ON APPEAL FROM THE CHANCERY DIVISION (REVENUE)
(Mr Justice Lightman)
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE RT. HON. LORD JUSTICE WARD
THE RT. HON. LORD JUSTICE JACOB
THE RT. HON. SIR CHARLES MANTELL
Between :
COLLEGE OF ESTATE MANAGEMENT | Appellant |
- and - | |
COMMISSIONERS OF CUSTOMS & EXCISE | Respondent |
Mr Michael Sherry and Ms Louise Rippon (instructed by Richard Brown) for the Appellant
Mr Hugh McKay (instructed by Solicitor for Customs & Excise) for the Respondent
Hearing dates : 8-9th July 2004
Judgment
Lord Justice Ward :
Introduction.
The appellant, the College of Estate Management, is a higher educational charitable trust incorporated by Royal Charter. After a long association with the University of London it is now linked to the University of Reading. It offers a number of courses designed for students who wish to qualify for membership of the major professional bodies in the field of property and construction such as the Royal Institute of Chartered Surveyors, the Chartered Institute of Building and similar bodies in Hong Kong and Malaysia. It offers post-qualification courses for experienced and qualified practitioners wishing to focus on a particular area of their profession. There is very little face-to-face teaching. Most of the students live and work away from Reading and study at home. The College provides all the necessary printed material to enable students to pass their examinations. The majority of the printed matter comprises A4 binders of material written, produced and printed at the College’s premises at Reading University. This printed matter is not sold separately nor available elsewhere. It cannot be purchased from any bookstall.
The question in this appeal is whether or not the College makes a single supply of education to its students, such a supply being exempt from VAT, or whether it makes a separate supply of books, such a supply being zero-rated. The distinction is of considerable importance to the College in that it affects its position to reclaim input tax of about £60,000 per annum arising from their costs of production.
The Commissioners of Customs & Excise decided that the College is and has always been a provider of the VAT exempt principal service of education. The College’s appeal to the VAT and Duties Tribunal (Chairman Mr R.P. Huggins) was dismissed on 27th February 2003. The College’s appeal against that decision was dismissed by Lightman J. on 13th November 2003. With the permission of Carnwath L.J. the College makes this further appeal to us.
The Legislative Background.
Section 4(1) of the Value Added Tax Act 1994 (“the Act”) provides that VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. Any transfer of the whole property in the goods is a supply of goods: see paragraph 1(1) of schedule 4 to the Act. Anything which is not a supply of goods but is done for a consideration is a supply of services: see section 5(2)(b) of the Act. By virtue of section 4 (2) a taxable supply is a supply of goods or services made in the United Kingdom which is not an exempt supply.
Giving effect to article 13 of the 6th Council Directive (77/388/EEC) which enacts that educational services provided by non-profit making bodies and closely related supplies of services and goods shall be exempt supplies for the purposes of VAT, section 31(1) of the Act provides:-
“A supply of goods or services is an exempt supply if it is of a description for the time being specified in schedule 9.”
Schedule 9 includes the following:-
“GROUP 6 – EDUCATION.
Item No
1. The provision by an eligible body of –
(a) education;
(b) research, where supplied to an eligible body; or
(c) vocational training.
…..
3. The provision of examination services –
(a) by or to an eligible body; or
(b) to a person receiving education or vocational training which is –
(i) exempt by virtue of items 1, 2, 5 or 5A; or
(ii) provided otherwise than in the course or furtherance of a business.
4. The supply of any goods or services (other than examination services) which are closely related to a supply falling within item 1 (the principal supply) by or to the eligible body making the principal supply provided –
(a) the goods or services are for the direct use of the pupil, student or trainee (as the case may be) receiving the principal supply; and
(b) where the supply is to the eligible body making the principal supply, it is made by another eligible body.”
Article 28, paragraph 2(a), of the Sixth Directive permits supplies to be zero-rated. Thus section 30 of the Act provides:-
“(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section –
(a) no VAT shall be charged on the supply; but
(b) it shall in all other respects be treated as a taxable supply; and
accordingly the rate at which VAT is treated as charged on the supply shall be nil.
