“… 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 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 on him.” 80. In his opinion, the Advocate General said, at p 235a-c, that the payment to the Council was only indirectly for the benefit, if any, received by particular growers. The obligation was to pay towards the Council’s expenses of improving the industry; it was not to pay for what was individually received. On that basis, the necessary reciprocity or direct link could not be established. 81. At p 235c-d, the Advocate General also drew attention to the distinction, recognised by the Court of Justice in Gaston Schul Douane Expediteur BV v Inspecteur der Invoerrechten en Accijnzen, Roosendaal (Case 15/81) [1982] ECR 1409 , at [14], between a “transaction” necessary for an internal supply under which there is a supply of goods for valuable consideration and the mere importation of goods, which is a chargeable event whether there is a transaction or not, and whether or not the transaction is carried out for valuable consideration. The Advocate General took the view, at p235e-f, that the obligatory payment of the levy and the obligatory discharge of statutory functions unrelated to individual growers could not constitute the necessary transaction, let alone any form of bargain. 82. In expressing that opinion, the Advocate General drew a distinction between the general levy and “the Kingdom Scheme”
“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”. 84. In Tolsma there was no agreement between the parties, and no necessary link between the musical service and the payments to which it gave rise. It was irrelevant that Mr Tolsma played his music with a view to receiving payment and that he received payment or that Mr Tolsma solicited money and expected to receive it. The payments were entirely voluntary and the amount was practically impossible to determine. 85. In his opinion in Tolsma , Advocate General Lenz set out, at [14], a helpful summary of the criteria set out in the case law to define this principle: “….there must be a direct link between the service supplied (which in this case would be the music provided) and the consideration received (in this case the payments by passers-by) (see the judgments in [ Aardappel ] …. para1012, [ Apple and Pear ] ……. para 11 and Naturally Yours Cosmetics Ltd v Customs and Excise Comrs (Case 230/87)[1988] STC 879 at 894, [1988] ECR 6365 at 6389, para 11). The link must be such that a relationship can be established between the level of the benefits which the recipients obtain from the services provided and the amount of the consideration (see [ Apple and Pear …para 15). The consideration must be capable of being expressed in money (see the [ Aardappel ] judgment (at 454, para 13), and the [ Naturally Yours Cosmetics judgment … para 16]). It must be a subjective value (see para 23 below), since the taxable amount is the consideration actually received and not a value estimated according to objective criteria. A service for which no subjective consideration is received is consequently not a service 'for consideration' (see the [ Aardappel ] judgment (at 454, paras 10, 11), the [ Naturally Yours Cosmetics ] judgment…para 16).”
“14 [The relevant French law] states: ‘Expenses relating to medical care given to insured persons and recipients of social assistance in the homes and facilities listed in…. shall be borne by health insurance schemes or covered by social assistance, in the manner laid down by regulation, using lump-sum formulae where appropriate.’ 15 In accordance with [the relevant article in the French law], RCHEs which have signed a multi-annual agreement with the President of the General Council and the competent State authority are to receive a global lump-sum payment in respect of the care which they provide. 16 [The relevant article in the French law] reads as follows: ‘The care provided by the establishments or sections thereof referred to in Article L. 313‑12 … involve: 1. A daily rate for accommodation, 2. A daily rate for dependency, 3. A daily rate for care.’ 17 [The relevant article in the French law] provides: ‘The tariff relating to healthcare shall cover the medical and paramedical services needed to treat the somatic and psychological ailments of persons residing in the home and the paramedical services corresponding to healthcare that are connected with the dependency level of the residents.’ 18 …… the detailed rules for calculating the ‘healthcare lump sum’ take account of the number of residents hosted by each home and their dependency level, which are assessed in accordance with the conditions set out in [certain articles of the applicable French law], and of historical coefficients which are determined at national level and updated each year on the basis of the average expenses of all RCHEs.” 90. The court said, at [28], that in essence, the question was: “whether Article 11A(a) of the Sixth Directive and Article 73 of the VAT Directive are to be interpreted as meaning that a lump-sum payment such as the ‘healthcare lump sum’……constitutes the consideration for the healthcare provided for consideration by an RCHE to its residents and, on that basis, falls within the scope of VAT.” 91. The CJEU concluded, at [32] to [38], that the answer to the question set out at [28] is as follows: “32 . It is clear that the ‘healthcare lump sum’…..paid by the national sickness insurance fund to the RCHEs is received by the latter as consideration for the care which they provide, in different forms, to their residents. 33 . Firstly, as Rayon d’Or accepted at the hearing, the RCHEs are actually obliged to provide services to their residents in consideration of the payment of that lump sum. 34 . Next, it is not a requirement of the directive that, for a supply of goods or services to be effected ‘for consideration’, within the meaning of that directive, the consideration for that supply must be obtained directly from the person to whom those goods or services are supplied, since it may be obtained from a third party (see, to that effect, Joined Cases C‑53/09 and C‑55/09 Loyalty Management UK and Baxi Group EU:C:2010:590 , paragraph 56). 35 The fact that, in the main proceedings, the direct beneficiary of the services in question is not the national sickness insurance fund which pays the lump sum but the insured person is not, contrary to the submissions of Rayon d’Or, such as to break the direct link between the supply of services made and the consideration received. 36 Finally, it is clear from the Court’s case-law that where, as in the main proceedings, the supply of services in question is characterised, inter alia, by the permanent availability of the service provider to supply, at the appropriate time, the healthcare services required by the residents, it is not necessary, in order to recognise that there is a direct link between that service and the consideration received, to establish that a payment relates to a personalised supply of healthcare at a specific time carried out at the request of a resident (see, to that effect, Kennemer Golf EU:C:2002:200 , paragraph 40). 37 Accordingly, the fact, in the main proceedings, that the healthcare provided to residents is neither defined in advance nor personalised and that the payment is made in the form of a lump sum is also not such as to affect the direct link between the supply of services made and the consideration received, the amount of which is determined in advance on the basis of well-established criteria. 38 Having regard to the foregoing considerations, the answer to the question referred for a preliminary ruling is that Article 11A(1)(a) of the Sixth Directive and Article 73 of the VAT Directive must be interpreted as meaning that a lump-sum payment such as the ‘healthcare lump sum’ at issue in the main proceedings constitutes the consideration for the healthcare provided for consideration by an RCHE to its residents and, on that basis, falls within the scope of VAT.” 92. In Kennemer , to which the CJEU referred at [36] of Rayon D’Or the CJEU held that the annual subscription fees paid by members of a golf club in Holland, who also paid admission fees for the use of the course, were consideration for services. The court held that there was the required “direct link” (within the meaning of (amongst other judgements) the judgment in Apple and Pear ) on the basis that the service provided in exchange for the subscription fee was the opportunity to make use of the facilities, as set out at [40]: “As the Commission argues, the fact that…..the annual subscription fee is a fixed sum which cannot be related to each personal use of the golf course does not alter the fact that there is reciprocal performance between the members of a sports association….and the association itself. The services provided by the association are constituted by the making available to its members, on a permanent basis, of sports facilities and the associated advantages and not by particular services provided at the members' request . There is therefore a direct link between the annual subscription fees paid by members of a sports association…. and the services which it provides.” (Emphasis added.)
