highway. The payments are entirely voluntary and uncertain and the amount is practically impossible to determine.20. For all the above reasons the answer to the questions of the Gerechtshof Leeuwarden, should be that art 2(1) of the Sixth Directive must be interpreted as meaning that the 'supply of services effected for consideration' within the meaning of that provision does not include an activity consisting in playing music on the public highway, for which no remuneration is stipulated, even if the musician solicits money and receives sums whose amount is, however, neither quantified nor quantifiable."[31]In paragraph 13 the Court recognised that its jurisprudence required a direct link between the service provided and the consideration received. As I read paragraph 14 the Court was explaining how the requirement for a direct link was to be applied on the facts of that case, given the transient nature of the relationship between the player and his audience. Thus it was not introducing a requirement for "a legal relationship" between the supplier of the service and the provider of the consideration as well as a direct link between the supply and the consideration. Were it otherwise liability to VAT would vary from one member state to another depending on the conditions applied by the national law for the creation of a legal relationship. I note that my view is shared by the Advocate General in Town and County Factors Ltd v Customs and Excise to which I shall refer in due course.[32]Customs and Excise v First National Bank of Chicago [1998] STC 509 concerned foreign exchange dealings for which no commission was charged. The bank's profit was derived from "the spread", that is to say the difference between its buying and selling prices for the currency in question. The questions arose whether such foreign exchange transactions were supplies of services within the scope of VAT and if so whether the consideration for such supply was the full value of the currency received in exchange. The European Court of Justice held that there was a supply of services by the Bank and that the consideration was the net result of all the foreign exchange transactions over a period. The Court observed (para 28) that it could not be disputed that a bilateral relationship existed between the Bank and its counterparty under which the two parties to the transaction gave reciprocal undertakings to transfer amounts in a given currency and to receive the countervalue in a different currency. The court concluded (para 34) that "It must be held that foreign exchange transactions, performed even without commission or direct fees, are supplies of services provided in return for consideration, that is to say supplies of services effected for consideration." It also considered (paras 44-47) that the consideration was the remuneration on foreign exchange transactions which the Bank could actually apply to its own use.[33]Finally it is necessary to refer to Town and County Factors Ltd v Customs and Excise (case C-498/99) in which the Advocate General gave her opinion as recently as 27th September 2001. The case concerned a "spot the ball" competition and the liability to VAT of sums paid by participants to enter it. The competition rules stated that the transaction was "binding in honour only". The VAT and Duties Tribunal considered that such stipulation excluded any "legal relationship" between the competitor and the promotor and that that was sufficient to negative liability to VAT. The Advocate General disagreed. In her opinion she said"35. In this point, the Court has held inter alia in the Aardappelenbewaarplaats, Apple and Pear and Naturally Yours Cosmetics , cases that the concept of a supply for consideration within the meaning of Article 2(1) presupposes the existence of a 'direct link between the supply made and the consideration received. Only if that connection between the supply and the consideration exists can there be a supply for consideration and a taxable transaction.36. In Tolsma the Court refined that conclusion by holding that a supply is made 'for consideration and so is taxable only 'if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.37. In the light of Article 2 of the directive and the case-law of the Court cited above, that criterion of 'legal relationship is not to be understood in isolation as meaning a particular specific legal characteristic which a transaction must display. The 'legal relationship' concerns rather the link between supply and consideration." She concluded (para 39) that "All that need be examined is whether the components of reciprocal performance are exchanged in the framework of agreements – even ones binding in honour only – from which it is apparent that there is a direct link between them." The judgments of the Tribunal and of Neuberger J[34]Having considered all these authorities, except Town and County, in some detail the principles the Tribunal sought to apply are described in paragraph 31 of the decision in these terms:
"There must be a quid pro quo for the payment. The absence of any consensual element is a pointer to there not being in any sense a payment for a particular service. Although it is not necessary to be able to attribute a particular payment of consideration to a particular service, there must be a necessary reciprocity or direct link. The scope of the word "supplies" should be given its broadest possible meaning, but it must be capable of being evaluated and being expressed in pecuniary terms. The direct link must be such that a relationship can be established between the level of benefits which the recipient obtains from the services provided and the amount of the consideration. There must be a legal relationship between the parties (Tolsma), although this may well be an oversimplification."
The conclusion to which the Tribunal came (para 20 above) is that there was no such relationship and no such link.[35]The principles applied by the Tribunal were summarized by Neuberger J in paragraph 27 of his judgment as being that(1) there must be a reciprocity or direct link between the consideration and the service, and(2) there must be a legal relationship between the parties. In paragraphs 29 to 37 Neuberger J considered the second of those principles. In paragraph 34 he concluded that there was a contractual relationship. In paragraph 37 he determined that there was a sufficient "legal relationship". For the reasons I have already given in paragraph 23 above I do not agree with Neuberger J that there was or that it was open to him to find that there was a contractual relationship of the nature he described. Equally I consider, for the reasons indicated in paragraph 31 above, that it is not necessary to demonstrate such a relationship as well as a sufficient direct link between the supply of the service and the consideration. Thus the issue hinges on whether there was sufficient reciprocity. In the consideration of that issue it may be necessary to consider the nature of the relationship between the Foundation and the Company.[36]Neuberger J thought that there was sufficient reciprocity. He identified the services supplied by the Foundation (para 50) as the provision of improvements, or at least the opportunity to have further improvements, carried out to the school properties, which in the absence of grants, would not, or very probably would not, have been carried out. He considered that (para 39) "The Company was making the grants, as and when it could do so pursuant to its commitment in the letter, and indeed pursuant to the various resolutions of the Company to which I have referred, on the basis that the money would then be spent by the Foundation in carrying out the work as contemplated in the letter and, more specifically, in the resolutions of the Foundation which were closely related to, indeed significantly dependent on, the resolutions of the Company." He did not consider that either the differences in amount (£25m spent by the Foundation but only £4.8m received in grants), the fact, as found by the Tribunal, that the grants were not "attributable to anything in particular" or the fact that the grants might be and were spent on properties which were not at the time let to the Company prevented that conclusion. The arguments[37]Counsel for the Foundation submits that Neuberger J was wrong. He contends, in essence, that to find the necessary reciprocity it must be possible to identify the service allegedly supplied and, when identified, to conclude that the payments made by the Company to the Foundation were "for" those services. He submits that on the facts of the case no such reciprocity existed.