(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in schedule 8 or the supply is of a description for the time being so specified.”
Group 3 of schedule 8 applies in that it covers the following items:-
“1. Books, booklets, brochures, pamphlets and leaflets. …
…..
6. Covers, cases and other articles supplied with items 1-5 and not separately accounted for.”
Lightman J. usefully and accurately summarised the position in paragraph 22 of his judgment which I gratefully adopt:-
“The VAT position accordingly is that the supply of education, examination and closely related services and goods are exempt supplies and that the supply of books is zero-rated. The critical distinction is of course that, whilst in both cases the supplier does not have to account for VAT on the supplies made by him, in the case of zero-rated supplies alone (but not in the case of exempt supplies) the supplier can obtain credit from the Commissioners in respect of supplies made to him. The supply of books may be a separate supply from, but a supply closely connected with, the supply of education and examination services within item 4 of group 6 in schedule 9. In that case it may be both an exempt supply under schedule 9 as well as a zero-rated supply under schedule 8 group 3 and, where this is so, the characterisation as a zero-rate supply trumps that as an exempt supply and the supplier is entitled to credit from the Commissioners.”
The Issues.
The only issue is whether there is a separate supply of books or whether the supply of books is subsumed within a single supply of education and examination services.
The Facts.
The chairman of the Tribunal recited the following facts:-
“13. It (the College) is the leading provider in the United Kingdom of distance-taught courses and training to the property and construction professions having more than 2,300 students world wide in more than 70 countries. About 65% of its students are based in the United Kingdom.
14. The College offers a range of widely recognised and prestigious qualifications including degrees and further degrees. …
15. The total of the staff is over 100 of which the majority are employed full time. All are based in Reading.
16. The academic staff which is large in number have varied roles including teaching, assessing assignments, writing materials and research. They do not deliver lectures as a matter of course since no students attend regularly.
17. Virtually all the College’s students have full-time jobs in the property and construction field. They choose undertaking distance-learning courses in order to continue to work and earn whilst they study. …
18. Many of the students are already experienced but not necessarily qualified professionals. This is reflected in the average age of twenty-nine.
The courses and learning methods.
19. Fifteen courses are currently offered by the College …
21. Basically, the teaching provided by the College follows a similar pattern for each course and is designed to reflect the background and time constraints for the majority of the students. There are four main elements as follows:-
(a) Study at home or in the workplace of material provided by the college.
(b) Preparation and submission of assignments;
(c) Attendance at face-to-face teaching sessions; and
(d) Access to the College’s virtual learning environment provided on its website …
22. The College provides all necessary materials to enable students to pass their examinations. The majority of materials comprise A4 binders of printed material written, produced and printed at the College’s premises at Reading University. Typically, students receive one or two binders per module studied. For most prequalification courses, students are expected to study four modules per year. The printed material may be supplemented by text books, audio and video tapes and CD-ROMs.
23. The amount of material and other communication provided by the College is vast.
24. Study is focussed around regular assignments which students are expected to complete. These are submitted to the College for marking and comments. …
25. An average student is expected to spend 94% of their time using the study material provided, 4.5% of their time in face-to-face teaching and 1.5% in sitting examinations.
26. A majority of the direct expenditure of the College relates to the production and distribution of the study material.
27. Relatively few students follow the exact timetable recommended in each course prospectus. A significant proportion (especially those from overseas) do not attend teaching sessions. The time devoted to study of course material varies according to the student’s prior knowledge of the subject area and the amount of study time available.
Revenues and costs of courses.
28. The operating revenues of the College relate primarily to fees for distance-learning courses. Production and distribution of study materials make up the largest single direct cost item in expenditure.”
Also taken into account was the content of the College’s course handbook which provides as the course components and course teaching that:-
“The course is taught by written study material for private study, supplemented where appropriate by video and audio tapes and by face-to-face teaching supplemented where appropriate by video conferencing. The study material is delivered in module binders and includes …” [I have added the emphasis which appears in the College prospectus].
