[2010] UKFTT 113 (TC)

TC00424

Appeal number LON/2004/1071

VAT- whether provision of free meals to Fellows a taxable supply within Art 6(2) Sixth Directive- whether ancillary to  business of college-held: the provision was in the course of the business of the college: VNLTO applied- no- taxable supply
VAT – input tax – special method
VAT- input tax – Special Method Override Notice approved by HMRC – calculation of VAT due

FIRST-TIER TRIBUNAL

TAX 

	ST JOHN’S COLLEGE, OXFORD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	CHARLES HELLIER 
						ELIZABETH BRIDGE

Sitting in public in London on 12, 13, 14 October and 27 November 2009

Roger Thomas, counsel, instructed by Grant Thornton UK LLP for the Appellant

Owain Thomas, counsel, instructed by the Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	St John’s College was founded in 1555 by Mary Tudor and Phillip of Spain as a perpetual college of learning, sciences, sacred theology and philosophy and good arts. The Royal Patent of foundation provides (when translated from its original Latin) that the “President and Scholars of that college shall be, in deed and in name, one body corporate and politic, and have perpetual succession”. The college now supports a body of distinguished Fellows and also provides education and accommodation to many undergraduate and graduate members.
2.	These are two consolidated appeals by the college. The first relates to the Commissioners’ refusal to approve a new partial exemption method for the college. The second relates to the Commissioners refusal to accept a voluntary disclosure made by the college in which it claimed additional VAT credit on the basis of its latest proposed partial exemption method.
3.	The appeals arose because the college spent a large sum refurbishing the building which holds its Senior Common Room (the SCR). It incurred a large amount of input tax on its costs. But the method which HMRC had approved for the recovery of the college’s input tax permitted no additional input tax recovery for the input tax on the refurbishment.
4.	When a taxable person makes only taxable supplies all the input tax on input used to make those supplies is generally recoverable. Where such a person makes only exempt supplies then none of his input tax is recoverable. Where he makes both taxable and exempt supplies then the input tax on those inputs used only for taxable supplies may be recovered in full, the input tax on inputs used only for exempt supplies is not recoverable, and some method of apportionment is needed for the input tax (the residual input tax’) on inputs used for both taxable and exempt supplies. The legislation provides for a standard method of apportionment based on the relative values of the person’s outputs but provides that HMRC may direct or approve a special method. Such a method is normally called a partial exemption special method (PESM). The aim of a PESM is to produce a fair and reasonable calculation of the input tax attributable to the use of the residual inputs.
5.	In November 1998 HMRC had approved a PESM for the college. It provided that the college could recover an amount equal to 14.9% of its taxable supplies together with any input tax on supplies made by it which were used exclusively in making taxable supplies. We shall return to the detail later, but this was a very rough and ready method since it bore no direct relationship to the actual residual input tax or the use to which the inputs were put.
6.	The College considered that this method did not provide fair reimbursement for the input tax costs of the refurbishment of the SCR and proposed (successively) different PESMs to HMRC.
7.	If a person proposes a PESM in place of the standard method or an existing PESM, HMRC may approve or direct the use of that method or may refuse to do so. If it refuses the taxpayer may appeal to this Tribunal. The first appeal relates to such refusal.
8.	In 2003 regulations were introduced to deal with the situation in which a PESM was being used and it appeared that the apportionment under the method did not fairly represent the use of the inputs by the taxpayer. If the taxpayer did not think that his current PESM was fair he could serve a notice on HMRC. Such a notice is commonly known as a Special Method Override Notice (SMON). Where HMRC ‘approve’ such a notice the regulations require the taxpayer to account in his return for the difference between the input VAT creditable under his existing PESM an attribution which fairly represents use of the inputs.
9.	In September 2004 the college served a SMON and in November 2004 HMRC accepted it. It was not disputed that HMRC had thereby “approved” the notice for the purposes of the regulations. In March 2004 the college made a “voluntary disclosure” on the basis of its proposed (and rejected) latest PESM claiming £147K of additional input tax. HMRC refused to accept that disclosure. The second appeal is against that decision.
10.	Against this background a number of issues arise
(a)	What were the uses to which the SCR was put: for any apportionment must reflect those uses
(b)	the fairness and reasonableness of the college’s existing PESM and its proposed PESM(s) in the context of the college’s activities as a whole
(c)	whether on appeal in relation to the amount of creditable input tax in circumstances where a SMON has been approved by HMRC, the Tribunal’s obligation is to determine the amount of tax repayable or payable in accordance with a PESM it determines or only a method suggested by one of the parties.
The Evidence 
11.	We heard oral evidence from John Montgomery, an Emeritus Fellow of the college and its Finance Bursar from 1985 to 2006, and from Jonathan de Wilton of Grant Thornton UK LLP, who had been advising the college on VAT. Both Mr Montgomery and Mr de Wilton provided witness statements. We also had a witness statement from Richard Harvey the officer from HMRC who had been the main correspondent with the college in relation to its PESM proposals. We were provided with copies of various documents including the college’s patent and statutes, its accounts, and details of the refurbishment of the SCR.
The College statutes and objects
12.	Although constituted by the Royal Patent of Mary and Philip which permitted statutes to be made “to the end” of the purposes recited earlier in this decision, the present statutes of the college have been made under the provision of the Universities of Oxford and Cambridge Act 1923 and its predecessors. Under the provisions of those Acts in making a statute regard is required to be had the interests “of education, learning and research”, and to the maintenance of the college for those purposes.
13.	Under the statutes relevant to the period of the appeal:
(a)	the college consists of a President, Fellows and Scholars,,
(b)	there are eight classes of Fellows:
Professorial Fellows – who had a university office decreed to qualify for such a Fellowship
Official Fellows, such as the Chaplain and other office holders
Fellows by Special Elections, such as University lecturers.
Senior Research Fellows who have attained some academic distinction and who ‘undertake to perform some definite literary, scientific or educational work in the college or University or elsewhere’
Junior Research Fellows who must be “likely to do valuable work in some branch of letters or science or education and who shall undertake some course of higher study or research.” Junior Research Fellows may not engage in teaching without the prior approval of the Governing Body and in any event may not teach for more than six hours per week.
Emeritus Fellows
Supranumery Fellows; and 
Research Fellows.
(c) the Governing Body of the college is comprised of the President of the college, Official Fellows, Senior Research Fellows and some Professorial Fellows.

(d) Fellows receive such emoluments as the Governing Body decides from the revenues of the college 

(e) the Governing Body is required to make regulation for daily services in the college chapel

(f) the Governing Body is required to provide courses of instruction to the members of the college in statue pupillari

(g) rooms may be provided free of rent to Fellows for residence or for use in approved work

(h) the Governing Body is permitted:-
“to set apart and allow such moderate sums of money from the corporate Revenues of the college as it may from time to time determine for the provision of common meals whether in Hall or in some public room of the college of which the President and each of the Fellows shall be entitled to participate without charge, and also…any Lecturer or officer of the college not being a Fellow….” (statute XVII 2).

(i)  there are provisions in statute XX for the disposal of the revenue of the college which require surplus revenue to be applied “to any purposes relative to the University and conductive to the advancement of learning science or education”, Capital may be applied for the furtherance of the College’s objects.            

14.	The college pays emoluments broadly to those Fellows who are not paid by the University.

15.	It can be seen that through the detailed provisions permeate the twin objects of the advancement of learning and the advancement of education. There may be some overlap between these two objects but there is also a degree of separation: the college’s object is not just to provide education to undergraduates, nor only to further research and learning for their own sake, but both (and a mixture of) these objects.

Our Findings of Fact

The Fellowship.

16.	The College has getting on for 100 Fellows. Of these about 50 sit on the governing body.
17.	Emeritus Fellows do not teach. Junior Research Fellows are not encouraged to teach and do not teach for more than 6 hours per week. Senior Research Fellows came to Oxford to continue their research: they do not teach or lecture other than possibly to give a seminar at the end of their period of tenure. Professorial Fellows are paid salaries by the University and give university lectures. They do not generally teach at the college. Fellows by Special Election are paid a retainer by the college but receive their principle remuneration from the University. They may do some tuition at the college but not a lot. The teaching load of other Fellows depends on whether or not they are scientists. Scientists are funded 20% by the college and 80% by the university. They will teach the college’s students for 6 ‘weighted’ hours per week. An hour of teaching 2 students would for example be treated as 1 ½ weighted hours teaching. Fellows who were established would spend little time in preparation for tutorials. Non scientists Fellows have 60% of their salary paid by the college. They will teach up to 10 weighted hours per week.

18.	Fellows receive notice of their appointment in a letter from the President. The letter does not deal with dining rights but speaks principally about the expectation that the appointee will be engaged in higher research.

