[2010] UKFTT 176

TC00481

Value Added Tax  -  whether supplies for no consideration, alleged to be outside the course of the Appellant’s ordinary business activities, should occasion any denial of input tax  -  Appeal allowed

FIRST-TIER TRIBUNAL				Reference no:  LON/2009/0689

TAX

BRITISH DENTAL ASSOCIATION
Appellant

-and-

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

(Value Added Tax)

Tribunal:  HOWARD M. NOWLAN (Tribunal Judge)
RUTH WATTS DAVIES, MHCIMA, FCIPD

Sitting in public in London on 1 March 2010 

Philippa Whipple, counsel, for the Appellant
Richard Smith, counsel, for the Respondents

©CROWN COPYRIGHT 2010 

DECISION

Introduction

1.     This was an interesting and somewhat difficult case, revolving entirely around a legal point.    The facts were simple, and those that were material, simpler still.

2.      The Appellant is a mutual association targeted at, and providing various services to, dentists, retired dentists and dental students.      It is not compulsory for anyone, even dentists, to join.   Its services for VAT purposes include standard-rated services (including the provision of conferences and seminars) as well as services provided in exchange for membership subscriptions that are exempt. 

3.      The Appellant admitted dental students at universities to membership without charging them subscriptions.    The reasons for this were all commercial.   It was easy to attract dental students to membership when they were all congregated at universities, provided at least that membership was then free.    By attracting them to membership, there were then two benefits.    Firstly, they would be likely to remain paying members when they qualified.    Secondly the Appellant would have their contact details.   It would, by contrast, be far more difficult to locate qualified dentists, practising all over the country, and attract them as members if the Appellant only sought to do this once they had left universities and qualified.   

4.     It was common ground between the parties that the deductible input tax would have to be attributed between taxable and exempt supplies.     The dispute revolved solely around the issue of whether the provision of free membership to dental students was “a non-business activity”, to which part of the input tax should first be allocated and thus disallowed.    This is how the Respondents’ case was framed in its Statement of Case.   In the Respondents’ Skeleton Argument, and as the case was argued before us, the Respondents’ argument was advanced on the wider ground either that the provision of free services was inherently a non-business application, or that, as a quite separate principle, input VAT incurred in respect of services received that were used in part to provide services for which no consideration was charged also had to be disallowed in part.      It was suggested by the Respondents that approximately 13% of members were the students who paid no subscriptions and so it was suggested that, prior to the later attribution between taxable and exempt supplies, 13% of the input tax should be disallowed as being allocated to the provision of services for no consideration, which were thus outside the scope of VAT. 

5.     Our decision is simple.    We have absolutely no hesitation in saying that the provision of free membership to dental students is a provision within the compass of the Appellant’s one business.    We also conclude that there is no VAT principle, either in the Directives or in UK law, that requires a provision of free services, inherently made in the course of the undertaking of the one business, and given on very sensible commercial grounds, as requiring any disallowance of input tax.  Accordingly this Appeal is allowed.    

6.     We were greatly assisted in this case by the production of two excellent Closing Submissions by the two counsel.     These have been very helpful in weighing up the competing arguments and in interpreting the various authorities that had been quoted to us, none of which appeared to have been directly in point.   We might add, somewhat perversely, that the only authority that appears to be directly in point is the decision of Stephen Oliver QC, now Sir Stephen Oliver, in the case of The Imperial War Museum v. Commissioners of C&E (1992) VATTR 346, not referred to in argument, where the Commissioners lost precisely the argument that they have re-run in this case.   The statutory provisions, and the relevant Regulations were then in slightly different form, though it seems to us that they were to identical effect, and our decision is precisely in line with the decision in that case.   We will however explain our decision by reference to the current provisions, by reference to European case law, as well as by reference to the decision in The Imperial War Museum case. 

7.    Finally, by way of introduction, we mention two points on terminology. 

8.    Where a taxable person conducts business and non-business activities, it is common ground that input tax must be divided between the two.   Under section 24(5) VAT Act 1994, there must be an apportionment of the VAT in relation to supplies received between the business and non-business uses, and the correct terminology is then that “only so much [of the total input tax] as is referable to [the taxpayer’s]  business purposes is counted as his input tax”.   Thereafter, if the taxpayer renders taxable and exempt supplies in the course of the business, section 26 and the Regulations sub-divide that input tax.   We will refer to the first exercise of allocating between business and non-business use as one of allocation, and although the following would not be the normal terminology for the entire process of subdividing input tax between taxable and exempt supplies, we will refer to the division of input tax between taxable and exempt supplies as one of attribution.    