In setting out the reasons for the decision, the Tribunal applied Card Protection Plan Ltd. v Customs & Excise Commissioners (C-349/96) [1999] 2 A.C. 601 (“Card Protection”) to which I will have to refer more fully. The Tribunal said of “the College’s activities”:-
“56. Looking at the prospectus, its aims and objectives and activities, we come to the conclusion that the College is providing a supply of higher education. …
62. In evidence, Mr Batho [the director of studies at the College] recognised that each course qualification was the end that students sought. The course qualifications carry advantage for the students in their specialised professional careers. Mr Sherry argued that the tuition could not possibly be enjoyed without the study materials but the latter can and in the minority of instances were used without face-to-face tuition. That may be the case but we find that on the evidence before us the printed materials are not an end in themselves for the students. Furthermore, only the students can obtain the printed materials; they are not on general sale.
63. In our view, although the means of educating the students relies, principally, on the provision of written materials, this does not detract from the College providing overall a supply of education.”
The conclusion of the Tribunal was that there was one supply being the provision of education, the supply of the printed materials being an ancillary element and a means of better enjoying the provision of education.
Lightman J.’s judgment.
Having reviewed the authorities, as I must do, he concluded as follows:-
“35. The starting point [for the identification and characterisation of the supplies in this case] may be to treat each supply of service separately. But it is plain from an economic (or commercial) point of view that there is a single supply of the services of the College as a distance learning College to the typical consumers, namely its students, of the goods and services under consideration in this case, that is to say its teaching and examination services and the printed matter. This is reflected in the single price paid for all of them. Plainly that single supply cannot and should not be artificially split into supplies of its component parts.
36. The next question accordingly arises how that single supply should be characterised and what is the principal supply …
37. … It is quite plain: (a) the College exists to provide education in the broadest sense; (b) that the means by which the College seeks to achieve that end is by the provision of distance learning courses; and (c) that the principal means of doing so is through the provision of the printed matter: see paragraph 63 of the decision. The supply of the printed matter is indeed expensive. The printed matter (in the case of a distance learning institution) is an invaluable, if not essential, teaching tool. But as the Tribunal held, it is not an end in itself for students. The College is an educator, not merely a publisher of course material …
38. In agreement with the Tribunal I hold that there was a single supply which cannot be split and that the principal supply in this case was of education and examination services. As it seems to me the supply of the printed material was a component part of that single supply, not an add-on supply. But whichever of the two ways the supply of the printed matter is treated, the character of the principal supply of education and examination services determines the character of the supply of the printed matter. …
40. I accordingly hold that the supply by the College of the printed matter is an integral component part of its single supply of which the principal supply is of education and examination services, and I therefore dismiss this appeal.”
The approach to the problem to be extracted from the authorities.
I begin by repeating two observations made by Laws L.J. with which I agreed in Customs & Excise Commissioners v FDR Ltd. [2000] STC 672 (“FDR”). The first is in paragraph 54 at page 693:-
“… I think there is some danger of over-elaboration and needless complexity in this field. We are not here concerned with deep legal principle, but with the articulation of a fair and reasonable approach to those cases where there is a question how should the consideration given by a supplier for his reward be categorised for purposes of VAT, when there are multiple acts of supply involved. The simpler it is the better, so long as it is kept consistent with the doing of justice.”
The second is expressed in paragraph 53 on page 692 where he declined to accept a suggestion:-
“… that in every case where multiple supplies properly fall to be treated as a single supply for fiscal purposes there is always a single or unitary dominant supply to which all the other supplies in question are then regarded as ancillary. That, certainly, is one case; but there may be others where the single supply that is arrived at for VAT purposes consists, not in one supply to which others are ancillary, but in a bundle of supplies none of which predominates over the others; the single supply may, as it were, be an apex or a table top. There is thus a difference between what is “ancillary” and what is “integral”: several supplies may be “integral” to one another, with none predominating – the table top – and this I think is the situation contemplated by the phrase “physically and economically dissociable”, quoted by Millett L.J. [in Customs & Excise Commissioners v Wellington Private Hospital Ltd. [1997] STC 445 at 462 and appearing in some of the Court of Justice jurisprudence, and by Nolan L.J.’s expression “the true and substantial nature of the consideration given for the payment” (see Bobhuthatswana [1993] STC 702 at 708).”