19.	Overall we formed the impression that those Fellows who do teach for the college spend no more than 1 day per week during term time in that activity. The remainder of their time is spent on research and college and university matters.

20.	The Fellowship had increased over the last 30 years by about 30 or 40%. The increase has coincided with an increase in graduate and undergraduate members of  college and of the University. The Robbins report (1963) led to an expansion of undergraduate and graduate numbers at the university in the 1970’s. The University appointed more Lecturers and Professors. The new appointees were accommodated with Fellowships at the colleges including St John’s. When the University started offering new courses for example in History of Art or Computational Biology the college sought new Fellows who could tutor its members in those subjects. The number of Junior Research Fellowships were increased fourfold as the college found it could afford to fund their research.

21.	We conclude that the growth in the Fellowships was inspired by the growth in the number and size of the academic departments in the University and was, in part, to enable the college to educate its graduate and undergraduate members and, in part, to contribute to the greater volume of learning and research at the University.

22.	The Junior Research Fellows are given accommodation in college but no separate room in which to teach, Fellows with tutorial responsibilities all have a room in college in which they may teach. Professors in Arts subjects have a room in college in which to work and teach, and some Science Fellows are similarly accommodated.

The undergraduate and graduate members.

23.	The College has about 400 undergraduate and 150 graduate members. That number had substantially increased in the 1970s when the Thomas White building had been opened, doubling number of rooms available for student occupation.

24.	The undergraduate year consists of three eight-week terms. Undergraduates are normally present for a few extra days on either side of full term. The college makes a charge for their accommodation. Graduate members spend up to 47 weeks of each year in residence.

25.	One of the distinguishing features of the Oxford system of education of undergraduates is the college tutorial system under which they have regular tutorials with a college tutor. The number and the disciplines of the college’s Fellows will be affected by the need to provide such tutorials although on occasions there may be some swaps or sharing with other colleges.

26.	The college supplies food and drink to its undergraduate and graduate members for separate charges.

The Financing of the College.

27.	The College has a substantial endowment. It produces income. That income is the largest source of the college’s finance. About 2/3 comes from land, held as an investment or managed woodland, the remainder from shares and securities. The college’s land income derives in part from exempt supplies and in part from taxable supplies. It incurs costs in relation to the management of this land which bear input tax.

28.	The college’s other major sources of income are monies from the Higher Education Funding Council which are routed to it through the University, and charges made for supplies to undergraduates, graduates and Fellows. These latter charges include:-

(i)	tuition fees;
(ii)	charges for food and accommodation;
(iii)	charges for drinks; and
(iv)	charges made for guest rooms and food
29.	In addition the college lets out its facilities out of term time for conferences for consideration.

30.	The college’s accounts as presented to us did not permit a precise correlation of items of expense to the related income, but we found the following very broad summary instructive.

Source of Income			Expense of a related nature 

Academic fees		£1.7m 		Academic expenses 		£3.3

Room Charges, etc	£1.4m		Premises 			£2.6m
Conferences 		£0.8m		Residences, catering, etc  	£3.0m

Endowment Income 	£7.1m		Admin & Endowment		£2.0m 
i.	Management

31.	In this presentation of the figures we are not finding that the Academic expenses are those incurred to earn the academic fees or that the Premises expenditure is solely attributable to either Academic or Room charges income. But it is abundantly clear that the college’s income from fees and charges made to students for their education, accommodation and food does not pay for the running of the college, that the bulk of the college’s income is from its endowment and that that is the principal source of finance for the college’s maintenance and activities. ‘Academic expense’ and ‘Premises’ and ‘Residences Catering etc’  include expense on sustaining, accommodating and remunerating Fellows who do some or no teaching. It seemed clear to us that the college expended considerable sums supporting activities which were not used to make supplies of education. 

The Senior Common Room.

32.	The SCR is housed in a building in North Quad. Prior to the refurbishment project for that building which triggered this appeal it was last refurbished in the 1960s. The refurbishment project took place between 2003 and August 2005. It cost some £6m, and involved the following main changes to the building:-

(a)	The Fellows’ Lunchroom on the first floor was extended eastwards into the President’s Garden. The room was remodelled and its capacity rose from 48 places to 84.
(b)	The architecturally undistinguished east façade of the building along the portion housing the lunchroom was replaced by something regarded as more elegant.
(c)	The Muniments Room on the ground floor was replaced by improved kitchens and staff facilities. The existing staff and kitchen facilities were reorganised. The archives which had been kept in the Muniments Room were moved elsewhere;
(d)	a ground floor sitting room was created on the east side under the extension to the lunchroom;
(e)	on the second floor there were three guest bedrooms one of which was no longer used. These were remodelled and updated. A guests’ sitting room was provided close to the guest bedrooms. From that sitting room doors now lead on to a roof terrace;
(f)	there was a significant improvement in facilities for the disabled. Lifts were improved and installed and access made easier. New WCs were provided accessible to the disabled;
(g)	other passages and rooms were refurbished.

33.	In summary,  better kitchen facilities, more places in the lunchroom, revamped guest bedrooms, another Fellows’ sitting room and better disabled access.

34.	The kitchens in the refurbished building serve only the needs of the Fellows and their guests. They supply food to the Lunchroom and food to the High Table.

35.	During Term time those Fellows who eat dinner in college will generally eat at High Table. Out of term time they will eat in the Lunchroom. Breakfast and Lunch are served in the Lunchroom throughout the year. Breakfast and Lunch, and Dinner at High Table are free but wine is paid for.

36.	All Fellows are entitled to eat lunch in the Lunchroom. Most Fellows turn up for lunch. They may bring guests to lunch. Generally such guests will be other academics: usually from a similar discipline. A charge is levied for lunch for a guest; no charge is payable by Fellows. Certain officers such as the Librarian of the college are also entitled to use the lunchroom without charge. Certain part time lecturers who do specialised teaching for the college are allowed limited free dining. Some 80 to 100 people eat lunch there on most weekdays. A charge is made for any alcoholic drinks consumed at lunch. Fellows are not required to eat in college but most do. The Lunchroom is not open for lunch for undergraduates or graduate students. 

37.	The menu for the lunch is determined each day by the chef. It is a three course meal with the option of a salad. It is of a high standard and generally of better quality than that served to the other members of the college. Lunch is served from 12.00 to 2.00pm. Dinner at High Table is at a fixed time. 

38.	Mr Montgomery told us, and we accept, that generally lunchtime conversation is not about academic subjects. Normally the Fellows fill places in the Lunchroom in order of arriving and would find themselves next to Fellows of different disciplines with whom conversation about their respective fields would be limited.

39.	The lunchroom is not used for conferences. Their participants eat in the hall. Fellows could, for a charge, arrange private meals in the SCR accommodation. The guest rooms on the second floor are for Fellow’s guests. There is accommodation elsewhere for other members’ guests. A charge is made to the Fellow or the guest for the accommodation. The rooms are well used.

40.	At the end of their undergraduate time at the college undergraduates may be invited to Schools Diners which may take place in Lunchroom or another room in the SCR building.

41.	The SCR is open to its members throughout the day. There are other sitting rooms in the SCR building. Some of them may be used after lunch or dinner for coffee, desert or further drinks. There is a coffee machine in a sitting room, and coffee is served in the morning in the Sadler Room. The rooms may also be used to sit, to read, and possibly even to snooze (although Mr Montgomery had no recollection of any sleeping dons). The sitting room on the ground floor has a coffee machine. The SCR could potentially be a haven for besieged academics from their tutees.

42.	One of those sitting rooms is used for college committees on Wednesdays in term time and for interviewing for academic posts in the college. (This room was not one of those refurbished pursuant to the refurbishment project).

43.	The Lunchroom is used for Governing Body meetings. When so used it is not available for lunch. These meetings last about 2 hours and take place about 13 times a year. The Governing Body makes decisions on the conduct of the college’s activities and receives reports from the committees.

44.	The sitting rooms are not provided with desks or computer terminals. Mr Montgomery said, and we accept, that he had not seen a Fellow using a laptop computer there: Fellows pursued their work of that nature in their rooms. The use of mobile phones was discouraged in the building.

45.	 Mr Montgomery accepted that free dining rights were part of the ‘package’ a college Fellow gets. He accepted that adverts for Fellows mention the benefits available but did not accept that dining nights were the prime factor which attracted academics to the college: academic prestige was far more important.

The 1998 PESM and later proposals by the college.

46.	In 1998 HMRC approved a PESM under which:

a.	input tax on supplies used to make taxable supplies only was fully recoverable;

b.	input tax supplies used to make exempt supplies only was not recoverable; and

c.	the amount of residual input tax which was to be treated as recoverable was 14.9% of taxable output(not inputs).

