Birkdale School, Sheffield v HM Revenue & Customs [2008] EWHC 409 (Ch)

[2008] EWHC 409 (Ch)Case No CH/2007/APP/0297
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 05/03/2008
Before
THE HONOURABLE MR JUSTICE HENDERSON
Between
BIRKDALE SCHOOL, SHEFFIELDAppellantTHE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMSRespondents
Mr Roderick Cordara QC and Mr Jern-Fei Ng (instructed by Clifford Chance LLP) for AppellantMr James Puzey (instructed by the Acting Solicitor for HMRC) for the RespondentsHearing Hearing dates: 25 and 28 January 2008
JudgmentMr Justice Henderson :Introduction
[1]Since at least the 1920s it has been commonplace for schools in the United Kingdom which charge fees for the education which they provide to offer parents the option of participating in a scheme whereby they will be entitled to a refund of an appropriate proportion of fees paid in advance if the child concerned is unable to attend school for a specified period (typically a minimum of five days) by reason of illness, or in other specified circumstances. The price that a parent has to pay for participating in a scheme of this nature is normally a small percentage increase in the fees which would otherwise be chargeable. Nowadays the increase is typically of the order of 1.5%.[2]Although from the perspective of participating parents a scheme of this nature has many of the features of insurance, and although in some cases the scheme may even be called a school fees insurance scheme (or something similar), it is common ground that the contract between the school and the parent is not a contract of insurance. Indeed, it would be unlawful for a school to offer insurance services in its own right. Instead, the scheme operates by way of a variation of the contract for the provision of education entered into between the school and the parent, and in return for the increased fees charged it entitles the parent to a refund in the specified circumstances. In some cases, the scheme may also provide for the child to be educated free of charge for a specified period in the event of the accidental death of the fee-paying parent (a word which I use for convenience in this judgment to include any other person who is legally responsible for payment of the fees).[3]Although the scheme does not give rise to a contract of insurance between the school and a participating parent, the financial backing for the scheme is in practice usually provided by a contract of insurance entered into between the school and an insurance company. Probably the earliest version of the scheme, then called the “School Fees Remission Scheme”, was established by the Holmwoods Group of companies in the 1920s and was insured by Lloyd’s. By the 1950s, over 1,600 schools participated in the School Fees Protection Scheme, as it had by then become. Today, a large number of schools, including the appellant in the present case, Birkdale School, Sheffield (“the School”), insure their obligations under the scheme with companies in the HSBC group, and the necessary services of brokering and scheme administration are provided by an insurance intermediary, HSBC Insurance Brokers Ltd.[4]Until recently, the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) were content to take the view that the additional charge made to parents for participation in such schemes was exempt from Value Added Tax (“VAT”), presumably on the ground that it formed part of the consideration for the supply of exempt educational services by the school. However, in 2005 there was a change of policy within HMRC and the view was taken that participation in the scheme involved a separate standard rated supply by the school of the right to obtain refunds of fees in specific circumstances.[5]In the case of the School, this change of policy was reflected in two rulings given by HMRC, the first in a letter dated 1 December 2005 and the second, after consideration of representations made by the School, in a more detailed letter dated 7 April 2006. Meanwhile, the School was assessed to VAT in the sum of £20,279 plus interest in respect of its quarterly VAT returns for nine accounting periods between March 2003 and September 2005.[6]The School appealed against both decision letters and the assessments to VAT. The appeal was heard by the Chairman of the Manchester Value Added Tax and Duties Tribunal, Mr David Demack, on 29 January 2007. He gave his written decision (“the Decision”) on 3 April 2007.[7]As Mr Demack records in paragraph 3 of the Decision, the appeal was treated as a test case for all the independent schools which operate fees refund schemes. Accordingly, although the amounts at stake on the appeal were comparatively small, he had the benefit of submissions from leading counsel (Mr Roderick Cordara QC), who appeared with Mr Jern-Fei Ng of counsel for the School, and from experienced junior counsel, Mr James Puzey, on behalf of HMRC.[8]In the Decision the Tribunal substantially upheld HMRC’s case, and concluded that the scheme operated by the School “provides for the supply of an entitlement by parents to a refund of school fees in prescribed circumstances”: see paragraph 40. This supply was separate from the supply of education made by the School (paragraph 42), nor could it properly be regarded as ancillary to the principal service of education provided by the School (paragraph 45). It was correctly characterised as a standard rated supply (paragraph 46), although the Chairman went on to observe (in paragraph 47) that:
“it should be possible for the School to continue to operate the Scheme as part of an exempt supply of education by making what would appear to be relatively minor changes to it.”
[9]The School now appeals to the High Court against the Decision. The hearing before me took place on 25 and 28 January 2008. The representation of the parties was the same as before the Tribunal, and I record my gratitude to counsel on both sides for their clear and helpful arguments.[10]The appeal to the High Court lies only on questions of law: see section 11(1) of the Tribunals and Inquiries Act 1992 and paragraph 23.8(1) of the Practice Direction supplemental to CPR Part 52.