9.      As a separate matter of terminology we will use the expression “supply of services”, only in its VAT meaning of a supply for consideration.    We accept that it could sensibly be said, as a matter of ordinary language,  that the Appellant supplies services to the student members for no consideration, but where we are referring to a provision of services for no consideration, we will always use the phrase “provision of services” , rather than the technical VAT phrase of a “supply of services”. 

The evidence and the facts in more detail

10.     Uncontested written evidence was given by Richard Shilling, finance director of the Appellant.   This explained to us the points already mentioned in paragraph 3 above, which we consider to be absolutely self-evident.    The evidence summarised how there had been discussions in a Concession Working Group in 2005 to examine the concessions available to various categories of member.    The Group had concluded that it was vital to continue providing free membership to students, because very few would join, while at university, if there was a membership fee, and it would be very difficult to recruit them later, once they had left university and taken up practice anywhere in the country.   The Group concluded that the provision of free membership to students was “the Appellant’s investment in the future”.   

The acceptance by the Respondents that it was commercially sensible for free membership to be provided to students

11.     HMRC accepted that it was commercial for membership to be provided for no consideration in this way, though it was still contended that the provision of free membership was not a provision “in the course of the Appellant’s business”.    It was never clear to us whether this contention resulted from an argument that:
•	in general terms, the free provision of membership, whilst commercially driven, should nevertheless be said not to be provided, in the ordinary usage of the term, “in the course of the Appellant’s business”;
•	or whether there was a contention that the Appellant was conducting a business, and a separate non-business activity of providing free membership to students; 
•	or whether there was a VAT principle that, whatever the realistic construction of the facts, the provision of services without consideration was invariably to be treated as the provision of services, outside the ambit of the Appellant’s business; 
•	or finally whether, ignoring the business/non-business argument, input tax was to be denied anyway, because input tax used in the provision of free services that were not within the charge to VAT was invariably disallowed. 

Our findings of fact

12.     We think that it will be clearest to give two findings of fact first before turning to the more technical contentions of the parties on the legal points.   We accept that our findings of fact are findings of part fact and part law. 

13.      We accept first that the Appellant conducted only one business.    There have of course been cases where the courts have concluded that a taxpayer was conducting both business and non-business activities, and where indeed a hallmark of the non-business activities may very well have been that there was strictly no consideration for the services that were held to have been conducted in the non-business fashion.   

14.     In the present case, the services provided to the student members were the same as the services supplied to the fee-paying members and it is impossible to conclude that the Appellant was conducting two separate activities, one being a business and one being a distinct activity. 

15.     The facts of The Imperial War Museum case are relevant in this context.   In that case, the Trustees of the Museum amassed a display of British war memorabilia, to which the public were admitted.    The public were charged for admission, but school parties were admitted free, and anyone was admitted free on Fridays.    There were fairly marginal business ends still achieved by admitting people free, in that it was likely that they would buy refreshments, and possibly goods from the museum shop, and their admission would also increase the publicity achieved by the Museum’s sponsors.    Nevertheless, the Commissioners contended that the provision of free admission was not in the course of the business, albeit that they accepted that the overall activity, and all admissions for payment, constituted a business.

16.    The Tribunal concluded that the Trustees conducted only one business, and they also concluded that the provision of the free admission was an act performed in the course of the conduct of that one business. 

17.     The Imperial War Museum case appears to be identical to the present case in this respect, and we conclude that it is impossible, in a general sense of the phrase, to conclude that the present Appellant was doing anything other than conduct one single business. 

18.     We also adopt the conclusion and the reasoning of the Tribunal in The War Museum case for the proposition that the grant of free membership to dental students was an integral, and highly sensible, act in the course of the conduct of that one business.    The only difference between the two cases is that the present case is much stronger.    The only commercial benefit of granting free admissions on Fridays in the earlier case, was that the Trustees might make some profits from providing refreshments, and selling a few goods in the shop.    In the present case, we accept the argument that it was absolutely vital to maintaining high levels of membership that free membership should be provided to dental students. 