47.	Mr Montgomnery told us that in the period 1998 to 2003 the college, after discussing with the VAT officer, had limited their input tax recovery to £10,000: whenever the calculation in accordance with the approval exceeded £10,000 only £10,000 was claimed. The method was not changed in the period.

48.	Between July 2003 and September 2005 Grant Thornton, on behalf of the college, submitted proposals for a PESM which dealt with the input VAT on the refurbishment separately. There were discussions and meetings with HMRC, visits to the college and correspondence. The proposals were modified as a result of the discussion. Altogether four proposals were submitted each being a refinement of the last. Each dealt with the recovery of residual VAT.

(i)	Proposal 1    30 July 2003.
Under this proposal the deductible input tax on the SCR project was to be determined by treating all its use as taxable bar its use for Governing Body meetings. The Governing Body use was to be taken as the fraction of the total area used for such meetings multiplied by the fraction of the time it was so used. The Governing Body use was to be treated a giving rise to residual input tax, the remainder to wholly deductible tax on the basis that the remainder of the use of the SCR was for making taxable supplies of food and accommodation. The college’s total residual tax – from other sources and from the SCR project source - was then to be determined and apportioned between deductible and non deductible on the basis of the “conference method.”

(ii)	   Proposal 2     3 October 2009
This varied Proposal 1 by treating the college’s land   management residual input VAT separately. The input VAT attributable to land management was to be removed from the residual VAT pot and the recoverable proportion determined by applying the fraction obtained by dividing taxable land supplies by total land supplies.

(iii)	  Proposal 3     20 April 2004
Under this proposal the residual input tax, after exclusion of the SCR recoverable fraction and all the land input tax was to be apportioned, not on the “conference method”, but by reference to the taxable and exempt income of the college.

(iv)	  Proposal 4   1 September 2005
This proposal varied Proposal 3 in that it treated the HEFC grant as part of the college’s exempt income for the purpose of the calculation of the fraction to be applied to the remaining residual input tax after the SCR and land input tax had been deducted therefrom.

The Parties’ submissions

49.	Mr Roger Thomas says:

(a)	the supply of free meals to Fellows is a taxable supply by the college by virtue of article 6(2) of the Directive because the supply of the meals is  for purposes other than those of the college's business. In particular he says that the Fellows receive free meals by virtue of the Statutes of the college, and in such a capacity receive a private benefit within Article 6(2) of the Directive
(b)	the provision of the SCR is directly linked to that supply;
(c)	in accordance with Lennartz where an input is used for economic activity and for private purposes, the trader is entitled to bring into credit the whole of the input tax -- being liable to tax under articles 5 and 6 in relation to a notional private supply;
(d)	the Lennartz principle extends to the provision of capital services such as those relevant to the provision of the refurbishment of the SCR;
(e)	the college seeks to avail itself of that right. It is entitled to bring into credit the whole of the input tax;
(f)	having brought all the input VAT into account, one must then enquire how the input is used. If it is used for both exempt and taxable purposes, or alternatively, if it is used as an overhead, it must go into residue and be apportioned under article 17;
(g)	in fact the only direct uses made of the SCR (and thus of the refurbishment costs) were taxable ones. There was no direct link between the provisions of the SCR and any exempt activities of the college;
(h)	thus the college's proposals offered a concession to HMRC because they permitted part of the input tax to be attributed to indirect exempt use (by the part attributed to the use by the governing body);
(i)	Article 17(5) permits member states to authorise the computation of the deductible proportion of any input VAT by reference to separate sectors of a taxpayer’s business. The activities in the SCR (principally the provision of taxable free meals) can properly be regarded as a sector. There is nothing objectionable in this case about considering this part of the college's activities separately. In any event it fairly reflects the use of the inputs, and the later proposals deal fairly with the college's other activities;
(j)	thus at least one of the methods provided provided a fair and reasonable method of determining the proportion of input tax recoverable;
(k)	the acceptance by HMRC of the college's SMON means that the input VAT must thenceforth be determined on the basis of use, and therefore the tribunal, on an appeal against the decision that the amount claimed on the basis of use should not be allowed, was obliged to determine the amount as it would in the case of any other appeal under section 83(c) against a decision as to the amount of input tax creditable.

50.	Mr Owain Thomas says:
(a)	The provision of free meals did not fall within Atricle 6. The ECJ cases show that a supply falls within that provision if it does not serve the purposes of the business. The supply of free meals is part of the college’s business.
(b)	Apportionment on the basis of use requires regard to be had to “economic use”: in determining the use to which the SCR is put, it is too narrow an approach simply to look through the window and see what happens there. That was the approach eschewed in St Helens (see para 58 below);
(c)	the objective purpose of the expenditure on the SCR sheds light on the purpose for which it is "used". That purpose may be seen in: the statutory object of the college as a place of learning and research; the limitations on the use of the endowment to expenditure within those objects; the approval of the governing body of the expenditure as falling within those objects; and the need to accommodate a Fellowship which has expanded as a result of the increased provision of education at Oxford.

(d)	in determining economic use one should have regard to: the purposes of the college, the source of the funds, and the objective reasons for the need for new lunchroom;
(e)	therefore, even if the provision of free food to Fellows did  fall within article 5(6) or 6(2) that would not be the end of the matter because the provision of the SCR was for the purpose of the college's business of education. Good food attracted a good Fellows. Fellows were there to educate. High table was part of the Oxford experience of the education the college provided.
(f)	the appellant's methods resulted in almost all the inputs on the SCR being recoverable: that could not be right given the use of the building as a facility for Fellows engaged in education. The tribunal must analyse the role of the inputs in the business of the college. That depended upon the behaviour of the Fellows. The physical uses are not limited to consumption of food wine and accommodation: Fellows arrive before, and leave after, eating: there are sitting rooms and committee and governing body meetings take place in the SCR;
(g)	the provision of free meals was not the economic purpose of the expenditure. The modification and maintenance of the SCR serves the same economic purpose as the modification and maintenance of Fellows rooms, namely those of the college as a whole.

Discussion

The legislation and the authorities

(a)the recovery of input tax

51.	Article 17(2) of the Sixth Directive gives a right to a taxable person to the recovery of input tax ‘in so far as the goods and services are used for the purposes of his taxable transactions’. Another way of approaching the question of whether an input tax is “used” for a transaction is to ask whether it is a cost component of that transaction (see Art 2 of the First Directive, BLP Group Plc V C&E Comms [1995] STC 424, and paras [18] and [24] in Dial a Phone V C&E Comms [2004] TSC 987).

52.	If there is a direct and immediate link of an input to an output then the input is to be treated as used for, or as a cost component of, the output (see BLP and Dial a Phone para [28]).

53.	Art 17(5) deals with inputs which are used both for taxable and exempt transactions and transactions in respect of which VAT is not deductible. It is necessary to set out its provisions in detail:-

“ As regards goods and services to be used by a taxable person both for [taxable transactions] and for transactions in respect to which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

“This proportion shall be determined , in accordance with Article 19, for all the transactions carried out by the taxable person.

“However Member states may:

authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;

compel the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;

authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services;…”

54.	Article 19 sets out an output value based method of apportionment: the   deductible input tax is that fraction of the residual tax (the non directly apportionable tax) as broadly, is equal to taxable outputs divided by all outputs.

55.	These provisions are given life in domestic legislation by section 26 VATA 
and Regulations 101ff of the VAT General Regulations 1995/2518. Section 26(1) requires credit for input tax to be given for so much of the input tax as by regulations is attributable to taxable supplies (and others irrelevant to this appeal). Section 26(3) requires the Commissioners to make regulations for securing a “fair and reasonable” attribution of input tax to taxable supplies. It was common ground that the Regulations are to be read as permeated by a requirement to determine a fair and reasonable attribution.

56.	Regulation 101 requires:

(i)	an attribution to taxable supplies of input tax on those inputs ‘exclusively’ used in making taxable supplies

(ii)	that “no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies shall be attributed to taxable supplies”; and

(iii)	the remainder of the input tax (the ‘residual input tax’) to be attributed broadly in accordance with the Art 19 method (the ‘standard method’) [excluding by (3)(d) any supply made to himself]

57.	But Regulation 102 provides that the Commissioners may “approve or direct” the use by a taxable person of a different method. Regulation 102(4) provides that

“Any direction under paragraph (1)…shall take effect from the date upon 
which the Commissioners give such direction or from such later date as they may specify”

58.	The UK legislation envisages that the fair and reasonable attribution of 
input tax will reflect the use of the inputs in making taxable supplies.  The standard method can be viewed “as a proxy for an apportionment according to the relative uses (whatever that word may mean) in making taxable supplies” (see Warren J at [16] in St Helen’s School Northwood V HMRC [2007] STC 633). From St Helens we also draw the following conclusions:

(a)	the search is for a fair and reasonable proxy for use of the input [75] unless actual use can be clearly identified in which case there is no need for a proxy [52];
(b)	although physical use may be a good proxy for use for VAT purposes [50], the use referred to is not physical use but some special VAT use: a helpful general approach is to search for the "economic" use of an input;
(c)	in determining the economic use of an input the source of funds and the objectively ascertained purpose of the taxpayer are relevant considerations ([77]). The exclusion of motive does not allow the tribunal to disregard observable terms and features in the wider context in which a transaction is carried out. It is legitimate in this context to have regard to the main functions of the taxpayer ([79]) and the extent to which other objective purposes were secondary.