[38]Counsel for Customs pointed out that the emphasis of the legislation is on the consideration for that is what is subject to VAT. I understood her to suggest that it was not necessary to identify the relevant supply of services with precision provided that it could be seen that the consideration had been given for something other than a supply of goods. She submitted that the authorities to which I have referred establish that for there to be a supply of services for a consideration, as required by Article 2 of the Sixth Directive and s.5(2) VAT Act 1994 "there must be, so far as material, a transaction between the parties in which a price or consideration is stipulated and pursuant to which there is reciprocal performance in the sense that the consideration received constitutes the value given for that service." She submitted that the facts as found by the Tribunal and relied on by Neuberger J demonstrated that her proposition was satisfied and liability must follow. Conclusion[39]Like the judge (para 54) I have not found this appeal easy to determine. It is essential, of course, first to identify the question. Having done so it is helpful to consider separately the various different factors relevant to the answer, in particular the leases from the Foundation to the Company.[40]The starting point must be Article 2 of the Sixth Directive and s.5(2) VAT Act 1994. Each requires that the supply is "for" a consideration. To test the application of that principle it is necessary to ascertain the supply of services relied on. Counsel for Customs submitted in both her written and oral argument that the supply of services is the procurement by the Foundation of the building works for the benefit of the Company. The question is whether that supply of that service was "for" a consideration and if so what.[41]The jurisprudence of the European Court of Justice has developed the concept of "for" in the cases to which I have referred. Initially what was required was a direct link between the supply of services and the alleged consideration. See Staatssecretaris van Financiën v Cooperatieve Aardappelenbewaarplaats GA [1981] ECR 445 , Naturally Yours Cosmetics Ltd v Customs and Excise [1988] STC 879 and Apple and Pear Development Council v Customs and Excise [1988] STC 221 . The direct link was further developed by reference to the facts of Tolsma into a legal relationship between the supplier of the service and the payor of the consideration pursuant to which there is reciprocal performance. See Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509 and Customs and Excise v First National Bank of Chicago [1998] STC 509. This development is recognized in the opinion of the Advocate General in Town and County Factors Ltd v Customs and Excise (case C-498/99), an opinion which both parties invited us to adopt. But in each case the formula applied by the Court was in explanation of, not substitution for, the requirement that the supply must be "for" consideration. For example a loan facility provided by a bank to a property company for use on a specific development gives rise to both a legal relationship, debtor/creditor, and reciprocal performance, drawdown/application. There is a direct link between the carrying out of the development and the drawdown of the loan. But the development is not a supply of services "for" the loan; rather it is effected "with" the loan. It is not a quid pro quo but a quid cum quo. It is appropriate to apply both tests to the facts of this case to see if either of them is satisfied.[42]It is convenient to take the Tolsma test first. It is beyond doubt that there is a legal relationship between the Foundation and the Company. It is twofold. Each controls the other (para 8 above) and the common membership of their respective councils enables that control to be given practical effect. In addition, except for the Caterham School, they are in the relation of landlord and tenant by virtue of the various leases of school properties by the Foundation to the Company. Equally there is an obvious reciprocity between the donations made by the Company to the Foundation and the building projects or acquisitions effected by the Foundation. Even so, in my judgment, it cannot be said that the execution of those works was "for" a consideration in the form of the donations. The Tribunal indicated, as the facts clearly showed, that the donation went towards the finance for the works. Such finance is not, for present purposes, distinguishable from an interest free loan from the Company to the Foundation limited in its use to specific works. Such a loan is not consideration "for" the works.[43]It is also necessary to consider whether there is a direct link between the execution of the building works and the donation. I will do so in stages. If an individual or unassociated charity makes a donation to another charity for its general purposes the implementation of those general purposes could not be a supply of services for consideration in the form of the donation. If authority were needed for such an obvious proposition it is to be found in Staatssecretaris van Financiën v Cooperatieve Aardappelenbewaarplaats GA [1981] ECR 445 and Apple and Pear Development Council v Customs and Excise [1988] STC 221 . In my judgment it makes no difference if the donation is for a specific purpose of the charity. In such a case there is no supply of services or consideration "for" that supply. Then let it be assumed that there is some relationship between the donor and the recipient charity. Of itself that cannot provide the necessary link between the supply consisting of the execution of the specific purpose and the donation. This proposition is also demonstrated by the same two cases.[44]It follows from the foregoing that the essential elements in this case, which are alleged to make all the difference, are the leases. For the moment I pass over the fact that this element is absent in the case of the Caterham School. This was the original view of Customs in their letter to the Foundation to which I have referred in paragraph 18 above. It is not disputed that there is a supply of services by the Foundation to the Company in consideration for the rents paid by the Company. But the original suggestion that the donation by the Company to the Foundation was additional consideration paid by the Company for the supply under the leases was abandoned.[45]In my view that concession was rightly made. There was no obligation on the Foundation as landlord under any of the leases to carry out any works of alteration, improvement or development. The terms of the leases were such that if improvements were carried out then the benefit to the Company as tenant was to be paid for by the increased rent payable from the next review date.[46]In my view the reality is, as the Tribunal found, that the Foundation improved its properties, or acquired more, with finance provided from a number of sources of which the Company's donations was but one. That source of finance was no more consideration for the works or acquisitions than any of the other sources. The interposition of the leases certainly provided for the payment of consideration for the improvements or acquisitions by means of the rent review. In my judgment the leases could not and did not alter the nature or effect of either the works or the donations so as to give rise to a supply of the former "for" a consideration comprising the latter.[47]If Customs were right it would be necessary to accommodate a number of anomalies. First, there was no lease of the Caterham School to the Company, yet it is plain that the donations provided part of the finance for all the projects including the acquisition of the properties associated with the Caterham School. Second, insofar as the donations provided some of the finance for all the projects they financed the acquisition of property, namely, the playing fields and assets of the Northcliffe School. Donations made before such acquisition were no different to any donation made to a charity for its general or a specific purpose. Donations made after such acquisition could not have been consideration for the acquisition. In those cases the benefit received by the Company was paid for in the form of rent under the lease which followed. Third, there is the disparity between the sums spent on all the works, £25m, and the aggregate amount of the donations, £4.8m. If the supply of the services was that for which Customs contends then the amount of the consideration ought to include the remaining £20.2m. By contrast if it is appropriate to tax only the donations then they ought to be attributable to the relevant supply. But, as the Tribunal held (paragraph 4), the donations were not paid for anything in particular.[48]In my view the argument for Customs failed to accommodate any of these anomalies. Its failure to do so leads me to question its argument. The formulation which I have quoted in paragraph 38 no doubt accurately reflects the effect of the authorities. But that formulation retains the requirement that the consideration received constitutes the value given "for" that service. It is that condition which is not satisfied whichever formulation one may seek to apply.[49]For all these reasons I disagree with the conclusions of Neuberger J. I would allow this appeal.