“…regard must be had to the economic realities and to all the circumstances in which the transaction takes place (see Revenue and Customs Commissioners v Loyalty Management UK Ltd (Case C-53/09 and C-55/09)[2010] STC 2651 at para 39, and Revenue and Customs Commissioners v Loyalty Management UK Ltd[2013] STC 784 per Lord Reed at para 38). It is necessary to have regard to the level of generality which corresponds to the social and economic reality ( Dr Beynon and Partners v Customs and Excise Commissioners[2005] STC 55 , per Lord Hoffman at [31]). As explained by Arden LJ in the Court of Appeal in Esporta Ltd v Revenue and Customs Commissioners[2014] EWCA Civ 155 , the contractual terms are the starting point, and the court has to consider whether those terms reflect the economic and commercial reality of the transaction.” 97. At [55] the UT drew what they regarded as an important distinction which was “at the heart of the Apple and Pear decision” and “at the heart of this case” between: (1) the supply of services “for consideration”; and (2) “a situation where Government funding is provided to a body in order for it to perform its function but where the services are not provided to the funder in return for that consideration…” 98. In their view, the Board’s case fell within the second type of situation they had identified at [55]. They said, at [56]: “In our judgment, on its own the Performance Agreement falls far short of demonstrating the degree and nature of reciprocity required to constitute the payments made by the Department to SATB as consideration for supplies by SATB. There is a link between the funding and the performance by SATB of its functions in accordance with the agreed business plan and objectives, but that is consistent with an arrangement of negotiated funding. There is nothing in the agreement to deflect away from that analysis towards a transaction of supply. The linkage is not one of mutual exchange of supply and consideration for that supply.” 99. The UT said, at [57] to [60], that the following factors supported their conclusion: “57. The economic and commercial context supports that analysis. It starts with the Tourism Act, and its high-level provision for the objectives and purpose of SATB. It provides for the means of funding of SATB, including the appropriation of monies by the South African Parliament. There is a statutory obligation of SATB to expend those monies in performance of its objectives. 58. The Tourism Act itself provides a framework for a funding arrangement as between the Government and SATB. SATB is under a duty, subject to being adequately funded, to perform according to its objectives. The fact that the funding is then determined by an iterative process involving negotiation to achieve a consensus on the detail of the business plan does not result in there being the necessary reciprocity or mutuality to convert a funding arrangement as contemplated under the Tourism Act into a transaction of the supply of services for a consideration. 59. We accept Ms Hall’s submission that the relationship between SATB and the South African Government is not exclusively defined by the Tourism Act. But the whole tenor of the Tourism Act, the PFMA, the Governance Protocol and the Performance Agreement is one of the funding of SATB’s activities. We regard that as a different legal relationship from the one contemplated by the reference to supply of services for a consideration in the VAT legislation. The Performance Agreement operates not to record the supply of services by SATB for a consideration, but to crystallise the funding at the level to support the detailed programme of activities. Ms Hall argued that reciprocity in terms of subjective agreement as to the value of the services was the material factor. We agree that is a relevant factor, but there is a difference between agreeing the value of something for the purpose of providing the appropriate level of funding to enable that thing to be carried out, and agreeing the value of a service for the purpose of paying for that service. The mere act of agreeing a value is not therefore decisive of the required mutuality. In this case the negotiation and agreement as to value was a function of the oversight of the arrangements by a funder, and not to provide a monetary exchange for a service provided. 60. The fact that the South African Government received a benefit from the activities of SATB is relevant, but again not decisive. Although the Government received something of value to it, that value was received as an incidental outcome of the ability of SATB to perform its statutory duties by virtue of the funding it had received. There was no relevant reciprocity and accordingly no direct link between the payment and the value received by the Government.” 100. The UT formed a different conclusion in respect of the different funding arrangements made under a memorandum of understanding between SATB and a separate entity, TBCSA, an organised body of business in tourism and related businesses. This body collected voluntary levies on the sale of hotel accommodation and rental cars to tourists (see [23]). The memorandum provided for specific benefits to be made available to those collecting levies such as: notice of marketing agreements, preferential profiling for the levy collectors, availability of office space and assistance in setting up appointments for the levy collectors, preferential participation in exhibitions, and other preferential promotional treatment (see [99]). The UT held that this demonstrated reciprocity, and even though a particular level of service could not be identified under the memorandum, it still contained a “quid pro quo” for the payments, which were consideration for VAT purposes (see [100]). 101. As set out in Colchester , HMRC consider that similarly, EFA and SFA provide funding on conditions to bodies such as Colchester and KMC; the arrangements between the funders and KMC lack the required reciprocity or direct link for the funding to be consideration for the supplies without charge. In Colchester , the appellant argued that the facts of SATB (save for as regards the TBSCA) and of Apple and Pear are very different to those in this case and other cases where payments have been held to lack a direct link are far distant from the facts of this case. For example, Institute of Chartered Accountants of England and Wales v CEC[1999] WLR 701 involved a public body performing regulatory functions, andCase C-284/04 T-Mobile Austria GmbH v Austria[2008] STC 184 involved the auction of mobile phone telephony licences, a public function undertaken by the competent authorities as part of their regulatory function. Decision in Colchester 102. In Colchester the UT rejected HMRC’s arguments for the reasons set out below and held that the tribunal had erred in its conclusion. 