Thus it is in my judgment important to bear in mind, as the Court of Justice said in paragraph 32 of Card Protection:-
“… it is for the national court to determine … whether the transactions … are to be regarded for VAT purposes as comprising two independent supplies … or whether one of those two supplies is the principal supply to which the other is ancillary, so that it receives the same tax treatment as the principal supply.”
I have added the emphasis to make the point that the fact that separate supplies can be demonstrated does not necessarily lead to the conclusion that the court has to ask which of the two is more dominant than the other so that there can only be one principal supply to which the other is ancillary. It is perfectly possible to have several distinct supplies requiring different tax treatment. It is certainly not always an either/or choice.
The starting point must be that stated in Faaborg-Gelting Linien A/S v Finanzamt Flemsburg [1996] STC 744 (“Faaborg”) in paragraph 12 at page 783:-
“In order to determine whether such transactions constitute supplies of goods or supplies of services, regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features.”
The question there arose in connection with the characterisation of a meal taken on board a ferry where the Court of Justice drew this distinction in paragraph 14 of its judgment:-
“Consequently, restaurant transactions are characterised by a cluster of features and acts, of which the provision of food is only one component and in which services largely predominate. They must therefore be regarded as supplies of services within the meaning of art 6(1) of the Sixth Directive. The situation is different, however, where the transaction relates to “takeaway” food and is not coupled with services designed to enhance consumption on the spot in an appropriate setting.”
The consequence of having regard to all the circumstances is, as Lord Hope of Craighead said in Customs & Excise Commissioners v British Telecommunications plc [1999] 1 W.L.R. 1376 (“B.T.”) at page 1385F:-
“… no single factor will provide the sole test as to whether the supply in question is a distinct and independent supply or is incidental or ancillary to another principal supply.”
The second basic principle may be taken from Customs & Excise Commissioners v Mirror Group plc, Customs & Excise Commissioners v Cantor Fitzgerald International [2001] STC 1453 (“Cantor Fitzgerald”) at page 1474, paragraph 33:-
“The court observes in that connection [the VAT system’s objective of ensuring legal certainty] that, to facilitate the application of VAT, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question”.
Thus the question is, looking at all the circumstances objectively, what does the customer get, not why does he want it. As Lord Denning held in British Railways Board v Customs & Excise Commissioners [1977] 1 W.L.R. 588, 591F:-
“It cannot depend on the state of mind of any individual student by asking him or her: what did you pay the £1.50 for? It must depend on the legal effect of the transaction considered in relation to the words of the statute. And that is a question of law.”
The point was put this way by the Advocate General in Cantor Fitzgerald:-
“27. In order to identify the key features of a contract, however, we must go beyond an abstract or purely formal analysis. It is necessary to find the contract’s economic purpose, that is to say, the precise way in which the performance satisfies the interests of the parties. In other words we must identify the element which the legal traditions of various European countries term the cause of the contract and understand as the economic purpose, calculated to realise the parties respective interests, lying at the heart of the contract …
28. It goes without saying that this purpose is the same for all the parties to the contract and thus determines its content. On the one hand, it has no connection with the subjective reasons which have led each party to enter into the contract, and which obviously are not evident from its terms. I have drawn attention to this point because, in my view, failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, even in the cases under consideration here and has complicated the task of categorising the contracts at issue.”
The next basic principle is, as Lord Denning held, that the characterisation of the supply is a matter of law: see also Lord Slynn of Hadley in B.T. at page 1381D.
That exercise of characterisation requires that:-
“… 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 a single service:” see paragraph 29 of Card Protection.
When the case returned to the House of Lords Lord Slynn suggested a practical test for ascertaining the essential feature of the scheme. One could perhaps ask: why objectively people are likely to want to join it. See Card Protection Plan Ltd. v Customs & Excise Commissioners (No. 2) [2002] 1 A.C. 202 (“Card Protection No. 2”) paragraph 25.