59.	Article 17(5) deals with inputs “used…both for [taxable transactions] and for transactions in respect of which value added tax is not deductible.” The use of the word “used” suggest at first sight that a direct and immediate link of the input tax to one or more such outputs is required to be established before the input VAT may be put into the pot to be apportioned. However, in Abbey National Plc V CCE [2001] STC 297, the ECJ found that such a link to identified outputs was not required in relation to overheads. Such inputs were, it said, directly and immediately linked to the whole of the taxpayer’s businesses and therefore to all its outputs. Thus the pot of input tax to be apportioned under Art 17(5) includes both input tax which can be directly linked to both taxable and non taxable supplies but also that which is attributable to overheads.

60.	There is one further issue which arises in relation to Article 17(5). It is whether "transactions in respect of which value added tax is not deductible" includes non-economic transactions. In Securenta Gottinger Immobilienanlagen und Vermogensmanagement AG v Finanzamt Gottingen Case – 438/06, a case to which we were not directly referred but which was relied upon by the ECJ in the VNLTO case (see para 93 below), the court held that they did not. It said at [33]: "Articles 17(5) and 19 of the Sixth Directive relate to input tax on expenditure connected exclusively with economic activities, and distinguish between economic activities which are taxed and give rise to the right to deduct and those which are exempt and do not give rise to such a right. [34] In those circumstances, and so that taxpayers can make the necessary calculations, it is for the member states to establish methods and criteria appropriate to that aim and consistent with the principles underlying common system of VAT. ... [37]...they must therefore ensure that the calculation of the proportion of economic activities to non-economic activities objectively reflects the part of the input expenditure actually to be attributed, respectively, to those two types of activity." 

61.	As a result to the extent that the taxpayer's activities are non-economic an initial step is required to remove from the Article 17 VAT calculation any input VAT relating to those activities. The UK legislation does that in section 24(5) VATA. If however  transactions fall within Article 5(6) and 6(2), then Lennartz (see para 68 below) makes clear that they are to be treated as taxable economic transactions giving rise to the rights to bring into the account the related input VAT.

(b) taxable transactions

62.	Article 5 of the sixth Directive provides:-

“(6) The application by a taxable persons of goods forming part of his business assets, for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the components thereof was wholly or partly deductible shall be treated as supplies made for consideration…”

63.	Article 6(2) of the Directive provides:-

“(2) The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible.

(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than that of his business.”

Member states may derogate from this provision provided that such derogation does  not lead to distortion of competition.”

64.	Article 11 provides that the taxable amount in respect of supplies in Article 5(6) is the purchase price of the goods or absent such a price the cost price of the goods, and in respect of supplies under Art 6 the full cost to the taxable person of providing the service.

65.	These Articles raise, in the context of the SCR, the questions as to (a) whether the food provided therein to the Fellows was provided for private use or for the college’s business; and (b) whether, if the accommodation provided therein to the Fellows was provided in relation only to the supply of food or for other purposes, it was so provided for private use and not for the college’s business; and in any such case the extent of such use.

66.	In the context of the college as a whole the provisions raise the question as to whether any part of its goods were used, or any free services were supplied, for private use and not for the purposes of the college’s business.

67.	We were referred to three ECJ cases where these provisions were discussed.

68.	In Lennartz v Finanzamt Munchen III [1995] STC 514 a car was used by a trader partly for his private purposes and partly for the purpose of his business. He sought deduction of the input tax on the acquisition of the car. The UK had argued that only part of the input VAT was deductible namely that part corresponding to the business use of the car (see Advocate General [53]). The Court held that if the goods had been acquired by a taxable person in his capacity as such, the input tax was deductible in accordance with the rules in Article 17 which apportion between exempt and taxable use, and explained in para [26] that the private use should, in accordance with Art 6 be treated as a supply for consideration for the purposes of the appointment of his input tax under Art 17(2). In other words the private use is not used to reduce the eligible input tax but to assist in determining what taxable supplies are made for the purpose of apportioning that income tax between that part which is deductible, since it is attributable to taxable supplies, and that part which is not, since it is attributable to exempt supplies. We shall return to the interaction of this principle with that in Securenta later

69.	In Fillibeck (Julius) Sohne Gmbh & Co v Finanzamt Neustadt [1998] STC 513 a building company provided free transport for employees to their workplace. One question before the Court was whether the provision of this free service was a private supply otherwise than for the employer’s business purposes and thus a taxable supply within Article 6.

70.	The Advocate General recalled that the aim of Article 6 was “to prevent the 
non-taxation of business goods used for private purposes”, but thought that in exceptional cases and special circumstances a free supply could be found to be for business and not private purposes. In the particular circumstances the free transport was thought by him to be for the purposes of the employer’s business (or at least that it was possible for the national court so to find) and thus not a taxable supply. The factors the Advocate General thought relevant to this issues were:-

(i)	the employees’ places of work often changed from day to day. Employees were thus unable to exercise control over the length of their journey to work;

(ii)	the differing journeys meant the employer risked detriment if the employees were left to their own devices;

(iii)	the transport could thus meet the fundamental needs of the business;

(iv)	there was a collective agreement providing for such transport which was indicative of business purpose.

71.	The Court summarised the test to be applied by saying (at [34]) that Art 6(2) did not apply (so that there was no supply) when the circumstances were such that “the requirements of the business make it necessary for the employer to provide transport.”

72.	In Danfoss A/S and another V Skatteministeriet [2009] STC 701 two of the 
questions before the court concerned the provision of free meals by a company to business contacts and to staff, and the applicability of Act 6(2).The Advocate General thought that a lunch or sandwiches provided to business contacts in the course of a meeting to avoid the discomfort of hunger or the inconvenience of wasted time (and consequent inefficiency) involved in seeking other possibilities for lunch, should mean that the provision was for business purposes.

73.	In relation to the provision of food to employees, she suggested that 
analogously with a ‘necessary’ supply of transport, if an employer provided uniform or protective clothing which the employees had to wear by the nature of their job (and which they were not therefore free to choose), it was supplied for a business purpose. She continued:-

“53. Likewise, it is not normally part of an employer’s business activity to provide employees with free food and drink. Food and drink normally serve the employee’s private purposes. In eating and drinking they will usually be able to exercise a degree of choice comparable to that as to the clothing they wear. Again however, there may be circumstances in which the requirements of the job deprive the employee of that choice and indeed oblige him, for example to eat a set meal, which may not be entirely to his taste, at his place of work in the company of business contacts whom he is meeting or other employees with whom he is undergoing training. In such circumstances the employee will be complying with specific requirements which service principally the purposes of the employer’s business rather than his own private purposes. The provision of a free meal by the employer should therefore not be treated as an application for private use.” (Our italics).

74.	In this passage the Advocate General appears to be saying that the purpose of a free meal may be both for the private purposes of the employee and for the business purposes of the employer, but in determining whether Article 6(2) makes the supply taxable one should have regard to the weightier purpose: is it “principally [for] the employer’s business rather than his employees’ private purposes”? In addressing that question, the degree of choice offered to the employee is relevant to whether something is for his private purposes.

75.	That balancing act adds to the test in Fillibeck – namely whether the service was ‘necessary’ for the business – a test related to the choice afforded to the employee. The Court in Danfoss adopted the Advocate General’s identification of choice by the employee as a relevant factor as well as the identification of necessity from Fillibeck. It said:

“57. It is not contested that, normally it is the employee who 
chooses not only what he eats, but exactly when and, indeed, where he takes his meals. The employer has no say… Therefore the provision of meals to staff is generally for private use …within art 6(2)…”

“58.In certain circumstances, however, the requirements of the 
business may make it necessary for the employer to provide meals (see, by analogy…Fillibeck…)”	

“59. On the one hand….the meals at issue…are offered solely to 
staff in the context of meetings….the company’s interest in providing meals…in the particular context of company meetings lies in the fact that it allows the company to organise those meals in a manner that is both practical and efficient, by exercising control of where, when and with whom those working lunches take place.