103. As set out at [32] of the UT’s decision, the tribunal decided that the funding provided by EFA and SFA to CIC did not amount to consideration for any supplies by CIC. It agreed with HMRC that the funding was not “negotiated consideration paid for services, but rather a block grant provided subject to conditions” (see [127]). The UT then cited the reasons given by the tribunal at [127] as follows: “(1) The statutory background for the provision by the Secretary of State for funding for education and vocational training. This is not a strong factor against the payments amounting to consideration, but it is a factor. (2) The absence of any direct link between the education and training provided to any particular student, and the funding provided by the funding agencies. This is a strong factor against the funding constituting consideration. We note in particular the fact that the funding is provided by reference to formulae which are set out by the agencies on a “take it or leave it” basis –and are not negotiated. There is no direct link in the formulae between the costs actually incurred by CIC in providing a particular course to a particular student, and the funding it receives. The College has great freedom in the courses it chooses to provide. There is no control by the funding agencies over the number of students offered places, or (as regards EFA funding) the courses they will fund (providing they meet certain basic criteria). (3) The existence of agreements between the funding agencies and CIC is a neutral factor, as it is consistent both with the funding arrangements amounting to third party consideration, and with the funding arrangements amounting to a block grant made out of public funds but subject to conditions. (4) The rights of the funding agencies to “claw back” amounts in the event that a student does not attend the course to the end, or other conditions of funding are not met. This is a point in favour of the funding amounting to third-party consideration. But as the amount clawed-back bears no direct relationship to the actual amount of resources expended by the college on that student’s education or vocational training (or, indeed the “fee” that was “waived”) it is a weak point. (5) The amount shown on the “Receipts” issued to students whose fees are “waived” does not reflect a fee that is charged to the relevant funding agency for the provision of the course. It will not be the case (except by happenstance) that the aggregate amount shown on such receipts will equal the amount funded by the funding agencies, because of the components of, and adjustments made under, the funding formulae. This is a strong factor in demonstrating that there is not a fixed monetary amount which represents consideration paid in respect of each student. (6) The College would not be able to provide education and vocational training “but for” the funding it receives from the funding agencies. This is a factor in favour of the payments being consideration, but is a weak factor. (7) The College educating paying and non-paying students together. We consider this to be a neutral point, as it is consistent both with the funding provided to non-paying students being a block grant made out of public funds but subject to conditions, and the fees paid by fee-paying students amounting to consideration.” 104. I note that in this case there were no receipts of the type referred to by the tribunal in Colchester at 127([5)] as set out above. 105. Essentially, the UT held, at [69] to [74], that, contrary to HMRC’s view, the decision in Rayon d’Or is not limited to “ Kennemer supplies” and that, on the facts, Colchester fell squarely within its ambit; Rayon d’Or is analogous on its facts with Colchester and their analysis must follow that of the CJEU in that case: (1) They noted, at [69], that it was common ground that there was no “ Kennemer supply” in Colchester : “If the grant funding is consideration for anything, it is for supplies of education and vocational training made by CIC to students - albeit not students who can be identified at the start of the year when the payment is made, but students who fall within a category which that funding is intended to benefit.” (2) They explained, at [70] and [71], that in Rayon d’Or , the Court made repeated reference to the fact that the healthcare lump sum was paid in respect of the care provided to the residents of the care home and did not approach the relevant supplies as “some sort of right of access to healthcare, which might be called a Kennemer supply”
“The Court’s conclusion was that the healthcare lump sum, which was not personalised to any specific supply of healthcare to any particular resident, was still consideration for VAT purposes. Kennemer supported that conclusion, because Kennemer shows that reciprocity can still exist even though the payment in question “cannot be related to each personal use ...” (to quote from Kennemer [40], cited at [30] of Rayon d’Or ).” (4) They considered that, accordingly, at [72] the better analysis is that: “the rules for identifying what is, or is not, consideration for a VAT supply are generic, developed in the case law of the European Court, which rules fall to be applied in an infinite variety of different circumstances. Kennemer was just one case on one set of facts, it is an illustration of the rules being applied. Rayon d’Or , properly understood, is not a case involving a Kennemer supply at all. Mrs Hall sought to make that point by referring us to Saudeçor ; we agree that Saudeçor helps because Saudeçor plainly did not involve a Kennemer supply. But it is not necessary in our judgment to look outside the judgment in Rayon d’Or itself to understand the basis of the CJEU’s reasoning in that case.” 106. At [75] to [81] the UT went on to consider the particular factors which the tribunal had pointed to in its conclusions (as summarised at [127] of its decisions and set out above) to the contrary to those made by the UT: (1) At [75] they said that the statutory background is relevant in that it “opens the door to the “funding with conditions” analysis, because such funding is typically found in the context of bodies carrying out public functions on behalf of government (as was the case in SATB ). But they considered that Rayon d’Or demonstrates that a supply analysis remains possible even where the payments are made pursuant to statute. Therefore, they concluded that the statutory background was a neutral factor, consistent with both parties’ cases. (2) At [76] the UT disagreed with the tribunal’s finding that the existence of agreements between the funding agencies and CIC was a neutral factor; their existence was consistent with either side’s case. In the UT’s view “the content of those agreements is far from neutral, because the agreements are the starting point in the analysis” (referring to SATB at [55]). The UT did not consider them to be evidentially neutral but to be key to the analysis. They then set out four important features which they consider provide the answer to the question. (a) First, at [77]: “although the agreements did not state in terms which courses CIC was to