Birkdale School: The Facts

[11]The background to the scheme operated by the School (“the Scheme”) is described in a witness statement of Mr Nicholas Munday, who is a partner in the School’s solicitors, Clifford Chance LLP, and has conduct of the matter on the School’s behalf. He says this:
“Birkdale School is an independent day school for boys aged 4 to 18 with a co-educational sixth form and is located in Sheffield. The School is registered for VAT … and is also a registered charity constituted as a company limited by guarantee. Typically, Birkdale School enters into a contract with a parent whereby the School offers to provide tuition in return for which the parent will pay fees to the School, in other words, a contract for the supply of education. [He then exhibits a specimen contract.] The School’s terms do not usually provide for a refund of the fees which have been paid if and in so far that a pupil is unable to attend classes. However, it is open to the School and parent to agree to contract on a different basis, namely that the School will pay a refund to the parent if and in so far that the pupil concerned is unable to attend classes; those parents who opt to contract on this different basis pay a higher amount in fees than those who do not.”
[12]Paragraph 5 of the Decision explains that the School registered for VAT in order to deal with sales of clothing and tuck shop sales. It first registered as a partnership on 1 May 1989, and the registration was later transferred to the limited company on 1 April 1993. Paragraph 5 then continues:
“Prior to the commencement of each school term, and pursuant to a contract entered into between the School and the parents, parents are required to pay fees. The parents and the School make but one written contract in the case of each child. It is entered into on a child first becoming a pupil at the School and is a contract for the provision of education in consideration of the payment of fees.”
[13]The relevant terms and conditions of the contract are then set out. It is enough for present purposes to say that the contract between the parent and the School is concluded when the parent accepts the offer of a place and pays a deposit. The School’s obligation to provide an education for the child is to be found in clause 28, which states that:
“… we will do all that is reasonable to provide an educational environment and teaching of a range, standard and quality which is suitable for each Pupil and to provide education to at least the standard required by law, and often to a much higher standard.”
[14]Under the heading “Fees”, clauses 61 and 62 provide as follows:
“61. Payment: The Parents undertake to pay the Fees which apply and are due and owing from time to time. Fees are due and payable before commencement of the relevant school term. If one or more items on the bill are under query, the balance of the bill must be paid. 62. Refund/Waiver: Fees will not be refunded or waived for absence through sickness; or if a term is shortened or a vacation extended; or if a Pupil is released home after public examinations or otherwise before the normal end of term (provided that the School remains open to a Pupil who wishes to stay at school during that period); or for any other cause except at the discretion of Head or where there is a legal liability to make a refund. This rule is necessary so that the School can properly budget for its own expenditure and to ensure that the cost of individual default does not fall on other Parents. Separate rules … apply when a Pupil is expelled or removed, i.e. asked to leave.”
The important points are that fees are payable in advance before the beginning of each term, and that fees will not be refunded or waived for absence through sickness, or for any other reason except at the discretion of the Head or where there is a legal liability to make a refund.[15]Clause 83 provides that the offer of a place and its acceptance give rise to a legally binding contract on the terms of the printed Terms and Conditions, while clause 84 provides that only the School and the parents are parties to the contract.[16]The terms of the Scheme are set out in a document headed “Birkdale School Fees Refund Scheme”, and beneath that “Effective from September 2005”. Most of the relevant provisions are set out in the schedule to the Decision, but as they are of central importance I will for convenience reproduce them here:
“The absence of a pupil does not lessen the cost of running the school and fees are not refundable if a pupil is unable to attend classes due to sickness, accident or quarantine. The school is however, able to make refunds through the Fees Refund Scheme outlined below. Operation of the Scheme The contract you have with the school is for the provision of educational services. Participation in this Scheme alters that contract and entitles you to receive a refund of school fees in certain circumstances as detailed on this sheet. The school is able to refund such fees as it has taken out an insurance policy under which it can claim. To extend the benefits of this Scheme to you in the simplest and most economical way, a termly charge is included on your school fee account. The termly charge is not an insurance premium and you are not entitled to claim directly from the school’s policy. IF YOU DO NOT WISH TO PARTICIPATE IN THE FEES REFUND SCHEME PLEASE DELETE THE TERMLY CHARGE FROM YOUR ACCOUNT. The school reserves the right to vary the termly charge by giving advance notice to you. Commencement of the Scheme Your participation in the Scheme commences on the first day of term, or the date the first termly charge is paid to the school, whichever is the latter. Refunds are provided for absences during term time only including weekends and half term breaks. Refunds of fees are made for: (1) Absence from school due to illness, accident, contact with infection or closure of the school or house through an epidemic among the pupils for a continuous period of at least 5 days for Day Pupils (including weekends). A medical practitioner must certify the necessity of any absence of 15 days or over. [Certain exclusions are then set out, e.g. if a pupil is kept from school owing to a physical or mental condition that existed before his first inclusion in the Scheme.] How to apply for a refund (1) Absence from School – ask the School for a Fee Refund Form. … How refunds are calculated Refunds are based on the length of absence during term time only. Fees will be refunded pro rata to the actual time away from the school. This means that the amount payable for each day of absence is calculated by dividing the termly fee by the actual number of days in the term. The maximum refund under the Scheme for any one pupil for any one medical condition is limited to three terms’ fees calculated from the first day of absence. Free place in the event of accidental death In the event of an accident that results in the death of a person who is legally obliged to pay the school fees … for a pupil in the Scheme, the school will maintain the pupil’s place at the school free of charge for up to three terms following the death, provided that such person is under 65 years of age at the time of death and the death is caused solely by accidental means and independently of any other cause. … Cancellation The school may cancel this Scheme at any time by giving 30 days written notice to you at your last known address. You can discontinue your participation with effect from any anniversary of your joining the Scheme by giving advance written notification to the school. …”
Operation of the Scheme Commencement of the Scheme Refunds of fees are made for: How to apply for a refund How refunds are calculated Free place in the event of accidental death