“60...the…provision of meals allows the employer… to limit the 
reasons for which the meetings are interrupted. Therefore the fact that the employer alone is in a position to guarantee the meetings will run smoothly and without interruptions might oblige it to ensure that meals are provided…

“61. On the other hand… the meals consist of sandwiches and cold platters served in the meeting room…it is clear…that the employees have no choice as to where when and what they eat…

“62. In such particular circumstances, the provision of meals to 
employees by the employer is not for the private use of the employees and is not for the purposes other than those of the business. The personal advantage which employees derive from such provision appears to be merely accessory to the requirements of the business. ”[our emphasis].

76.	Thus the Court finds that lack of choice for the employee (other than 
we suppose the choice between cheese sandwiches and ham sandwiches), the control exercised by the employer, and the necessity to avoid interruption of the business mean that private use is merely accessory and the weightier use is that for the business.

77.	The provisions of Art 5(6) and 6(2) are enacted in domestic legislation in VATA Sch 4 para (1) and (4). Article 11 finds its domestic implementation in sch 6 para 6(1). It was not suggested that these provisions had an effect different from those of the Directive; we refer therefore hereafter only to the provisions of the Directive. However, sch 6 para 10 contains a provision for which a precursor is not to be found in the Directive:

“10(1) This paragraph applies to a supply of goods and services, 
whether or not for consideration, which is made by an employer and consists of -	

the provision in the course of catering of food or beverages to his employees, or 

the provisions of accommodation for his employees in a hotel, inn, boarding house or similar establishment

The value of a supply to which this paragraph applies shall be
taken to be nil unless the supply is for consideration consisting wholly or partly of money and in that case its value shall be determined without regard to any consideration other than money.”

78.	In other words if the college makes a free supply for “private” purposes of food or accommodation (of the right sort) to employees, then although it is a taxable supply, the consideration for it, and therefore the VAT on it, is nil. Mr Roger Thomas said that this provision explained the seeming oddity alleged by Mr Owain Thomas that all the VAT on the lunchroom was recoverable in the result of the college’s proposed methods: he said that if VAT had been payable on the deemed supply ( as the Directive required),  HMRC would have had no objection to full recovery of the input VAT. It was the operation of domestic provisions outside the scope of the scheme of the Directive which gave rise to the concern. We accept that that is correct if the supply of the meals is for “private “ purposes.

(c) The nature of the Tribunal’s jurisdiction in relation to special methods.

79.	In Banbury Vision plus Ltd v HMRC [2006] STC 1568, Etherton J held that the jurisdiction of the Tribunal in relation to an appeal against a refusal to approve a proposed PESM was not limited to considering whether the Commissioners’ decision was reasonable, but was a full appellate jurisdiction in the sense that the tribunal should decide whether the proposed a PESM secured a fair and reasonable attribution of input tax. This approach was followed in MBNA and also by Warren J in St Helens School. But Warren J added the following qualification (at [27]).

“This is not to say that the Tribunal is able to put forward its own 
version of a more reasonable special method (if there is one). It cannot do so…. If on an appeal…from a refusal of the Commissioners to allow a proposal special method the tribunal decides that the method is fair and reasonable and also that it is more fair and reasonable then the method in operation… the appeal should be allowed. But if the Tribunal thinks that both the existing method and the proposed method are unfair or unreasonable, it could not allow the appeal even if it considers that the proposed special method is less unfair and unreasonable than the existing method.”

80.	Mr Roger Thomas points out that the latter point of this passage was not necessary for Warren J’s decision: for he held in that case that the existing method was fair and was more fair and reasonable than the proposed method. Accordingly he says that passage is not binding upon the Tribunal. We accept his reasoning, but are not prepared to depart from this guidance.  

81.	In DCM (Optical Holdings) Ltd V HMRC [2008] STC 1294 the Court of Session accepted the common ground that it was not open to the Tribunal to put forward its own special method but said, at [16] that that conclusion did “not mean that the only alternatives open to a tribunal are to accept a proposal method… or to reject it outright.” Certain factual particulars such as the classification of certain areas could lead a tribunal to propose the modification of the proposed method “without departure from the proposed method as such”, and if the appellant was prepared to accept those changes the tribunal would be entitled to approve the method so modified. 

82.	It seems to us that the extension suggested by the Court of Session is not really very much. If for example residual VAT is under a proposal method, to be apportioned on the basis of the areas used for making taxable and exempt supplies in a shop, and the contention is that this area is in the ratio of, say 3:2, then a finding by the tribunal that the ratio is in fact 3:4 is not a variation of the method but the quantification of the application of the method and the appeal is in reality an appeal in relation to the amount of creditable input tax under section 83(c) rather than the method of appointment. It would be quite a different thing to say that the apportionment should be on the basis of say the ratio of staff engaged in each activity.

Our jurisdiction in relation to the SMON and regulation 102B

83.	Where a SMON has been approved by the Commissioners under Regulation 102C, regulation 102B applies. It provides:-

“Where this regulation applies, a taxable person shall calculate the difference between –

(a).	the attribution made by him in any prescribed accounting period or longer period, and

(b).   an attribution which represents the extent to which the goods and services used by him or are to be used by him in making taxable supplies,

and account for the differences on the return for that prescribed accounting period….”

The effect of this provision is that the net VAT to be shown as payable or repayable on the return will be that determined by “an attribution which represents” use of the inputs. The effect of the existing method will be evident in the return of this adjustment.

84.	In Loughborough University TC 00059, Richard Barlow held that the reasons stated in support of an application for approval for an override do not entitle the taxpayer to make the adjustment only in accordance with these reasons. It did not follow that every aspect of input recovery would be affected: that depended upon the facts – some aspects of the existing method might not be required to be changed. We agree. What Regulation 102C requires is a complete revisiting of the attribution of input tax and its recalculation on the basis of use. Whether some matters remain the same depends on the facts.

85.	It seems to us: that Regulation 102C affects the tax due, and in an appeal against tax due or input tax repayable the tribunal must therefore determine the figures on the basis of an appropriate attribution.

Discussion

Use of inputs for private and non-economic purposes

86.	The aspect of this appeal which we have found most troublesome relates to what we will call the research activities of the college.

87.	It seems to us that not all the activities of the college were concerned with the making of taxable and exempt supplies. This was suggested by the excess of expenditure on academic expenses over income from students and other supplies and was evident from:
(i)	the requirement that the Oxford and Cambridge Act 1923 makes that the statutes of the college have regard to the interests of education learning and research
(ii)	the appointment and support of Fellows who undertake to perform literary and scientific work or some course of research;
(iii)	the small proportion of time the Fellows spend in teaching, and the correspondingly larger amount of time we believe they spend in learning and research;
(iv)	Mr Montgomery’s evidence of the support offered to visiting Fellows who come to Oxford for a limited time to pursue some particular piece of research and who might, perhaps but only perhaps give a seminar during the course of their stay;
(v)	the maintenance of a chaplain and a chapel.

88.	Thus, alongside the supply of education, accommodation, food and beer, conference facilities and land and timber transactions, the college had material activities which were funded, broadly, by the endowment income of the college and which were not concerned with the making of supplies for consideration.

89.	Our concern is that these activities should be classified as non-economic activities. This was relevant in two respects. First, in relation to Articles 5 and 6, it could be relevant to the scope of the college's private and business purposes. Second, in relation to the total amount of input VAT which fell to be apportioned, it gave rise to a question as to whether some of the VAT that is sought be so treated is not attributable either to taxable or to exempt supplies since it is attributable to non-economic purposes. That question was relevant both in relation to the nature of the special method and to the determination of the appeal in relation to the SMON.

90.	In University of Southampton v  the Commissioners of her Majesty's Revenue and Customs [ 2006] EWHC 528 Warren J dismissed the university's appeal against the tribunal's finding that the publicly funded research (PFR) activity of the University was a separate non-economic activity from the university's other activities. The tribunal had held that the PFR activity was not a "business" activity (“business” was used in the judgement as a synonym for “economic activity”). As a result the university was not entitled to recover input tax by reference to that activity. We do not say that the college's position must be the same as that of the University of Southampton but that case indicates that at the least it may be possible that part of the college's activity may be non-economic.