19.     We agree with counsel for the Appellant that this case is no different from that where banks give free banking services to students, or where many suppliers of services might give free introductory offers to new customers.   All of those provisions of service are made in the course of the conduct of the one business.  The Respondents might have found it easier to accept the point if matters had been expressed along the lines that new members would have three years of free membership, and would thereafter pay if they remained members.    That nevertheless is the reality, and so our findings of fact, or mixed fact and law, are that:

•	the Appellant conducted only one business;
•	it did not, in the normal usage of the phrase, conduct any distinct activity that might be a non-business activity; and
•	the provision of free membership was a commercially sensible introductory offer made entirely for business purposes, and made to foster the Appellant’s one and only business, and thus made in the course of that business. 

The scope of this Appeal

20.      The Appellant’s counsel made the very fair point in her written Closing Submissions that, since the Respondents had not sought to amend their Statement of Case, but had only advanced wider arguments in their Skeleton Argument, and in the course of the hearing, it would be open to us to decide the case solely on the basis of whether the contentions in the Statement of Case justified dismissing the Appeal.   Were we to have followed this suggested course, we would unquestionably have allowed the appeal.   It appeared rather unconstructive, however, to ignore the legal arguments advanced in the Respondents’ Skeleton Argument, and in the hearing, to all of which the Appellant’s counsel had responded fully, and not therefore to deal with the points on which the right answer in this case must actually revolve.    We are accordingly proceeding on the basis that we should consider every contention made by the Respondents. 

The law

21.     We will refer below to the provisions of the relevant Directives, and the ECJ cases that have been advanced in argument, but will confine quotations of the relevant law at this stage to the provisions of the UK legislation.

22.     Section 94(2) of VAT Act 1994 provides that:

“Without prejudice to the generality of anything else in this Act, the following are deemed to be the carrying on of a business – 
(a)	the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members;”

23.      Inserting the definition of the term “supply” contained in section 5(2)(a) of VAT Act 1994 into the preceding section, section 4, which deals with the “Scope of VAT on taxable supplies”, section 4 reads as follows:

“4 (1)  VAT shall be charged on any supply of goods or services [for consideration that is] made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2)	A taxable supply is a supply of goods or services [for consideration] made in the United Kingdom other than an exempt supply.  

24.     There are other provisions that deem certain provisions of goods and services for no consideration to be supplies made for deemed consideration.     We are not presently concerned with those provisions because no contention was advanced along the lines that any of them was relevant.   Where they are relevant, their effect is of course the broad equivalent of input tax referable to the provision of goods and services for no consideration being disallowed in the first place. 

25.     It was common ground in this case that the provision of free membership was outside the scope of VAT, and there was no possibility of VAT being charged on an output, geared for instance to treating that provision of membership as a supply of services for deemed consideration. 

26.     The first provision dealing with input tax and output tax is section 24 of VAT Act 1994, which provides shortly that:

“Subject to the following provision of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say-
(a)	VAT on the supply to him of any goods or services;
(b)	………
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”

27.     Section 24(5) deals with the situation where a person receiving goods or services, subject to VAT, conducts a business and some other non-business activity.   It provides that:

“(5)  Where goods or services supplied to a taxable person ………… are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies, acquisitions and importations shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax”. 

28.     It follows from section 24(5) that if a trader incurs expenditure of £117.50 on receiving a service, and that service is used, as to 50% in enabling the trader to supply its own services, and, on the other hand, as to 50% in the free provision of a service outside the ambit of the business or in being applied for personal use or the use of the trader’s staff, the trader’s input tax will be only half of the £17.50.     This example glosses over the presently irrelevant issue of how precisely to allocate the initial input tax between the business utilisation and the non-business utilisation, but the example is nevertheless sufficient for present purposes. 

29.     Section 26 and the VAT Regulations 1995 then deal with the attribution of input tax between taxable and exempt supplies.      Section 26(1), coupled with section 26(2)(a) provides that:

“(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to [taxable supplies].”

30.     It is self-evident that where the trader used the acquired goods or services partly for business purposes and partly for other purposes, the reference in section 26(1) to input tax is to only that proportion of the original input tax that results from the apportionment made by section 24(5).    It is also important to note that the definition of “taxable supplies” is effectively “supplies for consideration of goods or services made in the United Kingdom other than exempt supplies”, as a result of the definitions already quoted from section 4(2) and 5(2)(a). 

31.     Turning to the Regulations, Regulation 100 effectively re-affirms the allocation of input tax between business supplies and any use “other than in the course or furtherance of the business”, already dealt with by section 24(5).   It provides that:

“100.     Nothing in this Part shall be construed as allowing a taxable person to deduct the whole or any part of VAT on the importation or acquisition by him of goods or services where those goods or services are not used or to be used by him in making supplies in the course or furtherance of a business carried on by him”.