Cancellation

[17]As the Tribunal correctly notes in paragraph 6 of the Decision, the Scheme is offered to parents on an “opt-out” basis. The additional charge for participation is therefore added to each term’s invoice for fees to be paid in advance, and parents who do not wish to participate in the Scheme have to delete the additional charge and perform the necessary subtraction in order to work out what they have to pay. The amount of the additional termly charge is currently 1.5% of the basic termly fees, before extras.[18]The Scheme conditions expressly provide that participation in the Scheme “alters” the parent’s contract with the School for the provision of educational services. In paragraph 7 of the Decision, the Tribunal correctly notes that there is nothing to prevent the parties to a contract from effecting a variation of it by mutual agreement, and that the terms of a written instrument may be varied by a subsequent agreement, whether written or oral. Nevertheless, paragraph 7 continues:
“I find that the standard terms are not varied when parents join the Scheme by paying the fees due from them: there is a separate and additional consideration for the Scheme.”
With all respect to the Tribunal, I consider that this so-called finding involves a clear error of law and cannot be supported. There is no reason not to give effect to the stated intention of the parties that participation in the Scheme should alter, or in other words vary, the contract previously entered into between a parent and the School, and in particular clause 62 of that contract. The mere fact that a separate and additional consideration is paid for the variation does not lead to the conclusion that there is a separate contract. Apart from anything else, the provision of further consideration is necessary in order to make the variation contractually binding. The result of participation in the Scheme, in my judgment, is that there is then a single, but varied, contract for the provision of educational services by the School, on the standard terms and conditions as modified by the provisions of the Scheme.[19]The “back-end” insurance of the Scheme is described by the Tribunal in paragraphs 9 and 10 of the Decision in the following terms:
“9. The School is able to operate the Scheme by virtue of its having purchased an insurance policy effected through HSBC Insurance Brokers Limited (“HSBC”) under which it is indemnified for any fees it has to refund. The policy provides the right for the insurer to decline to allow the name of any pupil of the School to be included in the cover provided, or to require the removal of his or her name from cover. The School has given an assurance to HSBC that it will refund fees paid in the circumstances prescribed in clause 7 of the policy, i.e. in the event of monies becoming payable to it under the policy. The insurance policy is underwritten by HSBC (Insurance) UK Limited and the Ecclesiastical Insurance Co Ltd, and all documents are issued in their names. The underwriters charge a premium for the cover effected which is inclusive of any brokerage owed to an intermediary. The School is the insured under the policy and is consequently liable for the premiums due under it from time to time. HSBC introduced the School to the underwriters, and continues to arrange and administer the policy. It receives and retains brokerage out of the premiums due to the underwriters. Premiums under the policy are due and payable on a termly basis. The School is sent a termly return which it completes and returns with a list of pupils and the fees due from the parents. On receipt of each return [HSBC] issues an invoice on which is shown the discount due to the School as its commission on the premiums. The discount is reviewed periodically, for the Scheme is dependent on the level of participation of parents in the Scheme. A pupil participation rate of between 25 and 40 per cent attracts a 15 per cent discount and a rate of 41per cent or over attracts a 20 per cent discount. 10. No evidence was adduced of any parents being denied access to the Scheme for any reason, and, in its absence, while I accept that there may be circumstances in which the School’s insurers may not be prepared to grant cover in relation to individual pupils, I proceed on the basis that essentially the Scheme is of general application.”
[20]I would make the following comments on the insurance arrangements:(a) First, although parents are informed in the Scheme conditions that the School is able to offer participation in the Scheme because it has taken out an insurance policy under which it can claim, that insurance policy forms no part of the contractual arrangements between the School and participating parents. Their right to a refund depends on fulfilment of the Scheme conditions, and is binding on the School as a matter of contract whether or not the School has insured its obligations under the Scheme. Accordingly, the parents are not concerned in any way with the detail of the insurance arrangements, and they are not provided with copies of the insurance documentation. The insured person under the policy is the School itself, and its insurable interest arises precisely because of the contractual obligations which it has undertaken to parents.(b) Secondly, it will be noted that the School has a financial interest in the operation of the Scheme, because it receives a discount on the gross amount of the premiums depending on the rate of pupil participation in the Scheme. Effectively, the School charges the gross amount of the premiums to parents who participate in the Scheme, but then keeps either 15 or 20% of that amount as its “commission”. This point is not drawn to the attention of parents, and may perhaps help to explain why the Scheme is made available on an opt-out basis.(c) Thirdly, the Scheme is in practice administered by HSBC Insurance Brokers Ltd, which provides the information sheets on the Scheme for issue to parents, receives completed claim forms, considers whether the claim is allowable, and (if asked by the School) makes payment direct to parents rather than refunding the School. No separate charge is made by HSBC for performing these functions.