Paragraph 29 of Card Protection states another basic principle which must be taken into account namely 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.”
Various checks or tests are suggested to assist in determining whether or not there are separate supplies within the one transaction. The first derives from E.C. Commission v. U.K. [1988] STC 251 (“E.C. v U.K.”) where the interpretation of the term “medical care” was in issue and the Court of Justice held in paragraph 33:-
“In those circumstances, apart from minor provisions of goods which are strictly necessary at the time when the care is provided, the supply of medicines and other goods, such as corrective spectacles prescribed by a doctor or other authorised person, is physically and economically dissociable from the provision of the service.”
This used to be a pointer toward, but not the definitive test, for the right answer. In Customs & Excise Commissioners v Wellington Private Hospital Ltd. [1997] STC 445 (“Wellington Hospital”) where the question arose as to whether the supply of drugs was part of a composite supply of care or medical treatment or whether it was a separate supply, Millett L.J. said at page 462:-
“In determining whether what would otherwise be two supplies should be regarded as a single supply the court has to ask itself whether one element is an “integral part” of the other or is “ancillary” or “incidental” to the other; or (in the decisions of the Court of Justice) whether the two elements are “physically and economically dissociable”.”
In B.T. Lord Slynn said at page 1382:-
“I do not read the United Kingdom case as introducing a different test. The phrase “ economically and physically dissociable” was simply a description in that case of the difference between a supply of goods and the provision of services in question. It is to be noted that in Card Protection … the phrase “physically and economically dissociable” is not used.”
At page 1383C he said:-
“The Card Protection Plan case … was concerned with the supply of two services whereas in the present case B.T. was supplied with goods (a car) and a service (delivery by a third party). The question is thus in my opinion whether the delivery is ancillary or incidental to the supply of the car or is a distinct supply. It may be that the “physically and economically dissociable” test comes to the same thing but the ancillary test avoids the more difficult question as to whether something which is physically separate and economically separate (e.g. because a separate charge is identified) is thereby necessarily “dissociable”.”
Lord Hope said at page 1386:-
“It may be said that before the supply can be regarded as a separate and distinct supply it must, at least to some degree, be physically and economically dissociable from the other supply. But it would not be right to take this factor as the sole criterion as to whether the supply was separate and distinct from the other supply or was merely incidental or ancillary to it. If that were so, it would mean that in every case where it was possible to dissociate the two economically and physically (for example, because one supply was of goods and the other supply was of services and the price for each supply could be separately identified) the two supplies would have to be treated as separate supplies for VAT purposes. That would not be consistent with the guidance which the court gave in Card Protection … Thus 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.
According to this guidance, the question is one of fact and degree taking account of all the circumstances.”
The second clue to whether the supplies are separate can be lifted from paragraph 29 of Card Protection:-
“a supply which comprises a single service from an economic point of view should not be artificially split.”
Lord Slynn in B.T. put the test this way at page 1384C:-
“In my view here if the transaction is looked at as a matter of commercial reality there was one contract for a delivered car: it is artificial to split the various parts of the transaction into different supplies for VAT purposes.”
The reason why one should not artificially split a single service is again spelt out in paragraph 29 of Card Protection and it is:-
“so as not to distort the functioning of the VAT system.”
We see this in Customs & Excise Commissioners v Madgett & Baldwin (t/a Hardin Court Hotel) [1998] STC 1189 (“Madgett & Baldwin”). The Advocate General said this:-
“30. The concern for simplification shown by the Community legislature applies in the same way with respect to two traders who carry on identical activities and are thus logically confronted with comparable difficulties.
31. That is an expression of the principle of neutrality of VAT As the German government rightly points out, the selective application to similar activities of a system intended to simplify the performance of their tax obligations by the traders concerned would benefit one class of traders for no good reason. The activity of the others would be obstructed by the difficulties resulting from the localisation of the supplies or services.