32.     Regulation 101 is then the familiar Regulation dealing with “the attribution of input tax to taxable supplies”, which thus deals with the attribution contemplated by section 26(1).    It provides as follows:

“101   (1)  Subject to regulation 102 [and 103B], the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation. 
(2)	In respect of each prescribed accounting period –
a.	goods imported or acquired by and … goods or services supplied to, the taxable person in the period shall be identified;
b.	there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies;
c.	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
d.	there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.” 

The contentions on behalf of the Appellant

33.      It was contended on behalf of the Appellant that:

•	the Appellant was deemed to be conducting a business by section 94, and there was nothing in section 94 that invariably treated the provision of services for no consideration as being made outside the course of that business;
•	as a matter of evidence, and straightforward analysis as to what activities were naturally made in the course of the business of the Appellant, there were compelling business reasons for free membership to be provided to dental students at universities, and that provision was accordingly made in the course of the Appellant’s business; 
•	the Appellant was conducting no activities outside the scope and compass of its business and so no apportionment of input tax fell to be made under section 24(5) VAT Act 1994;
•	it followed that the whole of the input tax suffered was the Appellant’s input tax; 
•	once this was determined, the recoverable percentage of input tax was reached by determining the ratio that taxable supplies bore to all supplies; and finally
•	it was incorrect to invent a category of “non-supplies” or “supplies outside the scope” when carrying out the attribution exercise.   Once the whole of the input tax had been analysed to have been incurred for business purposes, the only issue was to establish what was the appropriate percentage for recovery.   Account was not to be taken of activities which could have been charged for but were not.    Account was simply to be taken of the ratio of taxable supplies (i.e. non-exempt supplies) to total supplies, both expressions “taxable supplies” and “total supplies” plainly referring to supplies of goods or services for consideration. 

The contentions on behalf of the Respondents

34.       It was contended on behalf of the Respondents  that:

•	section 94, quoted above, not only deemed an association providing services for a consideration to be doing business, but implicitly deemed the provision of services by the association for no consideration to be services rendered in an activity outside “the course of that business”;
•	the provision of free membership was not a taxable supply and it was not a supply made in the course of business because it was made for no consideration;
•	the right to deduct input tax was available to taxpayers only insofar as that input tax was incurred on expenses which had a direct and immediate link to taxable supplies, or, in other words, were cost components of those supplies; so that
•	it was necessary to apportion the input tax, and to disallow 13% of it, as being referable to the provision of supplies for no consideration. 

Our decision

The section 94 point

35.      The plain purpose, and effect, of section 94 is to deem mutual associations and the other quasi-entities dealt with by the section to be conducting a business, and to counter the feature that many would only be sharing costs amongst members such that they might be said not to be conducting a business.    When it is clear that more usual taxable persons could in some circumstances provide services for no consideration without that provision being taken to be an act “outside the course of the business”, it would be very strange if the organisations dealt with by section 94 were to be placed in a different position.   It is equally clear that nothing in section 94 actually says that a provision of an incidental service for no consideration by one of the organisations covered by the section should be deemed not to be made in the course of that business.     We accordingly conclude that the Appellant’s counsel’s contention in relation to section 94 is correct.   There is nothing in section 94 that leads to the conclusion that incidental services provided for no consideration by this Appellant in what the Respondents accept to be an activity that generally constitutes a business, are uniquely deemed to be non-business activities. 

The general issue of whether the Appellant, in providing membership for no consideration, is acting in the course of its one business, or whether, as a matter of ordinary terminology, it is embarking on some distinct non-business activity

36.      We have already dealt with this point in paragraphs 12 to 19 above.    We of course accept that on appropriate facts, the type of organisation dealt with by section 94 might conduct a business and also a non-business activity.   And a hallmark of that non-business activity might be that services were provided for no consideration, or were funded by say compulsory subscriptions or government grant.   In this case however, we simply repeat the three conclusions given in the bullet points in paragraph 19 above. 

Apportionment 

37.      Before reaching the now seemingly obvious conclusion that no business/non-business apportionment is now required under section 24(5), with the result that the whole of the Appellant’s input tax remains “its input tax” when next dealing with attribution under section 26 and the Regulations, we should consider whether there is any provision or case law authority that actually deems provisions of service for no consideration to be a non-business activity.   