The Law: (1) Statutory

[21]VAT is charged in the United Kingdom by virtue of directly effective provisions of European Union (“EU”) law, given effect in domestic legislation by the Value Added Tax Act 1994 (“VATA 1994”). The key EU legislation is contained in EC Council Directive 77/388 of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes (“the Sixth Directive”), which has subsequently been recast as EC Council Directive 2006/112 of 28 November 2006 on the common system of Value Added Tax (“the 2006 Directive”). For convenience, I will refer in this judgment to the provisions of the Sixth Directive, both because they are more familiar and because they are the ones to which reference is made in the extensive case-law relating to single or multiple supplies.[22]By virtue of article 2 of the Sixth Directive, the supply of goods or services effected for consideration within the territory of a Member State by a taxable person acting as such is subject to VAT. Article 6.1 provides that “supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of article 5.[23]By virtue of article 11A(1)(a), the taxable amount in respect of supplies of goods and services made within the territory of the country concerned, subject to immaterial exceptions, is “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.” Article 11A(3)(b) provides that the taxable amount shall not include “price discounts and rebates allowed to the customer and accounted for at the time of the supply”, while article 11C(1) provides that:
“In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.”
[24]Article 13 of the Sixth Directive provides for various exemptions. By virtue of article 13A(1)(i), there is a mandatory exemption for “children’s or young people’s education”. Under part B of article 13, various transactions of a financial nature are also exempted, including:
“(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents; … (d) the following transactions: … 3. transaction[s], including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring; …”
[25]All of the provisions of the Sixth Directive to which I have referred above have in one way or another been incorporated into UK domestic law, either by VATA 1994 or in subordinate legislation. For present purposes, nothing turns on the precise terms of any of these domestic provisions and I will therefore say no more about them. The exemption for education is to be found in Group 6 in Schedule 9 to VATA 1994, where paragraph 1 refers to “the provision by an eligible body of (a) education …”. It is common ground that the School is an eligible body.

The Law: (2) Case Law

[26]There is a large, and rapidly growing, body of case law, both in the Court of Justice of the European Communities (“the ECJ”) and in the English courts, on the correct characterisation for VAT purposes of situations where goods or services are supplied by one person to another in the form of what one might broadly call a composite package. The wealth of material is already such that there is often a real danger of losing sight of the wood for the trees. I do not propose in this judgment to undertake a detailed review of the leading cases, partly because there was no discernible difference between the parties about the relevant principles of law to be applied, and partly because valuable reviews have already been carried out by other first instance judges: see in particular the judgments of Warren J in Byrom and others v HMRC [2006] EWHC 111 (Ch), [2006] STC 992 and of Briggs J in Tumble Tots (UK) Ltd vHMRC [2007] EWHC 103 (Ch), [2007] STC 1171.[27]I will instead refer to what appear to me to be the most important principles in the context of the present case, while acknowledging my indebtedness for much of what follows to the skeleton argument of counsel for the School as supplemented by Mr Cordara’s oral submissions.[28]The starting point is now generally agreed to be the guidance given by the ECJ in Case C-349/96 Card Protection Plan Ltd v Customs and ExciseCommissioners [1999] 2 AC 601, [1999] STC 270, at paragraphs 26 – 32. The Court stressed in paragraph 28 that “where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction takes place”. The Court then continued as follows:
“29. In this respect, taking into account, first, that it follows from article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, secondly, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service. 30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied … 31. In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest that there is a single service. However, notwithstanding the single price, if circumstances … indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this … ”
[29]The authority cited by the ECJ for the proposition that a service must be regarded as ancillary if it does not constitute for customers an aim in itself, but rather a means of better enjoying the principal service supplied, was Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel) (Joined Cases C-308/96 and 94/97), [1998] STC 1189 at paragraph 24, where the Court endorsed the view of the Advocate General (Léger) who had said in paragraph 36 of his Opinion:
“I consider that a service is ancillary if, first, it contributes to the proper performance of the principal service and, second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.”