provide, they did restrict the funding to courses within a list on the Government’s website. The essence was that the funding was for those courses; CIC was not at liberty to do anything else with the money.” (b) Secondly, at [78], the amount paid was by way of formula and not negotiated. Whilst the “use of a formula is not itself a basis for concluding that the payments are not consideration, as Rayon d’Or shows”, in this case “the components of the formula give clues as to what the grant payment were for”: “The starting point was a “per student” amount (of£4,000 ); the number of students was based on the last year’s intake, used as a proxy for the expected number of students in the current year; there were a number of adjustments to be made which related to the courses themselves –mostly reflecting the higher costs of providing courses (or certain types of courses) to students within the catchment of CIC. The formula was therefore highly specific to CIC’s outputs - to the number of students, the type of students, the number of courses and the type of courses.” (c) Thirdly, at [79], one way or another, CIC would have to pay back any part of the grant funding which was not used for supplying the courses as anticipated at the beginning of the year: “So far as SFA was concerned, if CIC did not provide courses of a sufficient number to meet the assumptions in the funding formula, the funding was clawed back pro-rata at year end. The arrangements with EFA were different, with a retention applied the following year to reflect any shortfall in provision by CIC for the current year, as part of the formula for that agency’s funding. Both mechanisms were aimed at ensuring that CIC delivered the number of courses paid for in any given year. The fact that the EFA retention applied in the following year and did not affect current year payments is not significant. In the context of a corporation making supplies year on year pursuant to statutory obligations funded by Government, a system of delayed adjustment at year end with effect on the following year’s payment is understandable. It is simply the means to an end, an accounting mechanism chosen to ensure that there was no overpayment. The FTT did not distinguish between the two methods of adjustment, clawback and retention; we agree that there is no meaningful distinction to be drawn between them.” (d) Fourth, at [80]: “in order to give the funding agencies full sight of its activities, and to permit accurate application of the relevant funding formulae, CIC submitted an ILR for each student on a monthly basis, comprising over 200 fields of data for each student. The ILRs were required under the agreements. By them, the funding agencies were given detailed information about how the funds are being spent by CIC. With that information, the funding agencies were able to adjust their payments to match that data and according to the standard formula. With that information, the funding agencies were able to see how their grant funding had been spent.” (3) The UT concluded on the above points, at [81], as follows: “Taken together, we conclude that these features, all contained within the agreements, seen in context, indicate the existence of a direct link between the grants coming into CIC and the courses provided to CIC’s students for free. We accept, of course, that the link could have been more direct than it was: the funding was not specific to any particular course or courses, it did not reflect the specific costs of any particular course, nor did it identify the particular students who would take those courses. But the law does not require such a degree of specificity; the concept of “direct link” encompasses a range of possibilities.” 107. At [82] and [83], the UT said that their conclusions also made sense viewed against “the wider canvass”: (1) At [82], they noted that some students did not benefit from grant funding but were required to pay, in whole or in part and the experience for these students was identical to that for the students who attended “free” courses fully funded by the grants: “To conclude that all students were in receipt of supplies by CIC, the consideration for those supplies coming from different sources, meets with common sense. If the law drove us to conclude that CIC made supplies only to the extent that a student actually paid for the services, but that otherwise the courses were not supplied for VAT purposes at all –as Mr Mantle suggested was the case –we would of course have to live with that, and with the consequence that within the same classroom CIC could be making business and non-business supplies. But that would be a strained analysis of these straightforward facts. Our conclusion has the advantage of simplicity.” (2) At [83], they said that CIC’s activities in this case “have echoes of the supplies under the Kingdom Scheme” in Apple and Pear and TBSCA supplies in SATB , which were for consideration. In both of those examples, there was little precision at the point of payment about what would be provided in exchange; rather, there was an understanding about the sort of services which would be provided year on year in exchange for the money paid. They said that these cases are “at one” with Rayon d’Or , Saudeçor and Nagyszénás and are “a better fit than the cases relied on by HMRC which are very distant on their facts from this case”. 108. At [85] to [88], the UT summarised the tribunal’s errors of law in Colchester as follows: “85. The error is clearest in the FTT’s treatment of Rayon d’Or , which the FTT appears to have distinguished on the basis that the taxpayer in that case made its services of healthcare “permanently available” to the elderly residents and the funding in that case was a “mandatory tariff fixed by legislation” (see [130]). For reasons set out above, we do not agree that Rayon d’Or can be distinguished in that way. 86. More fundamentally, the FTT was in error in looking for a link which was so direct that the payments could be matched to individual supplies or the costs of individual supplies, or to individual students taking courses. There is nothing in the case law to suggest that a link of that degree of specificity or directness must be present for a payment to constitute consideration. The concept of direct link is more flexible than that……. 87. To the extent that the FTT concentrated on the cost of the supplies (see again [127(2)] and [131]), it made a separate error because the cost of supplies is irrelevant to the question of whether a transaction is to be regarded as for consideration: seeCase C-520/14 Gemeente Borsele v Staatssecretaris van Financiën [2016] STC at [26]. 88. Finally, to the extent that the FTT placed emphasis on the figure CIC quoted on the “receipt” given to students who did not pay fees, it was in further error. The description by CIC to the students about the cost or funding of the courses is of little relevance to the analysis of the transaction between the funding agencies and CIC for VAT purposes.”