91.	In paragraphs 12 to 17 of his judgement Warren J embarks on a discussion of the treatment of input tax attributable to economic and non-economic activities. He explains that once it is established that a person carries on some economic activities and some non-economic activities, a method is needed to deal with the input tax on inputs used for both. He notes that in domestic law section 24(5) dealt with the position by requiring such input VAT to be apportioned "so that only so much as is referable to his business [economic] purposes is counted as input tax" to be further apportioned between  taxable and exempt supplies. But he notes that this was subject to underlying EU principles expanded in cases such as Lennartz which were summarised by the advocate general (Jacobs) in P Charles and TS Charles-Tijmens v Staatssecretaris van Financien, (case C-434/03)  where two routes or systems were identified:

“the first route … "concerns the situation in which taxable person consumes, in his private capacity, goods or services which were initially treated as intended for taxable business purposes and on which the input VAT was thus initially deducted. Under the broadly parallel provisions of, on the one hand Article 5 (6) where the final consumption is of goods or, on the other hand Article 6 (2) …which involves services, he is in effect deemed to acting in a dual capacity as business supplier and private purchaser, so that he must account for output VAT on the ‘transaction’. 

“The second route (see paragraph 56) "is the pro rata deduction system governed by Articles 17 (5) and 19, where business makes both taxed and untaxed output transactions. The basic rule is that, calculated on a yearly basis, a fraction of input tax corresponding to the net value of taxed output transactions divided by the net value of all output transactions of the business is deductible." “.

92.	Warren J concludes in paragraph 17 that "one solution for a  "taxable person who makes use of a supply of both the purposes of his economic activity and also for other purposes is to allocate the whole to his business/economic activity: in which case he can deduct the whole or part of the input tax depending on whether or not he makes exempt as well as taxable supplies. Articles 5 (6) and 6 (2) then come into play in relation to nonbusiness use. But another solution in the case of mixed use is to carry out a business/nonbusiness apportionment along the lines of section 24 (5)."

93.	This summary however must now be read as modified by the subsequent judgement of the ECJ in the Securenta  case and in the later case of   Verenigning Noordelijke Land –en Tuinbouw Organisatie v Staatssecretaris van Financien [2009] STC 935 (“VNLTO”). We have explained the effect of Securenta at paragraphs 60 and 61 above. In VNLTO the taxpayer promoted the agricultural interests of its members in Holland. It received subscriptions towards this activity. This was a non-economic activity. But it also made supplies for consideration (an economic activity). It sought to follow the "first solution" described by Warren J. The Dutch court referred to the ECJ the question of whether goods and services other than capital goods (the subject of Lennartz) could be treated in this way.

94.	We find the reasoning, conclusions and implications of VNLTO to be rather like St John's Gospel: sometimes it makes sense and at others it dissolves. The Advocate General said paragraph 55 and 54:

“I therefore consider that use "for the purposes other than those of [the] business" as provided by Article 6 (2) of the directive cannot include any use for the purposes of the taxpayer's non-economic activities.

"That assessment does not prejudice the effectiveness of the expression "purposes other than those of [the] business" since this may extend to any use for private purposes by a person other than the taxpayer or members of his staff ...”

95.	Thus use for non-economic activities would not give rise to a supply within Article 6, and correspondingly, input tax on goods and services to the extent used  for non-economic activities would not be deductible.

96.	The Court (at paragraph 38) agreed that Article 6(2)(a) was not intended to establish a rule that transactions outside the scope of the system and VAT (non-economic transactions) might be considered to be carried out "for purposes other than" those of the business. It then said:

"39. It is also appropriate to state that unlike [Charles], which concerned immovable property allocated to assets of the business before being attributed, in part, to private use, by definition completely different from the business of the taxable person, the situation in the main proceedings in the present case relates to transactions other than [VNLTO]'s taxable transactions, consisting in safeguarding the general interests of its members, and not being considered, in this case, to be nonbusiness transactions, given that they constitute the main corporate purposes of that association."

97.	Correspondingly Article 17(2)  and Article 6(2)(a) were not applicable to the use of inputs "allocated to the business for  the purposes of transactions other than taxable transactions of the taxable person."

98.	In other words non-economic activities should be capable of being considered as business transactions (thus giving "business" for the purposes of Article 6(2) a wider meaning than "economic"). (Although the Court refers only to Article 6(2)(a) its reasoning seems equally applicable to the same words in Article 6(2)(b).) The effect is therefore that the “business” of a corporate entity for Art 6(2) purposes can extend to its non economic activities conducted in pursuit of its corporate purpose.

99.	This raises the question of what constitutes private use by a taxpayer. And the answer seems to be that which is neither economic use nor non-economic use in the course of a business.

100.	The effect of this reasoning on the summary provided by Warren J in Southampton is that there is a threshold question to be asked, namely: is this particular input to be used in whole or in part for a non-economic purpose (other than one falling in Art 5(6) or 6(2))? If the answer to that question is yes, then an apportionment must be done (under national law provisions to which Securenta refers) and the only input VAT which can then come into the Art 17 apportionment calculation is that attributable to the economic and private use of the input. (The right to bring into the calculation all such VAT on capital goods appears to be fully established by the decision of the grand chamber in Charles.).

101.	Therefore it seems to us that the proper order is this: 

Stage 1: determine whether any input is to be used in whole or part for a non-economic use (bearing in mind that a private use within Article 5 or 6 will not be treated as non-economic use). If so determine according to section 24(5) VAT Act the portion not attributable to such use (the economic and private proportion).

Stage 2 the taxpayer may then integrate into his business either the whole of the economic and private part of the assets or just the economic part. If he chooses the second course of action section 24 (5) applies again and the deductible amount is settled. If he chooses to integrate the whole then stage 3 needs to be considered.

Stage 3: Article 6 (or 5) applies. To the extent of the private and nonbusiness use (in the wide economic and non-economic sense),a  taxable supply arises. VAT may be chargeable.

Stage 4: the input tax attributable to the economic and private use must  be recovered in accordance with Article 17. Where the input is used for exempt and taxable economic business purposes a method needs to be sought determining the deductible proportion on the basis of the use of the assets of each of those purposes.

102.	Mr Owain Thomas said that the research activity of the college was not private activity, it was business activity within the corporate purposes of the college. But he said that the respondents would be happy for us to determine the appeal on the basis that the deductible fraction was applied to 100% of the input tax suffered.

103.	Mr Roger Thomas was content with the conclusion that research activity carried out by the college was business for the purposes of Article 6.

104.	We do not fully see the logic in Mr Owain Thomas’s agreement that we should seek to apply Article 17 to the whole of the input VAT. It seems to us that there should first be a Stage 1 apportionment if the use of an input is the use for a non-economic purposes, whether that be the furtherance of research or learning, or of “learning, sciences, sound theology, philosophy and good arts”.

105.	Mr Roger Thomas says that the Lennartz principle applies to the inputs to the SCR. He says that that case establishes that so long as there is some use of an input for an economic activity, member states are not permitted to restrict the deduction of input tax, and where taxpayer brings in the whole of the input tax (or in the language of the EEC cases: treats the input as integrated into his economic business for VAT purposes) the charge is to be made for his private use by reference to a deemed Article 6 or 5 (4) output. He says that the college's arguments on Lennartz are not, to quote his final submissions, "founded on the business or nonbusiness nature of its wider activity of advancing learning. They are specifically linked to the private use of the SCR made by its Fellows. And in this context it is not [VNLTO] but Fillibeck and Danfoss which alone are relevant. In the college's submission, save for overhead use made of the SCR in the form of governing body meetings (and committee meetings) the SCR is not used either for the purposes of supplying exempt education or for the purpose of the advancement of learning."

106.	It seems to us that Mr Roger Thomas's submission begs the question of the order of the stages required by Securenta. If there is no non economic use of the SCR, then all that remains is private or economic use, and Danfoss and Fillibeck will apply. But first it must be determined whether there is non-economic use. After that Danfoss. Fillibeck, and Articles 5 and 6 can be applied bearing in mind the meaning of “business” dictated by VNLTO, and the consequent restriction on the input tax to be brought into the Article 17 computation. His submission that the SCR is not used for the supply of education or the advancement of learning also avoids the question of whether it is used for non-economic business purposes of the college which could have as their ultimate aim the advancement of learning but which consisted of the mental and physical sustenance of its Fellows (and the creation of a community).

107.	What, in the VNLTO  sense, was the business of the college? In our view it was the activities it undertook to further learning, research and and education. Some of thoses activities were economic activities: for example the provision of tutorials and beer to undergraduate members of the college; others were non economic: for example the payment of stipends to support Fellows doing research. The college also supported and maintained its Fellows: that activity was in our view part of its business: that can be seen from its patent and statutes and from the expenditure of the college..  One aspect of that support was in our view the maintenance of  a collegiate body through the provision of free meals. That activity was therefore in our view part of its business.