[30]When Card Protection Plan returned to the House of Lords, Lord Slynn, giving the only reasoned speech, said in paragraph 22 that it was clear from the ECJ’s judgment that the task of the national Court “is to have regard to the “essential features of the transaction” to see whether it is “several distinct principal services” or a single service and that what from an economic point of view is in reality a single service should not be “artificially split”. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.” See Card Protection Plan Ltd v Customs and Excise Commissioners (No.2) [2001] UKHL/4, [2002] 1 AC 202 at 212 G-H.[31]In Dr Beynon and Partners v Customs and Excise Commissioners [2004] UKHL 53, [2005] 1 WLR 86, [2005] STC 55, the House of Lords repeated the warning given by the ECJ in Card Protection Plan against artificial dissection of the transaction, and held that the prescription of drugs by a doctor to a patient in the course of the patient’s visit to the doctor for treatment should be classified as part of a single supply of medical services, and not as a separate supply of drugs. Lord Hoffmann, who gave the only reasoned speech, said in paragraph 31 that in his opinion “the level of generality which corresponds with social and economic reality is to regard the transaction as the patient’s visit to the doctor for treatment and not to split it into smaller units”.[32]The case is also of importance for the endorsement by the House of Lords of the view of the Court of Appeal that the question of classification of the transaction is a question of law. As Lord Hoffmann said in paragraph 27:
“In my opinion the weight of authority supports the view of the Court of Appeal on this point. The courts have not treated VAT classification in the same way as some questions of classification (for example whether a contract is of service or for services) which, notwithstanding that there are no facts in dispute, are deemed to be questions of fact so as to exclude an appeal on a question of law … On the other hand, … the question is one of fact and degree, taking account of all the circumstances. In such cases it is customary for an appellate court to show some circumspection before interfering with the decision of the tribunal merely because it would have put the case on the other side of the line.”
[33]Lord Hoffmann’s call for “circumspection” before interfering with the decision of the tribunal on a question of this nature was repeated by the House of Lords in College of Estate Management v Customs and ExciseCommissioners [2005] UKHL 62, [2005] 1 WLR 3351, [2005] STC 1597: see the speech of Lord Walker of Gestingthorpe, again giving the only reasoned speech, at paragraphs 35 and 36. However, the case is also important in two other respects:(a) First, in paragraph 29 Lord Walker repeated Lord Slynn’s emphasis, in Card Protection Plan (No.2), on the need to take an overall view, without over-zealous dissection, and to look for the essential purpose (objectively assessed) of a transaction; and(b) Secondly, in paragraph 30 Lord Walker brought out the point, which is implicit in paragraph 30 of the ECJ’s judgment in Card Protection Plan, that not every composite transaction will yield to an analysis in terms of what is principal and what is ancillary. Madgett and Baldwin was an example of a case where such an analysis was appropriate, but “there are other cases … in which it is inappropriate to analyse the transaction in terms of what is “principal” and “ancillary”, and it is unhelpful to strain the natural meaning of “ancillary” in an attempt to do so. Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services … Pharmaceuticals are not ancillary to medical care which requires the use of medication; again, they are of central and indispensable importance; nevertheless there is a single supply of services (Beynon).”[34]The importance of this distinction was further developed by the ECJ in Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) [2006] STC 766, where the court said with reference to Card Protection Plan :
“21. In that regard, the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal supply whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the tax treatment of the principal supply … 22. The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single indivisible economic supply, which it would be artificial to split.”
Accordingly, there may be cases where one element of the transaction is not ancillary, and may even be of central and indispensable importance, but it is nevertheless so closely linked with one or more other elements that, regarded objectively, they form “a single, indivisible economic supply, which it would be artificial to split”. The character of this single supply may be that of one or other of the constituent elements, but it may also have a unique character enjoyed by none of the constituent elements.[35]Levob was concerned with the customisation of basic software sold to a customer, in order to enable the customer to use it for its own business requirements. Unsurprisingly, the ECJ held in paragraph 24 that “it is not possible, without entering the realms of the artificial, to take the view that such a consumer has purchased, from the same supplier, first, pre-existing software which, as it stood, was nevertheless of no use for the purposes of its economic activity, and only subsequently the customisation, which alone made that software useful to it.” The ECJ went on in paragraph 25 to say that the fact that separate prices were contractually stipulated for the supply of the basic software and its customisation was not of itself decisive:
“Such a fact cannot affect the objective close link which has just been shown with regard to that supply and that customisation nor the fact that they form part of a single economic transaction …”