LORD JUSTICE BUXTON :

[50]I gratefully adopt the account of the background to this appeal that is set out by the Vice-Chancellor. Like my Lord, and everyone else who has had to wrestle with this case, I find it to be a matter of some difficulty. That difficulty however springs, not from fundamental uncertainties in the law of VAT, but rather from the application of fairly well-worn principles of law, challenging only in the level of generality at which they are expressed, to the particular facts of this case. I shall therefore start by making some observations about those facts, prefaced by reference to the approach to the facts adopted by the Tribunal, as the original fact-finding body; and by a brief reminder of the principles of law that are in issue. The Tribunal's approach[51]In its Decision the Tribunal set out verbatim, and must be taken to have adopted, the witness statement of Mr Harper, together with a summary of a small amount of oral evidence given by him, which equally the Tribunal accepted. That was in my view the limit of the Tribunal's fact-finding exercise. It drew no conclusions of fact from the primary facts set out by Mr Harper.[52]The Tribunal however went on, in paragraph 32 of its Decision, quoted by the Vice-Chancellor in paragraph 20 of his judgment, to consider the relationship between the Company and the Foundation. I have no doubt that the Tribunal was there doing what it said in paragraph 31 of its Decision (set out by the Vice-Chancellor in paragraph 34 of his judgment) that it was setting itself to do: to determine whether there was a "legal relationship" between the Company and the Foundation in the terms adopted in paragraph 14 of the judgment in Tolsma (set out by the Vice-Chancellor in paragraph 30 of his judgment). However, Mrs Hall was able to demonstrate that the Tribunal was in error if, as appears to be the case, it interpreted the requirement of a "legal relationship" between the provider of the service and the recipient as a requirement to demonstrate a relationship falling within a legal category recognised by domestic law. So to proceed would infringe the principle of fiscal neutrality, recognised by the Court of Justice in, for instance, Case C-283/95 [1998] ECR I-3369 [27]-[28] ( Fischer ), where the Court held that liability to VAT could not depend on the lawfulness within the law of the member state of the transaction alleged to give rise to the tax. The same view, indicating that the "relationship" is no more than a further expression of the need for a link between the service and the consideration, was expressed by the Advocate-General in paragraph 37 of her Opinion in Town and County Factors , set out by the Vice-Chancellor in paragraph 33 of his judgment. I should also add, in the same context, that the Tribunal's reference in its paragraph 32 to "optional" co-operation appears again to be a conclusion as to the status of the relationship in English domestic law, rather than a finding of fact.[53]The only other source of factual conclusions were the minutes of the two companies, agreed by Mr Milne to be an accurate representation of the intentions of those attending the meetings, and thus available in principle to provide factual information.[54]Accordingly, and quite apart from the tentative terms in which they are expressed, I do not regard ourselves as constrained by the Tribunal's observations in its paragraph 32 in the same way as we would be if that paragraph contained findings of fact. We can, therefore, turn to the findings of fact that the Tribunal did make, principally by adopting Mr Harper's evidence, in order to identify the elements that are relevant to the issue of law in this case. The issue of law[55]I respectfully agree with Arden LJ (paragraph 95 of her judgment) that the test is most conveniently set out in paragraph 14 of the judgment in Tolsma : whether there is "a legal relationship between the provider of the service and the reipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service consitituting the value actually given in return for the service supplied to the recipient."[56]I also would respectfully adopt the graphic practical summaries of the law that commend themselves to the other members of the court: Was the payment made by the Company a gift? (per Arden LJ at paragraph 95 of her judgment); Was the payment made "for" services provided by the Foundation (per the Vice-Chancellor at paragraph 37 and following of his judgment). The Company and the Foundation[57]The implications of the detailed facts of the case can only be understood in the context of the corporate structure that was deliberately adopted upon the dissolution of the structure of the original Church Schools Company Limited in 1993. What had previously been a single enterprise was divided between the Company and the Foundation. Despite their common chairman, common chief executive, and the fact pointed out by the Vice-Chancellor in paragraph 8 of his judgment that in company law terms each of them controls the other, the Company and the Foundation were created as separate entities, not in VAT terms a single group.[58]It is not clear from the evidence why those particular arrangements were adopted. They would not seem to follow of necessity from the managerial considerations set out by Mr Harper in his evidence, and summarised by the Vice-Chancellor in paragraph 7 of his judgment; and one can only speculate as to why it was not seen as possible to separate the functions on the one hand of running the schools and on the other hand of managing the finances and building activity of the enterprise, whilst nonetheless remaining within a single corporate structure. The upshot is however that we have to deal with the structure that in fact obtains, of two separate bodies that, as Mr Harper emphasised in his evidence, conduct their operations at arms-length from each other (on which see further paragraph 59 (iv) below). The facts[59]Against that background, the following considerations bear upon the determination of the legal issue set out above. i) In his evidence Mr Harper described two particular features of the relationship between the Foundation and the Company: features that were plainly seen by him as separate and different from each other. The first, to be found in paragraphs 12-15 of his witness statement, under the heading of "The Lease Structure", was in relation to the leases that had to be entered into once the Company was hived off from the original Church Schools Company Limited, but without taking with it the assets of that company, including the freeholds of the schools. Although not so set out in the leases themselves, Mr Harper said that the original rents, and the triennial review of them, were agreed to be on a "market-rate" basis, but because of the difficulty of valuing the school premises what was adopted was a "profits sharing" rental. The second aspect of the relationship, described by Mr Harper in paragraph 19 of his witness statement under the heading of "Grants Made From Company to Foundation", concerned the expectation that operating surpluses of the Company would be transferred to the Foundation by way of "charitable grants". That part of Mr Harper's evidence is set out by the Vice-Chancellor in paragraph 16 of his judgment. ii) Both of these aspects of the relationship between the Foundation and the Company were separate incidents of a common purpose to promote the success of the schools. That common purpose is demonstrated by what Mr Harper said in his oral evidence, as reported by the Tribunal in paragraph 4 of its Decision:
"The long-term objective was to build up the [Foundation] by paying it surplus cash and for the [Foundation] to improve the whole quality of the schools.