32. The court considers that one of the principles of the VAT system is the elimination of factors which may lead to distortions of competition at national and Community level … Those distortions of competition can be avoided if art 26 is read as covering activities which are comparable according to objective criteria, not according to a predetermined classification of a trader in one occupational category even if he devotes a substantial part of his activity to the provision of services which fall within another category.”
That was approved by the court in paragraph 22 of its judgment which emphasised the need not to create distortion of competition between traders or jeopardise the uniform application of the Sixth Directive.
This principle of neutrality is important because it precludes similar supplies which are in competition with each other being treated differently for VAT purposes. It supported Lord Hope’s opinion in B.T. He said at page 1387:-
“There is one factor which, in my opinion, supports the view that the supply of the transport and delivery services were incidental or ancillary to the purchase of the motor cars and are not to be regarded as a separate and distinct supply for VAT purposes. As a matter of general principle comparable transactions should for VAT purposes, so far as possible, be treated equally. Taxable persons who purchase motor cars for business use from authorised dealers are precluded by the Blocking Order from recovering as input tax the VAT paid upon the price charged by the dealer for the supply. This includes the cost of transporting and delivering the cars to the dealer’s premises from the factory, which the dealer recovers from the customer. If B.T. were able to recover as input tax the VAT charged by the manufacturers on the service of transporting and delivering the cars to their premises from the factory, they would be obtaining more favourable treatment than that available to others in the market for the purchase and delivery from authorised dealers of the same motor cars.”
Another factor to bring into account is the price. It is, however, important to bear in mind the strong caveat in paragraph 31 of Card Protection where the court said:-
“… 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 the 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 method of calculation or assessment should be used for this (see, to that effect Madgett & Baldwin (at 1208, paragraphs 45 and 46)).”
In Madgett & Baldwin the court made this observation in paragraph 38:-
“… a service may be categorised as a service equivalent to the principal service provided by the trader if its relative share of the total amount paid by the traveller is substantial, so that it cannot be regarded as ancillary, compared with the other services supplied, whether by its price or its value from the customer’s point of view.”
Having analysed the transaction and decided that elements of it suggest different supplies, the essential task is then to decide whether those supplies can be treated as distinct and independent on the one hand or as subordinate and ancillary on the other, always remembering, as I stated at the beginning of this exposition of the law, that it is permissible to find distinct supplies and that it is not necessary always to ask which supply is subordinate to the other. We are not construing the words of a statute but capturing the essence of principles laid down by the court. It is, nonetheless, perhaps instructive to remind oneself that “ancillary” literally means of or pertaining to a handmaiden and so connotes something which is subservient, subordinate and ministering to something else.
The approved test was stated by the Advocate General in Madgett & Baldwin 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.”
That was approved by the court in paragraph 24 and now finds its place in paragraph 30 of Card Protection:-
“There is a single supply in particular cases where one or more elements are to be regarded as constituting the principle 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.”
Having gone through that process of analysis, it is then necessary to stand back, look again objectively at all the circumstances and see how the conclusions fit into the whole picture. As Lord Slynn said in paragraph 22 of Card Protection No. 2:-
“It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.”
As I have read and reread these authorities these phrases or sentences stand out as the litmus tests for this overall review:-
Is this supply to be regarded “not as ancillary but as a distinct supply” – see Lord Slynn in B.T. at page 1384E;
Is the relationship between the supplies “so disproportionate as not to enable the transaction to be regarded as comprising one supply? - see Lord Hope in B.T. at page 1386F.
Are the features of the plan “sufficiently coherent as to be treated as one separate supply” per Lord Slynn in Card Protection No. 2 at paragraph 28;
“What is the true and substantial nature of the consideration given for the payment?”, per Nolan L.J. in Bophuthatswana National Commercial Corp. Ltd. v Customs & Excise Commissioners [1993] STC 702 at 708.
The application of those principles to the facts before us.