Discussion and conclusions

[36]Against this background, it seems logical to begin with the question whether the provision of the Scheme by the School to a typical parent is so closely linked with the provision of educational services by the School to the parent as to form, objectively, a single, indivisible economic supply which it would be artificial to split (see Levob at paragraph 22, and College of Estate Management at paragraph 30). The question needs to be answered by taking an overall view, without over-zealous dissection, and by looking for the essential purpose (objectively assessed) of the transaction in the light of the circumstances in which it took place (Card Protection Plan at paragraphs 28 – 29). Regard must be had to the commercial reality of the matter, at the level of generality which corresponds with social and economic reality (Beynon at paragraph 31).[37]It is fair to say, I think, that the general trend of the recent authorities has been away from artificial splitting of transactions, and (where possible) towards a unitary or single classification which corresponds with the objective business reality of the transaction. The matter is looked at from the perspective of the average customer, not from the point of view of the supplier: see the reference to “a typical consumer” in Levob at paragraph 22, and compare the opinion of the Advocate General (Kokott) at paragraph 69. One reason for looking at the question from the perspective of the customer is no doubt that it is the consideration provided by the customer for the supply which forms the taxable subject matter.[38]In the interests of clarity, I should also emphasise that a single or unitary classification is only possible where all the elements of the composite supply are provided by the same supplier: see Telewest Communications Plc vCustoms and Excise Commissioners [2005] EWCA Civ 102, [2005] STC 481, especially at paragraph 80 per Arden LJ.[39]The Tribunal dealt with this question fairly shortly, in paragraphs 41 and 42 of the Decision:
“41. Despite the persuasive nature of the primary case for the School as advanced by Mr Cordara, I am unable to accept his submission that there is in reality a single supply of education of which the provision of the Scheme simply forms part: there is a difference for VAT purposes between the nature of the supply made to parents who avail themselves of the Scheme, and those who do not. Certainly, each group receives an education for their children but those who do join it also receive the separate supply referred to in the last preceding paragraph [i.e. the supply of an entitlement to a refund of school fees in prescribed circumstances], which has no effect on that education. As I mentioned earlier, I am unable to accept that the terms of the Scheme take effect as an amendment and/or variation of clause 62 of the School’s standard terms and conditions. I further disagree with Mr Cordara’s contention that any terms concerning fees are an integral part of, and cannot be divorced from, the contract for education: the fees for the Scheme are identified on the School’s invoices and are charged separately from those for education. 42. Whilst the Scheme necessarily relates to the supply of education made by the School, it cannot itself be described as a supply of education. I hold that there are two separate supplies: a supply of education, and a supply of the entitlement to the refund of school fees in prescribed circumstances.”
[40]In my judgment this reasoning is erroneous and cannot be supported. The only matters identified by the Tribunal as reasons for holding that the Scheme gives rise to a separate supply are:(a) the fact that participation in the Scheme has no effect on the child’s education;(b) the Tribunal’s view that the terms of the Scheme do not take effect as an amendment or variation of the School’s standard terms and conditions; and(c) the fact that the fees for the Scheme are charged separately from the fees for education.[41]I have already held (see paragraph 18 above) that reason (b) involves a clear error of law. With all respect to the Tribunal, reasons (a) and (c) also seem to me to be of little, if any, relevance.[42]With regard to reason (a), it is of course true that participation in the Scheme has no effect on the education provided by the School to the child. The child will be educated in exactly the same way whether or not his parent participates in the Scheme. This point is a central plank of HMRC’s case, and was repeated to me several times by Mr Puzey in his oral and written submissions. However, in my judgment it focuses on the wrong question. What matters in the present context is not the education provided by the School to the child, but the supply of educational services by the School to the parent. The parent is paying the School to educate his child. Participation in the Scheme affects the price which he pays for that service, and entitles him to a refund, or to a full remission of fees, in certain specified circumstances. However, it is still the child’s education that the parent is paying for. The economic reality of the matter, in my judgment, is that the parent is provided by the School with two payment options for the same educational service. That is how a typical parent would view the matter, and that is the appropriate level of social and economic reality at which to examine the question. The parent is offered two different ways of paying for the child’s education. In my judgment it really is as simple as that.[43]As regards reason (c), the authorities clearly indicate that the charging of a separate price for one element of a composite supply is not of itself decisive: see in particular Levob at paragraph 25 and the ECJ in Card Protection Plan at paragraph 31. In my judgment, this is just the kind of formalistic distinction which will usually have little, if any, part to play in the characterisation of a composite supply.[44]The indivisible nature of the supply is also brought out by the fact that the Scheme could have no independent existence apart from the supply of education. This was rightly recognised by the Tribunal in paragraph 44 of the Decision, but the Chairman then said “I … do not consider that fact to help the School in any way”. That comment was made in the context of the School’s alternative argument that the Scheme was ancillary to the supply of education, and not in the context of the School’s primary argument. However, the Tribunal should in my view have had regard to the point as a highly material circumstance in relation to the primary argument, where it provides substantial support for the School’s case. It helps to bring out the critical point that the Scheme is merely an optional variation of the contract for the supply of educational services, which gives the parent a different method of paying for it.