(i) above: "

Obviously the Council of [the Company] is keen that [the Foundation] continues to improve the fabric of the schools that it occupies and therefore both companies work closely together." iv) Despite the common purpose of the Foundation and the Company, and the no doubt high degree of trust existing between those respectively making decisions on behalf of the two organisations, they conduct their relationship at arms length, and with formal reassurances by the one as to the policy of the other. That is demonstrated by the letter of 18 March 1993, set out by the the Vice-Chancellor in paragraph 12 of his judgment, and by the exchanges of formal minutes that were set out by the judge and by the Vice-Chancellor in paragraph 14 of his judgment.

(i) above):

"In accepting this proposal the Board of [the Foundation] appreciated that the schools needed investment to improve their surpluses, but that just improving the property would not guarantee that numbers would grow. That would depend on the quality of the management of [the Company]. However, the Directors decided to take the risk on the basis that they were impressed by the business plan. The Council of [the Company] had to accept that to receive the property improvements needed, it would have to allow [the Foundation] to share in the improved surpluses that were planned, not just to flow from improved premises but from a proactive policy to manage the schools in a more commercial way."
Some comments[60]It will be convenient at this stage to mention, in order to dispose of them, some issues arising from the Tribunal or the judge's treatment of the facts.[61]Although the Tribunal appears to have adopted Mr Harper's characterisation of the payments as "charitable" grants, that constituted comment on his part, and if it was intended to be a finding of fact cannot be supported. The Company, and the Foundation in backing it, were plainly engaged in commercial activity, in providing education for which the schools charged fees. The payments were seen as part of the mechanism whereby that commercial activity was to be promoted. The fact that they were made by and to bodies that are in law charities does not make the payments "charitable" in any sense relevant to the determination of this appeal.[62]In considering the nature of the relationship between the Foundation and the Company in paragraph 32 of its Decision the Tribunal said:
"Is it a commercial relationship?-No. Is it some form of joint venture? No. In my opinion this requires a commercial relationship"
I cannot agree with that analysis. The Company and the Foundation were working together to achieve an end that was commercial, even if, because it was educational, it was also charitable. To describe their relationship as one of joint venture would seem an entirely apt characterisation of two separate bodies working together towards a common goal. Mr Harper's evidence, referred to in paragraphs 59 (ii) and (iii) above, strongly supports that view.[63]I respectfully agree with the Vice-Chancellor that it was not open to the judge to find that the assurance of payments of surplus by the Company formed an element in any English law contract. The relationship is rather to be characterised as one of mutual assurance and understanding. It is agreed on all sides that, because of the rule exemplified by the approach of the Advocate-General in Town and County Factors referred to in paragraph 52 above, the judge's finding of the existence of a contract was not necessary to his decision. What was the service provided by the Foundation?[64]Against that background, the first issue in this appeal is to determine the service provided by the Foundation for which the payments of surplus by the Company were the reciprocal consideration. Mrs Hall argued that the services sought by the Company had been the performance of the building works and improvements; but she said further that such services could also be found in the willingness evinced by the Foundation to undertake such works. I consider that there are a number of difficulties about the formulation that was the Commissioners' preferred case.[65]On the Commissioners' case, the necessary reciprocal understanding between the Foundation and the Company must have arisen at the time of the exchanges about the distribution of surpluses, as set out in the minutes of the Company's meeting of 18 March 1993, and its letter of the same date. At that date, no work had been done or, so far as can be seen, was in practical contemplation: so it is difficult to see how actual performance of the works could be the foundation of the agreement. Nor was the willingness of the Company to transfer surpluses, if any, linked to any specific work to be undertaken by the Foundation.[66]I therefore consider that what the Foundation held out, and what the Company sought, was an admittedly more vaguely stated general willingness on the part of Foundation to act in support of the Company in seeking, and if possible and appropriate performing, improvements to Company's operating plant. That general attitude on the Foundation's part cannot, in my view, be said to be remunerated, and certainly not wholly remunerated, through the rents chargeable on such properties as were in the event improved. I develop that point further in paragraph 77 below.[67]While this view of the nature of the service was not, as I have said, in the forefront of the Commissioners' case, it was certainly within the contemplation of the judge. He said, at paragraph 50 of his judgment: "The services in question were the provision of improvements, or at least the opportunity to have further improvements carried out to the school premises (whether by alteration or extension), which improvements, in the absence of the grants, would not, or very probably would not, have been carried out"[italics supplied][68]Nor does this approach create a problem about the "valuation" of the services provided by Foundation. Mrs Hall relied on paragraphs 14 and 23 of the Opinion of the Advocate-General in Tolsma for the proposition that the valuation must be "subjective": what the person receiving the services is ready to pay for them, rather than their value assessed by objective criteria. This proposition is really of a piece with the need for the services to be provided as part of an underlying agreement or understanding, because it is in that agreement or understanding that the valuation is to be found. And she relied on the approach of the Court of Justice in Case C-172/96 [1998] ECR I-4387 ( First National Bank of Chicago ), in particular in paragraphs 48-49 of its Judgment in that case, for the proposition that the amount of the consideration, and thus the amount liable to VAT, could be arrived at ex post facto by assessing how the agreement between the parties worked out in practice. These are also features of the present case. The payments of surplus were made to the Foundation as the ability to do so arose, the amounts upon which VAT was sought to be levied being the totals of those payments. The fact that the amounts were not fixed in advance, and depended on current circumstances, does not in my view prevent their representing the valuation placed by Company on the services that it received from the Foundation: any more than the need to calculate the bank's remuneration on the outcome of a series of transactions that it was not possible to specify at the time of the agreement prevented the valuation of the consideration in First National Bank . Was there reciprocity?[69]As I have already indicated, I adopt the Vice-Chancellor's formulation of this enquiry as whether, in terms of the Sixth Directive, the services were provided "for" consideration. My view is the same as that of the judge, that against the background of the relationship between the Foundation and the Company, and the nature of the exchanges between them that has been referred to above, it strains credulity to think that the undertaking or willingness on the part of the Company to transfer surpluses was not adopted in response to, and because of, the attitude evinced by the Foundation to the improvement of the properties. As