There clearly was a separate supply of goods, namely the printed material from which the students were to prepare their assignments and study for their examinations. The writing, printing and distribution of the books formed a substantial part of the undertaking of the College both in terms of the demands it placed upon its staff as well as the actual proportion of the annual expenditure. The supply of those goods was clearly physically dissociable from the supply of the education service. Although only one price was being paid the supply of the books constituted a substantial part of the consideration paid by the students who relied on the printed material and who spent 94% of their time using the study material and only 4.5% of their time in face-to-face teaching. Although only one fee was charged, that part of the single price which related to the supply of goods was capable of calculation without insuperable difficulty. Since a single price is an equivocal factor it is difficult to see why when looking at it from an economic point of view the transaction should be treated as a single supply, whether of goods or educational services. It would not be artificial to split the transaction because the supplies separate out easily and naturally into the respective supplies of goods and services. So to do would not distort the functioning of the VAT system. On the contrary subsuming the supply of goods within the supply of services does result in unequal treatment. The books could be supplied by a wholly owned subsidiary of the College and there is some distortion of the system if the independent supplier is able to claim a different VAT treatment for his supply of the books than the College does when linking their supply to the additional supply of educational services. Consequently I conclude that there is a distinct and separate supply of goods.
I do not agree, however, with the submissions advanced by Mr Sherry that that is the end of the matter. It is, in my judgment, still necessary to test whether that supply is to be treated as ancillary to the other supply of education. One must consider the matter overall. Mr Batho, the Director of Studies, conceded what to me seems to be the obvious namely that qualification was the end that students sought and the Tribunal so found. The Tribunal’s conclusion that the printed materials were not an end in themselves for the students is, however, an inference to be drawn from the primary facts which this court is as capable of deciding as the Tribunal was. Ultimately it is a question of law what the essential object of character of this contract was. One must bear all the circumstances in mind but particularly in this case bear in mind that the College’s unique service was to provide “distance-taught courses and training”, that “they do not deliver lectures as a matter of course since no students attend regularly” and that “virtually all the student have full-time jobs in the property and construction fields. They choose undertaking distance-learning courses in order to continue to work and earn while they study”. I add the emphasis to highlight the purpose. I add the emphasis to the finding in paragraph 17 of the decision. The main element of the teaching (the education service) is study at home or in the workplace of material provided by the College. The College “provides all necessary materials to enable students to pass their examinations” but the prospectus which sells this course to students proclaims, with its emphasis emboldened, and mine in italics, “The course is taught by written study material for private study, supplemented … by face-to-face teaching”. It seems to me, therefore, quite clear viewing this transaction objectively that the reason why these students enrolled with the College (Lord Slynn’s test) is that they would have provided for them all the necessary material to enable them both to work and also to study. They could not attend full-time lectures, nor did they wish to scour the bookshops nor visit the libraries in order to gain access to the material they needed. They wanted the material supplied. Obtaining their degree was their ultimate goal, of course, and the written material was equally obviously a means to an end. But it seems to me impossible to deny that for the students who availed themselves of this educational service the provision of the written material was an end in itself. In the words of the Advocate General in Madgett & Baldwin, the obtaining of this written material did constitute an object for the students sought for its own sake.
In my judgment the supply of the written material was a distinct and separate supply which was not ancillary to the supply of educational services. I confess that I came to the appeal convinced by the reasoning of the Tribunal and of the learned judge, both of whom have considerable experience in this field. It then dawned on me that the error in their approach was to treat this as a single either/or question answered by asking whether the supply of the written material was the means for better enjoying the education and by omitting to ask first whether or not the supply of the books was in itself sufficiently coherent, distinct and independent to constitute for the students an aim in itself. With respect to the tribunal and the judge they fell into the error identified by Laws L.J. in paragraph 61 of FDR:-
“The potential error to which Millett L.J. drew attention would arise where the court or tribunal starts by asking whether some particular element in what the taxpayer does is ancillary to the whole of his relevant activities, for that would be to beg the question whether the case falls to be treated as one of a single supply at all.”
I am now totally satisfied that there are two distinct supplies in this case one the exempt supply of educational services and the other the zero-rated supply of goods. I would therefore allow the appeal and remit the matter to the tribunal to apportion the price between the respective supplies.
Lord Justice Jacob :
I agree.
Sir Charles Mantell :
I also agree.