[45]In his submissions for HMRC, Mr Puzey relied on a number of points in addition to his basic argument that participation in the Scheme has no effect on the child’s education. He said that the contract for the supply of education is signed on one occasion only, and is governed by a self-contained set of terms and conditions, whereas the Scheme is entered into at a later stage and is subject to separate terms and conditions. It is not administered solely by the School, but also by HSBC. Indeed, the Scheme could have been supplied and administered solely by a third party such as HSBC. Furthermore, a parent may opt out of the Scheme or back into it repeatedly throughout his child’s time at the School, but he is still bound by the original contract for education.[46]Mr Puzey also submitted that the question is one of fact and degree, and that due deference should be accorded to the decision of the Tribunal. Further, the case concerns the scope of an exemption from VAT, and as a matter of principle exemptions should be narrowly construed.[47]These contentions were attractively advanced by Mr Puzey, but I am not persuaded by them.[48]First, while it is true that the original contract for the supply of education is concluded on the School’s standard terms and conditions, and participation in the Scheme follows later, and is subject to its own terms and conditions, what matters for present purposes is the position if and when a parent decides to participate in the Scheme. At that point the original terms and conditions are varied, and while the parent chooses to remain a member of the Scheme the terms on which he pays for his child’s education will be varied accordingly. The question that has to be answered is whether this variation affects the essential nature of the educational services supplied by the School to the parent. In my judgment it clearly does not.[49]Secondly, the role of HSBC in administering the Scheme is in my view irrelevant. It is no more than part of the means by which the School fulfils its contractual obligations to parents under the Scheme. The position would indeed be different if the Scheme were provided by HSBC, or some other third party, because then there would no longer be a single composite supply by a single supplier. However, that is not the present position. Furthermore, even if a similar scheme were to be provided by a third party, it would presumably be structured as some form of insurance, which would itself be exempt from VAT.[50]Thirdly, although it is well established that an appellate court should show appropriate deference to the decision of the Tribunal in a borderline case, that principle can in my judgment have no application where, as in the present case, the reasoning of the Tribunal exhibits clear errors of law, and it is not just a question of how the primary facts should be evaluated. The question which has to be decided is a question of law, to which there can be only one right answer. It is no more than an application of the time-honoured principle in Edwards v Bairstow [1956] AC 14 to say that it is the duty of the court to intervene if it considers that the decision reached by the Tribunal contradicts the true and only reasonable conclusion to be drawn from the facts: see Lord Radcliffe at 36. As he went on to say at 39, the duty of the courts “is no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado.”[51]Fourthly, while there is indeed a principle that exemptions from VAT should be strictly construed, I agree with Mr Cordara that it is important not to overstate what this entails. He referred me in this connection to the decision of the Court of Appeal in Expert Witness Institute v Customs and ExciseCommissioners [2001] EWCA Civ 1882, [2002] STC 42, where the question was the meaning of the phrase “aims of a civic nature”. Chadwick LJ, with whom the other members of the Court agreed, said this in paragraph 17:
“It does not follow, however, that the court is required to give to the phrase “aims of a civic nature” the most restricted, or most narrow, meaning that can be given to those words. A “strict” construction is not to be equated, in this context, with a restricted construction. The court must recognise that it is for a supplier, whose supplies would otherwise be taxable, to establish that it comes within the exemption, so that if the court is left in doubt whether a fair interpretation of the words of the exemption covers the supplies in question, the claim to the exemption must be rejected. But the court is not required to reject a claim which does come within a fair interpretation of the words of the exemption because there is another, more restricted, meaning of the words which would exclude the supplies in question.”
He went on to say in paragraph 19 that:
“The task of the court is to give the exempting words a meaning which they can fairly and properly bear in the context in which they are used.”
[52]In any event, this principle is in my judgment not really engaged in the present case, because there can be no doubt that the educational services provided by the School come within the exemption for education, and the Scheme is merely concerned with the means by which participating parents pay for those services. It is a measure of the artificiality of the Crown’s case that it has to characterise the Scheme as involving a supply of the entitlement to the refund of fees in prescribed circumstances. I do not believe that anybody would ever have dreamed of describing the Scheme in those terms except for the purposes of a VAT appeal.[53]For all these reasons I consider that the Tribunal was clearly wrong to reject the School’s primary case, and that when a parent participates in the Scheme there is still a single supply to him of educational services by the School. I would only add, in fairness to the Tribunal, that the School’s primary argument does not seem to have been as fully argued before it as it was on this appeal, and that the Tribunal was apparently not referred to the decision of the ECJ in Levob.