the judge found in paragraph 45 of his judgment:

"At the very lowest…it appears to me that the Company was making over the grant in return for the expectation, indeed the virtual certainty, that it would result in substantially increased expenditure by the Foundation on improving the school properties, as indeed turned out to be the case"
[70]Mr Harper does not appear to have been asked directly, or if he was asked his reply is not recorded, what the attitude of the Company would have been had the Foundation indicated that it was, or had become, uninterested in improvement of the school premises, or wished, as an educational charity, to direct its activities away from the schools: something that in law the Foundation was free to do, however much that policy might have threatened deadlock in the respective controlling shareholdings and embarrassment to the individuals concerned. But it is impossible to see what answer he could have given other than that such a departure would have forced at least a serious reconsideration by the Company of what it did with its surpluses. Any other reply would have been quite inconsistent with Mr Harper's account of the mutual long-term objectives of the Foundation and the Company that is set out in paragraph 59 (ii) above.[71]The element of reciprocity is also in my view strongly reinforced by the arms-length nature of the relationship between the Company and the Foundation, which is emphasised in the appellants' evidence: see paragraph 59(iv) above. The Company was in law free to pay over the surpluses or not, as it saw fit. It could not be coerced by the Foundation to do so, any more than the Foundation could be coerced into any particular building or investment policy. In making its decision to pay the surpluses, the Company plainly did not act for no reason. Its reason was that set out by Mr Harper in those parts of his evidence that are quoted in paragraphs 59 (ii)-(iii) above:
"The long-term objective was to build up the Foundation by paying it surplus cash and for the Foundation to improve the whole quality of the schools…..the Company is keen that the Foundation continues to improve the fabric of the schools that it occupies."
I find it impossible to conclude from that that the Company would have continued to pay over the surpluses if the Foundation had not evinced its continuing commitment to the improvement that the Company wished to see. It is entirely consistent with that position to say that it was "for" that commitment that the Company paid its money.[72]I of course accept the point made by Arden LJ in paragraph 103 of her judgment that the Tribunal did not find that the Company made any binding promise to pay over the surpluses. But as is apparent from paragraph 37 of the Opinion of the Advocate General in Town and Country Factors , cited by the Vice-Chancellor in paragraph 33 of his judgment, binding commitment to pay either in the past or in the future is not required. It is enough that there is a link between the fact of the payment and the fact of the consideration. As the Advocate-General put it in her paragraph 39:
"All that need be examined is whether the components of reciprocal performance are exchanged in the framework of agreements-even ones binding in honour only-from which it is apparent that there is a direct link between them."
In our case, the payments were not made in isolation, accidentally or as a casual act of benevolence. There was plainly a direct link between the payments and the Company's willingness to make them and the expectation and understanding that the Foundation would retain its commitment to the development of the schools: which the judge identified as the relevant consideration in the passage of his judgment set out in paragraph 69 above.[73]In my view, therefore, the willingness to pay the surpluses was evinced reciprocally to, or "for", a willingness on the part of the Foundation to improve the schools. It is quite artificial to view those two policies as existing merely in parallel and unconnected with each other. Were the payments gifts?[74]The factors set out in the preceding paragraphs also in my respectful view provide the answer to the question posed by Arden LJ of whether the payments were gifts. The payments were made as part of an understanding between two bodies that had a long-standing relationship with each other in a common enterprise, in which each had a specific role to play. It is quite impossible to place them, against that background, on the same level as the casual benevolence of the passers-by in Tolsma . Resolution of the appeal[75]I am therefore satisfied that the relationship between the payment of the surpluses by the Company and the activity by the Foundation fell within the test to be drawn from Tolsma and the further expressions of the substance of that test that I have set out in paragraphs 55 and 56 above. I am very conscious that that view does not commend itself to the Vice-Chancellor and to Arden LJ; and I should therefore indicate, I hope with due deference, why I am not persuaded by various criticisms of the approach to the facts that I favour.[76]First, I venture to refer to a passage in paragraph 42 of the Vice-Chancellor's judgment:
"there is an obvious reciprocity between the donations made by the Company to the Foundation and the building projects or acquisitions effected by the Foundation. Even so, in my judgment, it cannot be said that the execution of those works was 'for' a consideration in the form of donations. The Tribunal indicated, as the facts clearly showed, that the donation went towards the finance for the works. Such finance is not, for present purposes, distinguishable from an interest free loan from the Company to the Foundation limited in its use to specific works. Such a loan is not consideration 'for' the works"