108.	Mr Roger Thomas contended that the provision of free meals to Fellows was not for the purposes of, was not used for, the supply of education. We agree. In our view it was not used in making any economic supply by the college: it was used in the non economic activity of sustaining the fellowship. There was no direct link to the supply of education or ( save perhaps in the provision of free meals to the Bursar) to the supplies made of beer, of conferences or of land, or to the  overhead activities of the college associated with making economic supplies. The provision of free meals was not necessary for and did not improve those supplies, it was not reflected in the cost of making those supplies ( see para [60] Stattevereket v AB SKF  Case C-29/08); the link to such supplies was at most indirect (in this respect we agree with Mr Roger Thomas’ remarks in para 53 of his Closing Submissinos).

Is the provision of free meals to Fellows within Article 5 (6 )or 6?

109.	It seems to us that the provision of meals to Fellows was the supply of a service to them, rather than the supply of goods or the separate supply of goods and services (see Faaborg-Gelting Linien A/S v Finanzamt Flensburg [1996] STC 774). Accordingly the relevant provision is Article 6 (2) (b).

110.	It is clear that the services were carried out free of charge. The question is whether they were carried out for the college's private use or that of its staff or more generally for purposes other than those of its business.

111.	The first question is whether the Fellows are to be treated as the college’s staff for the purposes of this provision. Although the college consists of the principal and Fellows, and the terms of engagement of a  Fellow may be somewhat different from a normal employment contract, it seems to us that "staff" is intended to encompass persons who owe duties of personal service and receive financial support, and that the Fellows fell within that description.

112.	The next question is whether the supply was for the private use of the college’s staff or for the purposes of its business. Danfoss and Fillibeck indicate that if the provision was necessary for, or principally for, the purposes of the business it would not be for the private purposes of the staff. VNLTO indicates that "for the purposes of the business" includes not just the purposes of the economic activities of the taxpayer, but also the non-economic business activities.

113.	We have found that, in the VNLTO sense the business of the college was the activities it performed for the purposes of its objects of the advancement of learning, research and education, and encompassed therein is the provision for the Fellows of accommodation, emoluments and food as well as the provision of education. Mr Roger Thomas in his skeleton argument says that "the function of the SCR of the college is to accommodate those who are themselves beneficiaries of the foundation instrument of the college". Accommodating Fellows in this way is in our view, part of the "business"- the non-economic and economic activities - of the college, just as paying or accommodating them is. The business of the college, in the sense required by VNLTO, includes the making of provision for the sustenance of its Fellows.

114.	Thus the provision of free meals to Fellows was for a purpose of the business of the college.

115.	It may be possible, in reliance on VNLTO to stop here. Something done in the course of the non-economic activities of a business is not to be construed as being done "for purposes other than those of the business". The provision of free meals for Fellows is, in our view, a non-economic activity and therefore is not within the words "for purposes other than those of his business"; and the drafting of Article 6 (2), and the decisions in Danfoss and Fillibeck indicate that that phrase permeates and infects the phrase “private use”: accordingly the provision of meals will not be for “private use”. However, we shall also consider the Danfoss and Fillibeck tests.

116.	Danfoss and Fillibeck say that Article 6 applies to make such a supply of free meals a taxable supply unless the provision of the meals was necessary for the business or the private benefit was merely accessory to it. It seems to us that the provision of that service is a part of the requirements of the business of the college which consists in part of the sustenance and maintenance of its Fellows (and the creation of a community), and, that business is so constituted that the Fellows’ sustenance and maintenance is necessary to it, in the same sense that the provision of travel to work was necessary to Fillibeck’s activities. 

117.	In Danfoss the provision of food to employees was weighed and  determined to be accessory to the business. The consideration of the characteristics of the provision formed part of that weighing.

118.	In the college’s case there was some limited choice of lunchtime menu (salad rather than the set menu). It was a grander choice than the choice between cheese and ham sandwiches on a platter, but not in principle less limited. Dinner at high table took place at a time determined by the college. Lunch was more flexible. Fellows attendance was not compulsory, rather it was one of the advantages of Fellowship.

119.	We accept that Fellows eating together promoted the college life as it may have been the principal occasion on which Fellows from different disciplines met: the seating of one Fellow next to the Fellow who arrived immediately before him promoted community not cliques. It may well have been with these factors in mind that the college statutes provided for such meals, and we accept that a collegiate environment may make the college more attractive and promote its objects of advancing learning, science, theology, philosophy and good arts.

120.	If the business of the college was just providing education then we would not be persuaded that these benefits were enough to make the free meals merely accessory to the business of the college. But in our view the business of the college is not so limited. It extends to paying, accommodating, and sustaining its Fellows individually and as an academic community. It does that for the purpose of learning and research, but its business is the way in which it accomplishes those purposes. On that view, feeding the Fellows is no more "merely accessory" to its business than paying them. The advantages which accrue from a collegiate atmosphere and from accommodating and paying Fellows are the reasons why these activities are part of the college's business and are not in ancillary to it.

121.	Mr Roger Thomas says that in Danfoss the ECJ indicated that [57] that, in normal circumstances the provision of free meals for staff is a taxable supply, and only where the provision is necessary for the business, or the employer is obliged to provide the free service, and where the benefits to the employee are merely ancillary to the business can there be no taxable supply: those criteria were not satisfied. But in our view the activity of the college - it's non-economic business - included the activity of sustaining its Fellows. The college is not like a factory producing widgets which has a works canteen. The business of the factory is selling widgets, not providing for its staff. The college’s business is different.

122.	We therefore conclude that the provision of free meals does not give rise to a supply within Article 6.

123.	We also conclude that to the extent of the improvements to the SCR building were used for the purposes of the noneconomic part of the business of the college, the related input VAT must be disallowed before any calculation is made under article 17. The article 17 attribution (and thus any partial exemption special benefit) must apply to the remaining part of the input tax and apportioned between the part attributable to the exempt and taxable activities of the college.

124.	The first conclusion in the preceding paragraph gives rise to another issue. Having excluded from the computation such input VAT as relates to the nonbusiness activities of the college, should we then consider the application of article 6(2) by reference to the economic business of the college? If free meals were provided to A whose only  activity was non-economic research, and also to B whose only activity was supplying education on behalf of the college, then (on the basis that article 6 (2) (a) applied because there was a portion of the input VAT on goods which was  wholly or partly deductible) and one would properly consider the Danfoss and Fillibeck tests in relation to B. It thus seems equally proper to consider whether part of the meal supplied to a fellow who was engaged in both noneconomic research and also the provision of economic education should be treated as supplied for economic purposes within article 6 (2). In other words, ignoring the input VAT attributable to noneconomic purposes, and ignoring the noneconomic purposes the business, what should ask whether part of the benefit of free meals was applied for the purposes of the educational business of the college. Asking that question serves the neutrality which article 6 seeks to achieve.

125.	In this case, however, we consider that the provision of free meals is almost wholly for the purposes of the noneconomic activities of the college. The provision is not in our view used in supplying education or in any other economic activity. As a result in most cases the second stage of the analysis suggested by the preceding paragraph does not arise.

126.	We say "almost wholly". That is because Mr Montgomery explained that some academics who teach for the college and were not Fellows were offered free lunches. That provision appears to us not part of the non-economic activity of the college nor merely ancillary to the provision of education.

127.	Lastly under this heading we note that we considered whether our conclusion would have been different if each fellow had been required to pay, say, 25p for his meal. In that case there would have been taxable supplies by the college and the lunchroom would have been used to make them. However, it seems to us that, unless full value were paid, the use of the lunchroom would not simply be for making that supply: the undervalue would reflect the use of that lunchroom as part of the noneconomic provision for Fellows.

128.	If we were wrong in our conclusion that none of the provision of free meals to Fellows was for the purposes of the educational business of the college, then in our view a taxable supply would arise under article 6 in relation to that part of the supply of the meal which could be treated as preferable to that activity. The effect would be that the input VAT referable to the economic activities would be apportioned with regard to that taxable supply.

What taxable or exempt "use" was made of the inputs to the SCR?

129.	As we have noted above one use of the SCR (and of its improvements) was in the non-economic business of the college in sustaining its fellowship. The remainder of this section deals with other uses and is relevant to the apportionment of the input VAT remaining after disallowing that attributable to noneconomic business use.

	(a) the guest bedrooms

130.	The improvements relating to the guest bedrooms are in our view directly and immediately linked to the supply of accommodation in those bedrooms. The costs are a component of the cost of supplying those rooms.

131.	Are those costs directly and immediately linked to any other supply by the college? The rooms are used for Fellows’ guests who are generally academics. These guests’ presence may enhance and sustain the learning education and research done by the Fellows. But the link to any educational supplies made by the college- or to any other of its taxable supplies -- is in our view neither immediate nor direct. It is uncertain, contingent and, unless that guest has provided a lecture or a seminar to those whom the college educates, more than one step removed from the provision of education. We could not say that it was “sufficiently direct”.