Alternative arguments

[54]The conclusion which I have already reached is sufficient to determine the appeal in the School’s favour. However, I will also deal more briefly with two further arguments advanced by the School.[55]The School’s first alternative argument was that there is a composite supply, with the supply of education being the principal service and the provision of the fees refund arrangements under the Scheme being an ancillary element.[56]The distinction between principal and ancillary elements was explained by the ECJ in Card Protection Plan at paragraph 30, which for convenience I will set out again:
“There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied …”
Where there is a composite supply, therefore, containing both principal and ancillary elements, the ancillary element takes its fiscal character from the principal element in the package.[57]In support of his submission that participation in the Scheme did not constitute an aim in itself for parents, but was a means of better enjoying the principal service of education supplied to them by the School, Mr Cordara argued that the Scheme had no free-standing utility to the parents, and the reason for participating in it was to make the education provided by the School more affordable, and therefore more attractive, to those who were concerned with the risk of illness on the part of their children, or their own accidental death. The essential aim of the parents was to receive a supply of education, and no parent would have entered into the Scheme unless he had first concluded a contract for education with the School. It was not a stand-alone supply which the parents could, or would, have purchased separately, and therefore could not be an aim in itself. Moreover, as the Tribunal accepted in paragraph 43 of the Decision, the charges for the Scheme constituted only a marginal proportion of the total fees payable by parents.[58]In answer to this argument, Mr Puzey relied on many of the points which he also relied on in relation to the School’s primary argument. He submitted that the Scheme did not contribute in any way to the School’s performance of the principal service of education, nor was it a means of better enjoying that service. He said that there is no reason in principle why a number of separate supplies may not be made to the same customer, by the same supplier, on the same occasion, where none of the supplies is ancillary to a principal supply: see Customs and Excise Commissioners v FDR Ltd [2000] STC 672 (CA) per Laws LJ at paragraph 53.[59]Mr Puzey disagreed with Mr Cordara’s submission that the Scheme has no free-standing utility. He pointed out that the Scheme does not, in itself, have any impact on the nature or quality of the child’s education, but it deals rather with the financial consequences of the absence of the child from that education. The fees paid for participation in the Scheme are admittedly marginal in amount, but they are not part of the fees paid for the child’s education, nor do they form part of an educational package.[60]The Tribunal accepted Mr Puzey’s submissions in their entirety in paragraphs 43 to 45 of the Decision:
“43. I then turn to consider the alternative case for the School. In doing so, I adopt the submissions of Mr Puzey in their entirety. As Advocate-General Léger opined in Madgett andBaldwin, for a service to be ancillary it must both contribute to the proper performance of the principal service and take up no more than a marginal proportion of the package price compared to the principal service; it must also be a means of better enjoying the principal service. Whilst the charges for the Scheme may only constitute a “marginal proportion” of the total fees payable by parents, I cannot accept Mr Cordara’s contention that the Scheme itself is an integral part of the “proper performance of the principal service” of education. Nor does the Scheme provide a means of better enjoying that principal service: it does not, in my judgment, add value to and enhance the package of educational services, as Mr Cordara would also have me accept. Indeed, it makes no difference whatsoever to the supply of education. 44. I accept that the Scheme could never have a life separate from that of the principal service, as Mr Cordara also submitted, but do not consider that fact to help the School in any way. 45. It follows that I hold that the Scheme is not ancillary to the principal service of education provided by the School.”
[61]Again, I find myself unable to accept the Tribunal’s reasoning or conclusion. It is essential to bear firmly in mind that the basic service provided by the School is not a service provided to the child, but rather the provision of educational services to the fee-paying parent. The Scheme offers an optional and alternative method of paying for those services. In economic terms, it enables a parent to “insure” against the risk of the child’s illness or his own accidental death, and thus to guard against the risks of having to pay for those services during a period when the child is unable to take advantage of them, or when it might be difficult or impossible to pay the fees following the accidental death of the parent. It seems clear to me that participation in the Scheme does not constitute an aim in itself, but is rather a means of dealing with two risks inherent in the basic contract between the School and the parent, namely the risks of illness of the child and accidental death of the parent.[62]I accept that it would not be a natural use of language to describe participation in the Scheme as a means of “better enjoying” the educational services supplied by the School to the parent, but the language used by the ECJ in Card Protection Plan at paragraph 30 is in my judgment no more than a guideline, and not intended to provide an exhaustive definition of what is “ancillary”. The important point is that for parents who participate in the Scheme it provides a preferable method of paying for the School’s educational services, because it guards against the two risks which I have mentioned in return for payment of a small “premium”. A variation of this nature to the financial terms upon which the principal service is provided, and which participating parents will find preferable to the unvaried terms, is in my judgment well capable of constituting an ancillary service within the meaning of the test in Card Protection Plan. When regard is also had to the very small cost of the Scheme, and the fact that the Scheme could never have a life separate from that of the principal service, the conclusion that it should be regarded as ancillary is in my judgment inevitable. The basic fallacy in the Tribunal’s analysis, in my respectful opinion, is that it looks to the effect of participation in the Scheme on the education provided to the child, rather than to its effect on the financial obligations undertaken by the fee-paying parent.[63]The School’s second alternative argument was that the provision of the Scheme is exempt as a “transaction … concerning … payments” within the meaning of Article 13B(d)(3) of the Sixth Directive. In support of this argument Mr Cordara submitted that purely financial transactions present conceptual difficulties for VAT and are therefore generally excluded from its scope: for example, the exemptions in Article 13B include insurance and reinsurance transactions, the granting and negotiation of credit, transactions concerning currency, and betting, lotteries and other forms of gambling. There is no existing authority on the interpretation of paragraph (d)(3), the text of which I have already set out but will for convenience repeat:
“3. Transaction[s], including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring.”
Mr Cordara submitted that there is no warrant for giving a narrow interpretation to the wide and general words “transaction … concerning … payments”, and they apply in the present case because the essence of the Scheme is a promise by the School to make payments of monies to parents in specified circumstances, in return for payment of a price, i.e. the 1.5% increase in basic fees.[64]Mr Puzey’s response to these submissions was that Article 13B(d)(3) is typically concerned with situations where a person uses money to make further money, and the Scheme falls outside its scope, being essentially concerned with the provision of a right to a refund in specified circumstances.[65]Neither side elaborated its arguments on this question in any great detail, and the Tribunal did not deal with it apart from apparently accepting Mr Puzey’s submission (recorded in paragraph 38 of the Decision) that the Scheme “did not appear to fit the type of transaction contemplated” in Article 13B(d)(3): see paragraph 46 of the Decision, where the reference to paragraphs 34 to 36 must I think be an error for paragraphs 37 to 39.[66]The true scope of the words “transaction … concerning … payments” in Article 13B(d)(3) is in my judgment an important and difficult question, on which I would be reluctant to express a firm opinion unless it were necessary to my decision and I had heard full argument on it. In addition, a reference to the ECJ might prove to be necessary before the question could be resolved. For these reasons, I prefer to say nothing definite about it. I would, however, comment that Mr Cordara’s argument does in my view have considerable attractions. The Scheme is in essence a purely financial transaction, involving the payment of money in return for a right to repayments, or a total remission of fees, in specified circumstances. My provisional view is that, if the Scheme does involve the making of a separate supply, it would accord with the underlying philosophy of VAT if it were to be treated as exempt by virtue of Article 13B(d)(3). Further support for this conclusion might be found in the treatment of price discounts, rebates, and subsequent refunds in the context of what constitutes the taxable amount for taxable supplies: see in particular Article 11A(3)(b) and 11C(1), and the decision of the ECJ in Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94), [1996] STC 1387.[67]Finally, and for similar reasons, I prefer to say nothing about a further argument which Mr Cordara for the School advanced even more briefly, and which does not seem to have been considered at all by the Tribunal, although there is a brief reference to it in paragraph 27 of the Decision. The argument, put very shortly, is that even if output tax is due in respect of the Scheme, the quantum of tax due cannot be calculated simply by reference to the gross sums paid by the parents, and account must be taken of the sums which have actually been refunded, either individually or globally.

Disposal

[68]For the reasons which I have given, the School’s appeal will be allowed.

Cited in 1 later judgment