For my part, however, the fact that the donations by the Company were in the event all absorbed in the building programme increases, rather than removes, the implication that the donations were made to support such a progamme, and in the expectation that it would be seriously carried through. And the "donations" were indeed donations, at least in the sense that Mr Harper emphasised, that they were not refundable. That increases the implication that the Company expected something for its money, and would not have paid it over without the assurance of getting something in return.[77]Second, I accept that merely to make a donation to a charity, or even for a specific purpose of a charity, would not constitute consideration for the performance by the charity of its normal charitable functions. But that is not this case. The Foundation is indeed a charity, but a charity of a very particular sort; and what it does in relation to the schools is unquestionably done "for" the Company, as well as in the interests of the education of the pupils. Any general arguments about the implications of charitable donations therefore do not assist in, and are not affected by, the factual situation existing in this case.[78]Third, I cannot with respect agree with the Vice-Chancellor, in paragraph 44 of his judgment, that the essential element in this case, which is alleged to make all the difference, are the leases. The position of the parties under the leases was parallel to, but did not entirely absorb, their respective positions in the overall relationship. That was the upshot of Mr Harper's evidence referred to in paragraphs 59 (i) and (ii) above. And there was no obligation on the Foundation as landlord under the leases to carry out any works of improvement. Although there was no doubt a high degree of mutual trust between the Company and the Foundation that such works would be undertaken, the deliberately arms-length relationship between the parties required mutual assurance, at least on the part of the Company in the formal terms adopted in the letter of 18 March 1993. That exchange took place outside the limited framework of the leases.[79]Nor can it be said that the consideration received by the Foundation for its willingness to improve the premises was to be found in the enhanced rents thereby chargeable under the leases. That is not so even if the service provided by the Foundation is regarded narrowly as the actual performance of improvements. As Mr Harper made clear (see paragraph 59 (i) above), not only were the rents fixed according to the performance of the schools, and not by any direct reference to the improvements; but also the parties recognised that improvement of the premises would not of itself generate increased profits and thus higher rents in the absence of satisfactory performance by the schools themselves. To see the rents as the relevant and only consideration for the Foundation's services was not, therefore, realistic even if the services are regarded as only the actual performance of the works; and that analysis is even less apt if the service provided by the Foundation is regarded in the wider terms suggested in paragraph 66 above.[80]For much the same reasons, I venture to differ from Arden LJ when she says, in paragraph 100 of her judgment, that it defies logic to say that the Company remunerated the Foundation for improving properties which would give the Foundation the ability to charge higher rents to the Company. As Mr Harper made clear in that part of his evidence that I have referred to in paragraph 59 (iv) above, the use by the parties of a "profits sharing" basis of rental meant both that rent levels did not bear a direct relationship to activity in improving the premises; and that the rent to be paid depended on the success of the Company in running the schools. What the Company wanted was better schools in which to operate its educational activities; and it was prepared to hand over its surpluses in the context of an expectation that the Foundation would devote itself to that end.[81]I accordingly respectfully remain of the view that the payment of surplus was provided reciprocally and "for" the services, understood as in paragraph 66 above, that were to be provided by the Foundation. However, for completeness I need to address some further issues that were raised in the appellants' argument. Is there a "direct link" between the service provided and the consideration received?[82]The Tribunal, at paragraph 31 of its Decision, treated the issue of "direct link" as being the same as reciprocity and, subject to the point just to be discussed, I respectfully consider that to be a correct reading of the Community jurisprudence. Nonetheless, the possibility that this element may have been regarded by the Court of Justice in Tolsma as additional to the requirements already set out gave Mr Milne the basis of a particular argument in this appeal.[83]In Apple and Pear Development Council the question arose of whether mandatory charges imposed on growers to finance the Council's general supportive and advisory functions constituted the supply of services effected for consideration for the purposes of the Sixth Directive. The Court of Justice held, [1988] ECR 1443 at paragraphs 15-16, that "no relationship exists between the level of benefits which individual growers obtain from the services provided by the Council and the amount of the mandatory charges which they are obliged to pay under the 1980 [Apple and Pear Development Council] Order. The charges, which are imposed by virtue not of a contractual but of a statutory obligation, are always recoverable from each individual grower as a debt dute to the Council, whether or not a given service of the Council confers a benefit upon him. It follows that mandatory charges of the kind imposed on the growers in this case do not constitute consideration having a direct link with the benefits accruing to individual growers as a result of the exercise of the Council's functions."[84]Mr Milne argued that, by the same token, it was impossible to demonstrate a link between the level or amount of benefit by way of service received by the Company and the price or consideration that the Company was prepared to pay for those services. I consider that this argument takes too literalistic an approach to what the Court of Justice said in Apple and Pear Development Council . There, the levy was imposed on the growers, and had to be paid whether or not any benefit accrued to them from membership. The point therefore is really as to whether there was reciprocity in relation to the payment of levies, rather than as to calculation of the amount of those levies. In our case, the structure and arrangement has been agreed between the parties, and the Company has seen fit to undertake to make the payment of surpluses against a commitment that will not necessarily lead to any particular practical result or to any specific financial advantage to the Company. It is the agreement that provides the direct link, and difficulties of assessment of value do not undermine that conclusion: any more than they did in First National Bank of Chicago . The alleged anomalies[85]The Vice-Chancellor draws attention, in paragraph 47 of his judgment, to a number of anomalies that were alleged to arise were the Commissioners correct in their submissions. I deal first with the disparity between the amount spent on all the works, £25 million, and the total of donations, £4.8 million; and then in a separate section with the two particular cases of Caterham and Northcliffe schools.[86]I consider that the answer to this objection was given by

the judge in paragraph 40 of his judgment:

"It is true that substantially more money was spent by the Foundation on improvements to the school properties than was actually made over to the Foundation by the company by way of grants…..However, I do not consider that that prevents there being the sort of reciprocity or mutuality between payment and services contemplated by the Advocate General or the ECJ in Tolsma . The grants were not paid for specific building work to any of the school properties, but, by being paid by the Company to the Foundation, the reality is that the Company was obtaining further improvements to the school properties, or, at the very lowest, a strong probability of obtaining further improvements to the school properties, over and above those improvements which the Foundation would otherwise have been prepared to finance. If that were not so, it is difficult to see why the Letter [of 18 March 1993], which is a formal document, was written, or why the Board of the Foundation and the Committee of the Company were so anxious to tie in the decisions of the Foundation to commit itself to expenditure with the commitment of the Company to provide financial support"
[87]The judge thus approaches the relationship on two levels. First, the general desire of the Company to promote the undertaking of improvements. Second, the specific understandings in relation to particular projects, the existence of which underlines the overall reciprocal relationship, and which is amply demonstrated from the minutes of both the Foundation and the Company. The fact that the Company's payments formed part only of expenditure of the Foundation does not undermine the relevance of either of those examples of reciprocity. The consideration that moved from the Company was indeed the £4.8 million, not the £25 million, because £4.8 million was all that the Company had to give. But it was willing to give all of what it did have available to secure the services identified by the judge in the passage just quoted. Caterham and Northcliffe Schools[88]Mr Milne pointed out that the Foundation had, with the concurrence of the Company, given substantial financial support to Caterham. That school was not leased to nor controlled by the Company, but the use of the Foundation's funds for non-Company purposes had not led to any suggestion that grants to the Foundation should be witheld pro rata or at all. He argued that that indicated that the grants were made simply in order to support the general educational work of the Foundation, and therefore could not be said to be consideration for functions performed by the Foundation specifically for the Company.[89]There are two difficulties about this argument. First, the arrangement between the Foundation and the Company was sufficiently general in terms to exclude any stipulation on the part of the Company that the Foundation must, as a condition of receiving the surpluses, confine its activities to the Company's schools. In the unlikely event of the Foundation broadening its activities in any significant way, the relationship between the two parties might have had to be reviewed: but that would indeed be a review, not the implementation of some term or understanding within the existing arrangements. Second, the unlikelihood of the Foundation broadening its activities in a way unhelpful to the Company is demonstrated by the Caterham case itself. The Company was interested in Caterham, and Caterham needed investment, because it was to accommodate a substantial number of pupils from a Company school, Eothen, that had had to be closed. Both common decency and commercial prudence dictated that the Company procured the continuation of those pupils' education. It is therefore hardly surprising that the Company did not see the Foundation's investment as a departure from the understood relationship between them. Indeed, the Council of the Company was so far conscious of that realities of the situation that at its meeting on 2 February 1994 it resolved, because "the proposed merger was strategically important to the company and vital for the preservation of Eothen school, albeit in a merged form", to recommend the investment in Caterham to the Foundation.[90]As I understand it, Northcliffe was an addition to the "portfolio" of the Company, purchased by the Foundation with the specific financial support of the Company. This seems to be a plain example of the transfer of surplus being seen by the Company as appropriate in the context of a willingness on the part of the Foundation to take action in support of the Company's activities. It should perhaps also be noted that in dealing with Caterham, in paragraph 24 of his evidence, Mr Harper explained that it had originally been intended that that school also should be operated by the Company, just like the other schools. That objective had been frustrated, and a different organisational structure had had to be adopted, only because of restrictions imposed by the charitable trust that had previously owned Caterham. Conclusion[91]I am accordingly satisfied, in terms of the issue set out in paragraphs 55 and 56 above, that the payments of surplus were made as reciprocal remuneration for the service provided by the Foundation, understood as set out in paragraph 66 above. I appreciate that at first sight it may appear surprising that such payments, made within the operation of a joint enterprise, attract liability for VAT. That they do so is largely attributable to the particular nature of relationship that the parties have chosen to create between themselves, and to the way in which they have chosen to conduct their affairs. Orthodox principles of VAT law, applied to those facts, in my view compell the dismissal of this appeal.

LADY JUSTICE ARDEN:

[92]I agree that this appeal should be allowed for the reasons given by the Vice-Chancellor and the further reasons which I give below. I gratefully adopt his detailed description of the facts of this case and his references to the critical provisions of the sixth VAT directive and the Value Added Tax Act 1994 (VATA) and to the jurisprudence of the European Court of Justice (the ECJ). I will refer to the appellant as the Foundation, to the Church Schools Company as the Company, and to the Commissioners of Customs and Excise as the CCE.[93]The issue is whether the Foundation supplied something to the Company in return for remuneration. There is a little doubt as to the principles to be applied in answering this question but substantial disagreement as to how they are to be applied to the facts of this case. The facts are of course those found by the Tribunal. The appeal to the High Court and this court is only on a point of law.[94]The CCE submit that the commercial reality was that that the Foundation would share in the surpluses, but that alone is not enough. The CCE must show that the Company made grants to the Foundation which were in return for the benefits which it received from the Foundation: see Tolsma v Inspecteur der Omzetbelasting v. Leeuwarden [1994] STC 509 . The recompense which the Company provided in the form of the grants must have been induced by the benefit which the Foundation provided.[95]The issue in its crudest form is: when is a payment a gift and when is it a supply for VAT purposes? The charge to VAT does not apply to every transaction. It does not apply to a gift (VATA, section 5 (2) (a)). It only applies to a supply for consideration. Consideration does not here mean consideration for the purposes of English contract law. But it does mean remuneration for the service or other matter supplied by the supplier. In Tolsma the ECJ held that the remuneration must be stipulated by the parties, and there has to be an exchange of promises or a supply against agreement for remuneration (see Tolsma , at 516 paragraph 14).[96]Where the argument of the CCE falls down in my judgment is in identifying the supply for which the grants were recompense. Mrs Melanie Hall, in her able submissions for the CCE, submits that it was unnecessary for the Court to analyse the supply with precision. She accepts that the supply has to be capable of being used by and for the benefit of the Company (see Mohr v Finanzamt Bad Segelberg [1996] STC 328). What the Foundation did on her submission was bound to benefit the Company. But how? It is essential to identify the corresponding benefit. However wide the scope of the charge to VAT where there is a supply of something which does not fall within the definition of services, it must be possible to say what constitutes the supply with confidence.[97]Here what the Foundation did was to improve the schools. But it owned the schools so on the face of it that confers no benefit on the Company. Of course the Company received the benefit of the use of the properties but it had this benefit not in response to the grants which it made but in response to its payments of rent under the lease. Inevitably, there was an interval between the time when the premises were improved and the rent was reviewed to take account of the improvements, but no one has suggested that the terms as to rent or rent review were not normal commercial terms. A delay in raising the rent was therefore normal and inevitable.[98]Furthermore, the cost of the improvements carried out by the Foundation far exceeded the grants paid by the Company. No means exist for identifying the works said to have been undertaken in response to the grants made by the Company.[99]Mrs Hall contends that (if it is necessary to identify the supply) the supply comprised the procuring of the building works by the Foundation. This was the case put to the Tribunal which the Tribunal rejected (Decision, paragraphs 21, 33 and 34). The Tribunal's finding was in effect that the making of the improvements by the Foundation and the making of the grants by the Company were optional co-operation (Decision paragraphs 32 and 34). (The Tribunal's final sentence in paragraph 32 reads "it could be argued that there is a direct link between payments and receipts" but it seems clear from the context, including paragraph 34, that the Tribunal means "no" not "a" direct link). As I read the reference to "optional co-operation" (Decision, paragraph 32 read with paragraph 34), the Tribunal concluded as a matter of fact that there was co-operation between the parties but without any commitment on either side. Such a conclusion is tenable in law since it is possible for parties to have expectations about each other's conduct and even the same objectives without there being any mutuality or reciprocity in these expectations or objectives. There was evidence on which the Tribunal could reach the conclusion that that was the position here. The letter of 18 March 1993 did not stipulate that grants of surpluses were dependent on the Foundation carrying out building works. The amount of the grants paid is far less than the cost of the improvements. If the Company had not made the grants the Foundation would have borrowed more money (Decision, paragraph 3 (s)). Moreover the grants were not refundable and the Company's board minutes speak of payments by way of financial support not (say) inducement. While reciprocity may be inferred, it must involve some finding of fact. Accordingly in order for the CCE to succeed on an appeal against the Tribunal's decision they had to show that it was unreasonable for the Tribunal not to reach the conclusion that the making of the grants and the procuring of improvements were reciprocal undertakings, alternatively (if I am right in thinking that the Tribunal made the finding of fact to which I have referred in paragraph 32 of its decision) that it was unreasonable for the Tribunal to make that finding. Since the appeal is on a point of law only, the court cannot substitute its own conclusion on these points and I venture to think that as Mr Milne contends the judge fell into error in doing so in paragraphs 40 and 50 of his judgment. It must also be borne in mind that the CCE's submission to the Tribunal (and from the skeleton arguments on appeal) before the judge on the question of the supply was limited to the procuring of improvements.[100]So for my part I conclude that the CCE has failed to establish any supply for which the grants constitute remuneration. The conclusion that there was no such supply is consistent with common sense since it defies logic to say that the Company remunerated the Foundation for improving properties which would give Foundation the ability to charge higher rents to the Company. Such a bargain would make no sense. The only analysis which makes sense is that the Company was making grants to the Foundation. What characterises a grant or gift as opposed to remuneration is that it is not recompense for something. That seems to me to be what the Tribunal found here.[101]The letter of 18 March 1993 states that it is the Company's intention "to grant surpluses". There is no finding that the Company made these payments in return for some benefit. The minutes of both bodies merely record internal decisions, and there is no suggestion by the Tribunal that the terms of the letter of 18 March 1993 were varied or replaced by later communication between the parties.[102]There are understandable reasons for the Company transferring its surpluses to the Foundation. There was a desire to separate the function of running the schools from that of maintaining and improving the school properties. Both are complex activities which may benefit from being separated out. This was the reason for the reorganisation of the Company and the Foundation in 1993. With that management philosophy behind the reorganisation it is not surprising that the Company did not carry out the improvements itself. However, it would not further the Company's charitable purposes simply to retain any surpluses it had been fortunate enough to make.[103]The situation under consideration is distinguishable from the situation where the supplier does some act, such as confer a benefit on a third party, at the request of the person supplied. There may then be something which is supplied, namely the benefit to the person supplied of the request being fulfilled. However that reasoning does not apply here since the only candidate for supply is the improvement to the Foundation's own properties for which the parties had already agreed terms as to use by entering into the lease. There is no finding that the improvements were executed at the Company's request. On the facts as found by the Tribunal the Company made no binding promise to make any grant to the Foundation, and the Foundation in turn recognised that the Company's letter to it of 18 March 1993, which the Vice-Chancellor sets out in his judgment, was no more than a statement of intention.[104]On this analysis it does not matter that the Company indicated its intention from the outset of making grants to the Foundation as it did in the letter dated 18 March 1993. Nor does it matter that the Company intended that its grants should be used in some particular way. There was no finding by the Tribunal that there was a contract between the Foundation and the Company for making the improvements, and I agree with what the Vice-Chancellor has held about the judge's finding that there was a binding contract. Moreoever the Tribunal rejected the proposition that there was an arrangement between the parties falling short of a contract (Decision, paragraphs 33 and 34). The Tribunal rejected the proposition that a binding contract was required (Decision paragraphs 27 and 31), and in my judgment the Tribunal cannot be said to have misdirected itself in law on this point. As explained, I do not consider that it is sufficient to satisfy the requirement of reciprocity that the Company and Foundation had like objectives.[105]I have not dealt separately with the acquisition of the Northcliffe site. The same considerations apply and no doubt after its acquisition the existing leases between the Foundation and the Company were varied so as to include this property.[106]Accordingly I consider that the Tribunal's conclusion on the application of the law to the facts of this case discloses no reviewable error and accordingly that this appeal should be allowed.

Order

Appeal allowed with costs; costs to be subject to detailed assessment by a costs judge if not agreed; application for permission to appeal to House of Lords refused. (Order does not form part of the approved judgment)

Cited in 6 later judgments