“… where a taxpayer simultaneously carries out economic activities, taxed or exempt, and non-economic activities outside the scope of the Sixth Directive, deduction of the VAT relating to expenditure connected with the issue of shares and atypical silent partnerships is allowed only to the extent that that expenditure is attributable to the taxpayer's economic activity within the meaning of art 2(1) of that directive.” (2) In University of Southampton v HMRC[2006] STC 1389 , it was recognised that the University was undertaking a variety of activities and transactions which had to be separately analysed and that publicly funded research had to be regarded separately for VAT purposes from other research and other activities (even though it used the same infrastructure and equipment and all of the activities were “vital” to the university) (see in particular [82]). 114. Essentially, KMC’s stance is that KMC has a single economic activity, as a rural studies college, due to what it asserts is a high degree of interaction between its training function and its commercial supplies. KMC did not dispute the proposition set out in the cases referred to at [113] but said that, on the facts, there simply is no distinction to be drawn between KMC’s activities in this case. KMC pointed to decisions in the tribunal, in support of its case, in particular, NWT and BDA . 115. As HMRC emphasised, as is evident from the articles of the PVD in point here, the common VAT system is based around the key concept of “supply”
“Students on most courses at KMC engage in its Agricultural activities as part of their course of study, and the Agricultural activities are operated with the input of KMC’s students, alongside employees”
“2. The Appellant is a mutual association targeted at, and providing various services to, dentists, retired dentists and dental students. It is not compulsory for anyone, even dentists, to join. Its services for VAT purposes include standard-rated services (including the provision of conferences and seminars) as well as services provided in exchange for membership subscriptions that are exempt. 3. The Appellant admitted dental students at universities to membership without charging them subscriptions. The reasons for this were all commercial. It was easy to attract dental students to membership when they were all congregated at universities, provided at least that membership was then free. By attracting them to membership, there were then two benefits. Firstly, they would be likely to remain paying members when they qualified. Secondly the Appellant would have their contact details. It would, by contrast, be far more difficult to locate qualified dentists, practising all over the country, and attract them as members if the Appellant only sought to do this once they had left universities and qualified.” 122. It was held, at [5], that: “We have absolutely no hesitation in saying that the provision of free membership to dental students is a provision within the compass of the Appellant’s one business. We also conclude that there is no VAT principle, either in the Directives or in UK law, that requires a provision of free services, inherently made in the course of the undertaking of the one business, and given on very sensible commercial grounds, as requiring any disallowance of input tax.” 123. At [15] to [19] the tribunal explained its finding that the BDA conducted only one business as follows: 14. In the present case, the services provided to the student members were the same as the services supplied to the fee-paying members and it is impossible to conclude that the Appellant was conducting two separate activities, one being a business and one being a distinct activity. 15. The facts of The Imperial War Museum case [ The Imperial War Museum v Commissioners of C&E (1992) VATTR 346] are relevant in this context. In that case, the Trustees of the Museum amassed a display of British war memorabilia, to which the public were admitted. The public were charged for admission, but school parties were admitted free, and anyone was admitted free on Fridays. There were fairly marginal business ends still achieved by admitting people free, in that it was likely that they would buy refreshments, and possibly goods from the museum shop, and their admission would also increase the publicity achieved by the Museum’s sponsors. Nevertheless, the Commissioners contended that the provision of free admission was not in the course of the business, albeit that they accepted that the overall activity, and all admissions for payment, constituted a business. 16. The Tribunal concluded that the Trustees conducted only one business, and they also concluded that the provision of the free admission was an act performed in the course of the conduct of that one business. 17. The Imperial War Museum case appears to be identical to the present case in this respect, and we conclude that it is impossible, in a general sense of the phrase, to conclude that the present Appellant was doing anything other than conduct one single business. 18. We also adopt the conclusion and the reasoning of the Tribunal in The War Museum case for the proposition that the grant of free membership to dental students was an integral, and highly sensible, act in the course of the conduct of that one business. The only difference between the two cases is that the present case is much stronger. The only commercial benefit of granting free admissions on Fridays in the earlier case, was that the Trustees might make some profits from providing refreshments, and selling a few goods in the shop. In the present case, we accept the argument that it was absolutely vital to maintaining high levels of membership that free membership should be provided to dental students. 19. We agree with counsel for the Appellant that this case is no different from that where banks give free banking services to students, or where many suppliers of services might give free introductory offers to new customers. All of those provisions of service are made in the course of the conduct of the one business. The Respondents might have found it easier to accept the point if matters had been expressed along the lines that new members would have three years of free membership, and would thereafter pay if they remained members. That nevertheless is the reality, and so our findings of fact, or mixed fact and law, are that: · the Appellant conducted only one business; · it did not, in the normal usage of the phrase, conduct any distinct activity that might be a non-business activity; and · the provision of free membership was a commercially sensible introductory offer made entirely for business purposes, and made to foster the Appellant’s one and only business, and thus made in the course of that business.” 