38.     We conclude that there is no such provision or direction.   Although the Respondents argued quite correctly that services provided for no consideration were generally outside the scope of VAT, we consider that they then made an unexplained and unwarranted “jump” when they then asserted that services provided for no consideration were automatically provided in a non-business activity.   No provision or authority was quoted for this proposition and we conclude that there is none. 

39.     We are not strictly bound by the decision in The Imperial War Museum case but we certainly note that Sir Stephen Oliver came to the conclusion that we have reached in this case, on the “non-business” or “other purposes” argument.    The following extracts, quoted from page 353 of the report summarise the approach taken in that case:

“It is also relevant to restate the fact that the business is conducted in the same way with the same running expenses (with the possible exception of depreciation) and the same facilities being made available whether the visitor is paying for his admission or is entering free of charge.    ……

The whole of the input tax on the goods and services comprised in the general overheads “counts” as the Trustees’ input tax, to adopt the word used in section 14(4).    It was all input tax used or to be used for the purpose of the Trustees’ business: it was not used or to be used “partly for other purposes”, i.e. for purposes other than their business”.

Section 14(4) was of course the equivalent provision to what is now section 25(4). 

40.     The only difference that we can see between the earlier case and the present case is that the commercial and business case for providing free membership to dental students in this case is much stronger than the business rationale for admitting visitors to the museum on Fridays for no charge.   The point advanced in this case is that the free admission of student dentists is required to ensure that membership numbers amongst qualified dentists remain high, and if that is the very understandable judgment of the Association, which set up a Working Group to consider this issue, it is unacceptable for the VAT authorities to advance the unjustified proposition that the provision of free membership is some sort of extraneous non-business activity. 

Attribution

41.     Having established that the Appellant’s input tax is not to be taken to be reduced by section 25(4), the next exercise is to allocate that input tax between taxable and exempt supplies.    Section 26 commences by marginally confusing this point in the present context by providing that “the amount of input tax for which a taxable person is entitled to credit …… shall be so much of the input tax …… as is allowable by or under regulations as being attributable to …… taxable supplies”.

42.      Since the provision of free services to student members are obviously not “taxable supplies”, it might be inferred that some of the input tax should be disallowed as not being attributable to “taxable supplies”.     It is still necessary, however, to consider the Regulations in order to assess how much input tax is indeed to be attributed to “taxable supplies”, and the effect of Regulation 101, quoted above is to attribute the whole of the input tax to taxable supplies.  

43.     The change of one word in the Regulations that Sir Stephen Oliver had to consider in The Imperial War Museum case and the Regulations that we must now apply, is of some significance.    In what are now Regulations 101(2)(b) and (c) the word “exclusively” has been substituted for the word “wholly” that was in the Regulation that Sir Stephen Oliver had to consider.     Sir Stephen’s reasoning in The Imperial War Museum case was that the whole of the input tax was “wholly” used for the purposes of making taxable supplies within the meaning of the Regulation broadly equivalent to the current 101(2)(b), on the reasoning that the expenses borne were “wholly”(in the sense of “completely”) used in providing the taxable supplies.    He then went on to conclude that the equivalent of what is now Regulation 101(2)(c) was inapplicable because there were no exempt supplies and the Trustees were conducting no “activity other than the making of taxable supplies”; and that, whilst there was no need to consider the equivalent of what is now Regulation (2)(d), that provision would still leave the whole of the input tax as attributable to taxable supplies. 

44.      This present case is different in two respects from the earlier case, in that the word “wholly” has been replaced by the word “exclusively” in both current sub-paragraphs (b) and (c), and secondly in this case some of the Appellant’s supplies are admitted to be exempt supplies, such that an attribution is required under Regulation 101, quite apart from this contested issue as to whether there should be some denial of input tax because some of the services are being provided for no consideration.   In order not to confuse matters, it seems to us to be simplest, in considering the “no consideration” aspect, to apply the wording of current Regulation 101 on the fictitious basis that, whilst 13% of the services are provided to student members for no consideration, all of the services are taxable, and none exempt.     This notion does not change the correct application of the Regulation to the only point in dispute, and just simplifies matters. 