(b) the kitchens

132.	The kitchens on the ground floor of the SCR are used to provide food for high table and the lunch room. The college makes a taxable supply of food when guests’ meals are paid for. There is clearly a direct and immediate link to the provision of food to such guests. The same applies when private dinners are held which are paid for. The same applies in relation to the provision of paid-for drinks and beverages. 

133.	Is there a direct and immediate link to any other use of the kitchens? There is some link to education provided by the college but as we have explained it is,in our view, an indirect link: through the provision of food educators may be attracted who will teach and who may teach well. But it is not sufficiently direct: see para 107 above There is not a direct and immediate link to the provision of education or to any other economic activity of the college.

134.	The position in this respect is different from that in St Helen's. In that case Warren J said that the sports complex was used for the purposes of the school's business because the availability of the complex was part of the package of benefits which is provided to parents for the fees they pay and which constituted the exempt supply of the school. The use made by the school of the sports complex was its use in providing that package of services. In this case, by contrast, the use of the kitchens for the Fellows is not part of the package which is provided to those who are being educated; it is instead part of the college's provision to its Fellows. Mr Owain Thomas suggested that the experience of a High Table was part of the Oxford experience which was being supplied as part of the educational supply by the college. The kitchens were used in making that supply. We do not think that the provision of food to Fellows at High Table can properly be called a component of the cost of the supply of education made by the college.

(c) the lunchroom

135.	In the lunch room food is consumed daily and sometimes the governing body meet. Of what taxable supplies if any do the costs of this room (or its supply and maintenance) form a component cost? We have found that there is generally no taxable supply of free meals. Is there a direct link between the provision and maintenance of the lunch room and the meals supplied to a paying guest? The environment in which a meal is eaten is a component part of the service supplied, for what is supplied is a meal in the SCR, not a takeaway chip butty: in our view the cost of providing that environment is a component part of the provision of that paid for meal.

136.	Is there a direct and immediate link of the input relating to the lunchroom with any other supply? On the evidence before us the answer was no. For the same reason that the provision of food to the Fellows was not directly and immediately linked to taxable and exempt supplies by the college, the availability of lunchroom did not seem to us to be so linked.  Further the use of the lunchroom by the governing body did not provide a direct and immediate link to any particular supply by the college.

(d) other areas

137.	There are other rooms in the SCR. Some used after meals for desert and drink, some were used for committee meetings, at other times they were available for use by Fellows.

138.	We do not see a direct and immediate link between the cost of providing these rooms and the educational or other taxable and exempt outputs of the college. The use of a room within the SCR by a Fellow might or might not enhance his teaching or contribute towards it: the comparison with the use of a room to teach in, or for a conference, where the link is clearly direct, and the cost of provision of the room is a cost of the supply, illustrates the difference between a direct link and the link in this case.

139.	It seemed to us that the economic component of the use of these rooms related to the whole of the economic part of the business of the college and therefore that the related costs were overheads.

(e) summary

140.	The remaining part of the SCR were the lobbies, corridors, stairs, lifts and lavatories. These served the parts of the SCR of which we have spoken above. There was on the evidence before us no direct and immediate link other than those described above in relation to the parts they serve between their provision and the taxable and exempt supplies of the college.

141.	Thus, leaving aside non economic business use, we see direct links between the provision of the improvements to the SCR ( and of the SCR) and (1) accommodation and (2) paid for meals and drinks, but only indirect links to the remainder of the college's taxable and exempt supplies.

The existing special method

142.	Both HMRC and the appellant agreed that this method is not fair and reasonable. The method is plainly unfair and unreasonable. The recoverable residual tax is independent of the level of actual input tax: the amount recoverable is 14.9% of the output tax without regards to the actual input suffered in a particular period; there is a de facto cap of £10,000 regardless again of the actual residual input tax for period. Neither of these factors link to the use made of the inputs or to their amount.

The proposed PESMs

143.	Each of the proposed PESMs calculated a portion of input tax on the SCR project which was to be treated as recoverable, and then treated the remainder is residual to be apportioned according to a method applicable to the majority of the college's residual input tax. In each case the recoverable proportion of the SCR input tax was determined by treating all its use as taxable save that relating the governing body meetings.

144.	In our judgement each of these proposed methods suffered from the following defects:

(i)Stage 1 at paragraph 101 above was ignored: all the input tax on the SCR was put in at the beginning of the sausage machine. No consideration was given to whether or not it should be reduced under section 24(5) by a fraction representing non-economic business use of the SCR.
(ii)The treatment of governing body use as being the only non-taxable use ignored the use of rooms other than the lunchroom for purposes other than the taxable supply of food, namely the support of the other (economic and non economic) activities of the college. The SCR was not just used for supplying food, accommodation and accommodating governing body meetings; it was in our view a resource used to support all the activities of the college.
(ii) each method treated the provision of free meals to the Fellows as a taxable supply. In our view it was not. 

145.	These defects make all the proposed methods unfair and unreasonable in our view.

Determination of the PESM appeal

146.	As we do not consider that any of the PESMs are fair and reasonable we dismiss the appeal in relation to them. The methods are not in our view capable of the kind of modification suggested by the DCM  case.

The SMON appeal

147.	Regulation 102 C requires a complete revisiting of the input tax calculated on the basis of use. The voluntary disclosure of March 2004 purported to be a calculation on the basis of use. The appeal against the refusal of HMRC to accept that disclosure is in our view an appeal within section 83 (c) in relation to "the amount of any input tax which may be credited to any person". In determining such an appeal it seems to us the tribunal must determine the amount which should be credited.

148.	The evidence before us does not enable us to make a precise calculation. Mr Roger Thomas admits that if the tribunal can identify the manner in which that calculation should be done it should do so and adjourn to the parties to agree the figures (and in default to return to tribunal).

149.	Mr Owain Thomas suggested that this was impossible because the college had not led evidence as to each and every item of expenditure or its use made by the college. Mr Roger Thomas says  regulation 102B only requires the calculation to be carried out on the inputs whose use is not fairly and reasonably represented by the existing method. We disagree. The reference in regulation 102B to "the goods and services" is a reference back to that same phrase in regulation 102A which is a reference to all the taxpayer’s goods and services not just those which are affected by a proposed method. Further, he says, in the present case the college made no attempt to recover any amount by means of a partial exemption calculation other than the sums relating to the SCR construction works included in the voluntary disclosure. As a result a determination of that amount of VAT is possible. There is something in this: if we determine the appeal by determining the amount of allowable SCR VAT and ignoring other residual input VAT recovery, by determining it to be zero, we would do so on the basis that there was no evidence that there was such other VAT or as to what portion should be allowable.

150.	However we have reached  conclusions different from those advocated by either of the parties. In order to put our conclusions into practice and to consider what input VAT should be allowable, further evidence not originally expected by either party may be necessary. In such circumstances we do not believe it would be fair to determine the appeal merely by finding that, because the onus was on the Appellant to set aside the Respondents’ computation, that onus had not been discharged. We therefore adjourn the appeal on this issue with leave for the parties to seek a further hearing to settle it.

151.	We offer the following as a guide to the parties. In relation to determining the use made of the SCR inputs and accordingly the attribution of input tax, the following method may provide a foundation for an apportionment of input tax on the basis of use: --

(i)   determine the costs (including the relevant part of the common parts) attributable to guestrooms. Treat the  Input tax as deductible.;
(ii)determine the costs attributable to the kitchens. The noneconomic use of the kitchens consists of their use in providing free meals for Fellows; the economic (and taxable use) consists in the provision of paid for meals and meals to persons other than the Fellows who teach for the college. Apportion the related input VAT on the basis of the relative numbers of such meals, treating the portion that is attributable to Fellows (X) as not deductible (under section 24(5)), and that attributable to others (Y) as deductible. The remainder is allowable because all paid for meals and meals provided to persons other than Fellows are taxable supplies.
 (iii)determine the costs attributable to the lunchroom. Treat as allowable the proportion P/Q x Y/(X+Y), where X and Y are as above and P is the total time breakfast, lunch and dinner are available in the lunchroom and Q is the sum  of P and the time taken for the governing body meetings. Treat P/Q x X/(X + Y) as attributable to non-economic use. Treat the balance as residual.
(iv) determine the costs  attributable to the remaining rooms. Reduce by the proportion attributable to non-economic use. One way to do that could be to apportion use in the ratio of the college’s expenditure in making economic supplies to that used in providing support for the other activities of the college. Treat the balance as residual.

CHARLES HELLIER
      TRIBUNAL JUDGE
      RELEASE DATE: 11 March 2010