124. In NWT , the facts, as set out at [4] to [15] included that: (1) NWT was a registered charity whose principal purpose was the conservation of natural resources within Nottinghamshire. It managed 65 nature reserves, promoted conservation and provided education about it, conducted wildlife surveys, and provided various consultation and information services relating to wildlife. (2) As set out at [7], the 65 sites differed in character: “Many consist of open land, and of those sites some are suitable for grazing livestock; other sites are of woodland, including coppices; some are a mixture of the two; other sites still are wetlands. All have some form of wildlife. Most of the sites are freely open to the public, a few (or parts of them) only on prior request. Public footpaths cross many of the sites and, like any other landowner, NWT is obliged to keep the land alongside those footpaths, some paths it has itself created, and other areas to which the public have access, in a safe condition. That obligation entails the maintenance of trees by, for example, lopping dangerous branches. In order to protect the wildlife visitors are asked to keep to the marked paths and to keep dogs on leads.” (3) It was explained, at [8], that NWT had several sources of income: (a) Income such as membership subscriptions, fees earned from the grant of grazing rights and the proceeds of the sale of publications, souvenirs and similar items were agreed to represent the consideration for taxable supplies, and there was no dispute about the recoverability of the input tax attributable to them. (b) The sources in issue included “income derived from sales of merchandise such as meat, wool, animal feeds and bedding, timber and timber products, the provision of consultancy services, sales of data and hire of equipment”
“ Whether or not the ultimate objective of the activity is the advancement of NWT’s charitable purposes is immaterial: see BLP …the question is whether the activities are pursued with the intention, or for the purpose, of making taxable supplies; but, contrary to his contentions, I am satisfied they are. The notion that they are partly pursued for that purpose and partly for another, because of NWT’s ultimate aims, seems to me to be misconceived.” (2) At [25] and [26], the tribunal continued to state that whilst no doubt the relevant activities were conducted in a manner which is consistent with, even designed to advance, NWT’s conservation obligations, (a) the management of a flock is a single indivisible activity and where, as was the case in NWT , it is pursued in a business-like manner (as distinct from a hobby) with a view to earning profit, it is a business activity, and (b) “the fact of consistency does not mean that the forestry is itself no more than conservation. In my view it is a business activity which happens to be pursued by an organisation whose objects are charitable, but it is no less a business activity for that”. (3) At [27], the tribunal accepted that many of the visitors to NWT's sites may come in order to see the sheep, and to walk within managed, rather than wild, woodlands but held that the motives of NWT’s visitors and the fact that NWT encourages them (whereas other landowners might accept them only on sufferance) are “quite irrelevant considerations”. 126. I note that I am not bound to follow the decisions in BDA and NWT and that they were, of course, made without the benefit of the Court of Appeal’s comments in Wakefield . In any event, my view is that the decision in these cases do not provide support for KMC’s stance: (1) The decision in BDA hinged on the fact that BDA provided precisely the same services to its non-fee-paying student members as to its fee-paying members and that taking on non-fee-paying students members was “absolutely vital to maintaining high levels of membership”
“In this respect, taking into account, first that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, 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”. (3) At [30], the CJEU continued that 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 same tax treatment as 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”. (4) At [31], the fact that a single price is charged is not decisive. If the service provided to customers consists of several elements for a single price, the single price may suggest there is a single service. However, if circumstances indicated that the customers intended to purchase two distinct services (in that case being an insurance supply and a card registration service) it would be necessary to identify the part of the single price which related to the insurance supply. 129. In Levob Verzekeringen BV and another v Staatssecretaris van Financiën (Case C-41/04 )[2006] STC 766 L, having endorsed the principles in Card Protection Plan , the CJEU added the following at [22]: “The same is true [that there is one supply] 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. 130. In this case, it is plain from the evidence set out above that: (1) The training services provided by KMC are not ancillary to its taxable commercial supplies such that the test out in Card Protection Plan for there to be a single supply is not met. (2) Nor do the supplies of training services and the commercial supplies comprise “two or more elements or acts supplied” by a taxable person to the customer (a typical consumer) which are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split” under the test set out in Levob Verzekeringen BV and another . Part D - Attribution of input tax 131. It follows from the conclusion set out in Part C above that I accept that, so far as the claimed tax was incurred by KMC to inputs used for the purpose of making supplies without charge, it is not excluded from qualifying as “input tax” (as defined in s 24 VATA) on the basis that it relates to non-business activity. However, on KMC’s own case, KMC is entitled to “credit” for the claimed tax only if and to the extent that it constitutes “residual input tax”
“25. It is true that an undertaking whose activity is subject to VAT is entitled to deduct the tax on the services supplied by accountants or legal advisers for the taxable person’s taxable transactions and that if BLP had decided to take out a bank loan for the purpose of meeting the same requirements, it would have been entitled to deduct the VAT on the accountant's services required for that purpose. However, that is a consequence of the fact that those services, whose costs form part of the undertaking’s overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions. 26. In that respect it should be noted that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system. The principle of the neutrality of VAT, as defined in the case law of the court, does not have the scope attributed to it by BLP. That the common system of VAT ensures that all economic activities, whatever their purpose or results, are taxed in a wholly neutral way, presupposes that those activities are themselves subject to VAT (see in particular [ Rompelman ] para 19).” 135. The decision in BLP , therefore, shows the need for an objective assessment of the link between the relevant inputs and the supply or supplies to which they relate. BLP’s claim to deduct the relevant input tax failed because the only direct and immediate link which the inputs had was to the exempt sale of the shares. 136. It has also been recognised by the CJEU in cases such as C-98/98 Midland Bank plc v Customs and Excise Commissioners[2000] STC 501 that the absence of a direct and immediate link with specific output transactions is not fatal to the deductibility of VAT if the expenses in question are nonetheless cost components of the supplier’s business as a whole. In that case a company (S) in the Midland Bank group, acted as merchant bank for a client in a takeover bid. The client made an agreement with a rival bidder for the takeover of the target company and the sale of its broking arm to the client. The agreement was not adhered to and led to litigation which included a claim against S. S incurred solicitors’ fees in connection with the agreement and the subsequent litigation which it claimed were directly and solely attributable to the taxable services it supplied to its client. The Commissioners contended that the legal services were not used solely for the purpose of carrying out those taxable services but were also attributable to S’s business generally which included the making of both taxable and exempt supplies. 137. The CJEU noted, at [29], that VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components and said, at [30], that it follows from that principle as well as from the rule enshrined in BLP that: “the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired. That is why those cost components must[2000] STC 501 at 519 generally have arisen before the taxable person carried out the taxable transactions to which they relate.” 138. The court concluded, at [31], that it follows that: “….there is in general no direct and immediate link in the sense intended in BLP Group , between an output transaction and services used by a taxable person as a consequence of and following completion of the said transaction. Although the expenditure incurred in order to obtain the aforementioned services is the consequence of the output transaction, the fact remains that it is not generally part of the cost components of the output transaction, which art 2 of the First Directive none the less requires. Such services do not, therefore, have any direct and immediate link with the output transaction. On the other hand, the costs of those services are part of the taxable person's general costs and are, as such, components of the price of an undertaking's products. Such services therefore do have a direct and immediate link with the taxable person's business as a whole, so that the right to deduct VAT falls within art 17(5) of the Sixth Directive and the VAT is, according to that provision, deductible only in part.”
“ 58. It is, however, also accepted that a taxable person has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole (see, inter alia, Midland Bank (paras 23 and 31); Abbey National (para 35); Kretztechnik (para 36); and Investrand (para 24))…. 60. It follows that whether there is a right to deduct is determined by the nature of the output transactions to which the input transactions are assigned. Accordingly, there is a right to deduct when the input transaction subject to VAT has a direct and immediate link with one or more output transactions giving rise to the right to deduct. If that is not the case, it is necessary to examine whether the costs incurred to acquire the input goods or services are part of the general costs linked to the taxable person's overall economic activity. In either case, whether there is a direct and immediate link is based on the premise that the cost of the input services is incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his economic activities…. 62. …..In order to establish whether there is such a direct and immediate link, it is necessary to ascertain whether the costs incurred are likely to be incorporated in the prices of the shares which SKF intends to sell or whether they are only among the cost components of SKF’s products.” 140. HMRC referred to the summary of the principles involved in determining if a person is entitled to “credit” for input tax in the Court of Appeal’s decision in HMRC v Mayflower Theatre Trust Ltd[2006] EWCA Civ 116 where Carnwath LJ said the following: “ 9 ……I extract (with minor adaptations) the following points: i) Input tax is directly attributable to a given output if it has a "direct and immediate link" with that output (referred to as " the BLP test "). ii) That test has been formulated in different ways over the years, for example: whether the input is a "cost component" of the output; or whether the input is "essential" to the particular output. Such formulations are the same in substance as the "direct and immediate link" test. iii) The application of the BLP test is a matter of objective analysis as to how particular inputs are used and is not dependent upon establishing what is the ultimate aim pursued by the taxable person. It requires more than mere commercial links between transactions, or a "but for" approach. iv) The test is not one of identifying what is the transaction with which the input has the most direct and immediate link, but whether there is a sufficiently direct and immediate link with a taxable economic activity. v) The test is one of mixed fact and law, and is therefore amenable to review in the higher courts, albeit the test is fact sensitive……. 11. To that list I would add two further points, relied on by Miss Hall, again uncontroversial in principle: vi) It may be necessary to determine whether, for tax purposes, a number of supplies are to be treated as elements in some over-arching single supply. If so, that supply should not be artificially split: "The criterion is whether there is a single supply from an economic point of view. The answer will be found by ascertaining the essential features of the transaction under which the taxable person is operating when supplying the consumer, regarded as a typical consumer." ( College of Estate Management para 12, per Lord Walker ) vii) A transaction which is exempt from VAT will "break the chain" of attribution…..(Emphasis added.) 141. HMRC emphasised the comment highlighted above, that the “direct and immediate” link test is not a “but for” test of causation, satisfied if the inputs were “necessary” or “essential” for the relevant output supply to be made. It is simply not enough to show “but for” causation to establish the necessary sufficient link, and generally not very useful to think in such causal terms. HMRC also referred to the JDI International Leasing Ltd v HMRC[2018] STC 1570 at [38] as endorsing this view. KMC’s submissions 142. As set out above, KMC initially argued that none of the inputs received in the relevant period on which it incurred VAT were used or were to be used by it exclusively in making exempt supplies of training services. In other words, as put in the terms used in the cases, in its view, (a) none of the relevant inputs have a “direct and immediate link” only with such exempt supplies, and (b) rather they have a “direct and immediate” link both with exempt and taxable supplies, or are cost components of, and are attributable to, the overall business activities carried on by KMC. 143. KMC did not approach this by seeking to demonstrate what inputs the claimed tax relates to and how those inputs were used by KMC. KMC simply said that (a), in practice, it had not been able to identify “input tax” which is attributable exclusively to its exempt supplies, and (b) this is unsurprising given that all the taxable and exempt activities of KMC are very closely integrated such that it carries on a single “interlinked” and “integrated” business as a rural studies college. KMC’s stance is very similar, therefore, to that taken in relation to the issues set out in Part C, namely, that due to the students’ involvement, as part of the courses provided by KMC, in work needed for or, which assists KMC to make its taxable commercial supplies, all its activities form an integrated whole. KMC seemed to suggest that it must follow from the closely integrated nature of its outputs that all of its “input tax” (other than that wholly attributable to taxable supplies) must relate to both its exempt supplies of training services and its taxable commercial supplies. 144. During the hearing, KMC’s counsel accepted that given that it transpired from the evidence that many students were not involved, as part of the courses provided by KMC, in work relating to KMC’s taxable commercial supplies, at least some of the input tax which KMC incurred in the relevant periods must relate exclusively to KMC’s exempt supplies of training services. However, in submissions provided after the hearing, KMC maintained its stance that all or virtually all of its input tax is “residual” and suggested that there is a de minimis amount of tax attributable to exempt supplies exclusively. For example, KMC said that: “The contention of KMC has always been that, since the provision of education and/or vocational training was a single activity, indivisible by student age, payment or any other profile, input tax should be considered in the same way. As such, the clear and accepted interaction of such education and/or training with the commercial activities would make all input tax incurred in respect of it residual. The conditions for input tax apportionment set down in the PESM would, therefore, make it impossible for any input tax to be wholly and directly attributable to either exempt or, had HMRC been correct, ‘non-business’ activities. As such, all input tax would be reclaimable, almost by default. However, the Appellant took on board the comments in the hearing of Counsel for the Respondents with regards to certain individual courses in the pragmatic and conciliatory manner that it appeared that they were being made. The Appellant was, and remains, keen to find a solution to this somewhat strange issue….” (Emphasis added.)
“5. In each prescribed accounting period you should: i. First calculate the elements of your input VAT which relates to the business and non-business supplies using the methods set out in Annex 1 to this letter. The input VAT relating to non-business supplies is not recoverable and must also be excluded from the partial exemption calculations. The input VAT relating to your business supplies should be treated as follows: 6. In each prescribed accounting period you should: i. Identify all supplies, acquisitions and imports you receive which are used, or to be used, in whole by you exclusively in making taxable supplies. The input tax thereon is recoverable (Category [A] in Annex 1). ii. Identify all supplies, acquisitions and imports you receive which are used, or to be used, in whole by you exclusively in making exempt supplies. The input tax thereon is not recoverable (Category [J] in Annex 1). iii. Determine the recoverable percentage of the remaining non-attributable input VAT (Category [H] in Annex 1) using the following formula: Input tax relating to taxable supplies [A] Input tax relating to business supplies [A] + [J] x 100 The resulting percentage should be calculated to two decimal places.” 149. The introduction to annex 1 to the 1998 letter sets out the following: (1) the provision of education services in return for fees constitute supplies made in the course or furtherance of a business which is exempt under item 1 of group 6 of schedule 9 VATA; (2) as the Education Acts prohibit colleges from charging fees to students aged 19 or under, the supply of education services to such students is a non-business activity; and (3) the VAT on expenditure relating to non-business activities is not input tax and is non-deductible and should be calculated each quarter using the method set out in annex 1. 150. Annex 1 then set out the following method for attributing VAT between KMC’s business and non-business activities: “1. Identify the input tax which relates directly to taxable supplies which you have made or intend to make [A]. 2. Identify the VAT which does not relate directly to any particular supply eg general overheads, accountancy fees etc. This is your non-attributable VAT [B]. 3. Identify the input tax which relates to either exempt or non-business supplies (currently known as Non-Reclaimable VAT) [C]. 4. Identify the guided learning hours which relate to students under the age of 19 [D]. 5. Identify the total guided learning hours [E]. The non-business element of your input VAT should then be calculated using this formula: [ 1 ] [D] x [B] = Element of non-attributable VAT relating to non-business [E] supplies [F]. This is not recoverable. [ 2 ] [D] x [C] = Element of NRV VAT relating to non-business supplies [G]. This [E] is not recoverable. [ 3 ] [B] - [F] = Element of non-attributable VAT relating to taxable and exempt supplies [H]. This is partly recoverable using the Special Method for Partial Exemption. [ 4 ] [C] - [G] = Element of NRV VAT relating to exempt supplies [J]. This is not recoverable but the figure is needed to operate the Special Method for Partial Exemption.” 151. I have added the numbers in bold in para 5 of annex 1 for ease of reference. I refer to: (1) the calculations in para 5 of annex 1 which I have numbered [1] and [3] as “ the residual tax calculation ” and those which I have numbered [2] and [4] as “ the exempt tax calculation ”; and (2) the fraction of the number of guided learning hours relating to students under the age of 19 divided by the total number of guided learning hours as “ the learning hours fraction ”
“long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning…” 154. He continued that it is affirmed in the cases that “the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations” is of relevance. He noted, however, that when in Investors Compensation Scheme Ltd v West Bromwich Building Society[1998] 1 WLR 896 Lord Hoffmann (at pages 912-913) reformulated the principles of contractual interpretation, “some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past”
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) …Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, [the background] includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification….” 156. Lord Hodge said, at [13], that “textualism” and “contextualism” are not “conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation”
“Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance......”
“Clearly the PESM is entirely unsuitable for [KMC], and gives a result that cannot possibly be “ fair and reasonable ”
“Since the training undertaken by [KMC] consists of practical instruction whilst working on the working farms and other units where taxable supplies are made, there can be no input tax that is directly attributable to education and training as a whole.”