45.     We accept that we cannot say in this case that the goods and services carrying the input tax were “exclusively” used for the purposes of Regulation 101(2)(b) in making taxable supplies.      They were also used in providing free memberships that did not rank as services at all for VAT purposes.     By the same token, however, no input tax can be attributed to exempt supplies or to “any activity other than the making of taxable supplies” under Regulation 101(2)(c) for two reasons.   First we adopt Sir Stephen Oliver’s reasoning that the provision of free membership is simply a provision made in the course of the one and only business, and not in any sort of “other activity”.   Now that the word “exclusively” has been adopted in paragraph (c) however, it is clear that no goods and services are exclusively used in providing services in some activity distinct from the Appellant’s one and only business.     The change of the word “wholly” to “exclusively” may appear to assist the Respondents’ case, when considering Regulation 101(2)(b), but it has the opposite effect when considering Regulation 101(2)(c).    

46.     Finally, when we apply Regulation 101(2)(d), input tax is to be attributed to taxable supplies in the ratio that they bear to total supplies.    Since the provision of membership for no consideration is not a supply at all, it drops out of both sides of that equation.     Regulation 101(2)(d) thus ends up doing what it is generally expected that it is designed to do.    In other words it attributes input tax between taxable (standard-rated and zero-rated) services and exempt services, and provisions of service that fall into neither category should be ignored. 

47.     We accordingly decide that Regulation 101 does what it is generally expected that it does, namely it attributes input tax between supplies, whether taxable or exempt supplies, and provisions of service for no consideration do not come into the equation at any point in applying the provisions of the Regulation. 

48.     It occurs to us in passing, that there does appear to be something slightly curious about the drafting of Regulation 101(2)(c) in that, if input tax was exclusively attributable to the supply of services in a non-business activity (i.e. supplies by a taxable person for consideration, but supplies outside the course of that business), or input tax was exclusively attributable to the provision of services for no consideration in a non-business activity, there might rather oddly be a double disallowance.    In other words section 24(5) would plainly apply in both those cases to cut down the input tax before considering the attribution rules of Regulation 101, and if Regulation 101(2)(c) could apply (as seemingly it could) to attribute input tax to the non-business application, there would appear wrongly to be a double disallowance.     This is of no relevance in this case, but it appears odd, and the result would not arise if Regulation 101 was confined in its application to its natural scope of attributing input tax between taxable and exempt supplies. 

49.     Reverting to the conclusion reached in paragraph 47, it follows that our decision in this case is that:

•	no input tax falls to be disregarded under section 24(5) because the Appellant was at all times conducting only one business and the activity of providing free membership to dental students was an integral act in the conduct of that business; and
•	input tax that falls to be attributed to the actual exempt services that were admitted to be supplied by the Appellant cannot be deducted against the output liability in respect of taxable services, but the provision of free membership is not an exempt service, or indeed anything else that should be taken into account in the attribution between taxable and exempt supplies, or otherwise taken into account so as to diminish the deductible input tax. 

That is our decision, and it accordingly follows that this Appeal is allowed.

50.     Since there was very considerable argument in this case, we consider that we should make some further remarks to justify our decision, and to explain why we have dismissed the arguments advanced by the Respondents. 

The common sense approach

51.      We consider first that our decision entirely accords with common sense.   Counsel for the Respondents encouraged us not to be deflected by considerations of how the provision of free services would be dealt with in computing profits for the purpose of direct taxes.      Whilst of course we accept that a taxpayer’s profits would not be artificially lifted to include receipts that might have been received, had the taxpayer not chosen for good business reasons to supply goods or services for no consideration, we are not remotely influenced by this obvious point.    It seems to us, however, that even when considering a tax on turnover and one where the cost of the tax is only meant to rest with the supplier if it provides exempt services or is the consumer itself of services received, it is still illogical for input tax to be disallowed where a taxpayer includes some free services, along with the majority of its services that it charges for, in its business model.    It would be a self-evident nonsense for input tax to be disallowed where a trader sells goods on a “Buy one, get one free” basis.”    We accept that HMRC treats that transaction as a sale of both items for the price ostensibly charged for the one, so that there is no disallowance, but the business reality in that case is no different from that in the case where a supplier might supply services free in an introductory offer, all in order to generate business and the maximum possible taxable supplies.    In the present case, the Appellant is not seeking to promote any interest other than the interest of its one business.   All its costs are entirely channelled to maximising its business turnover.     It is not exhibiting any generosity in not charging for student memberships.     Indeed the Appellant recently delegated to a Working Group the task of maximising fee income, and cutting out free or discount memberships where this was remotely possible, and the conclusion was that there was an absolutely compelling business reason to continue to give free membership to students.    We accordingly agree with the Appellant that, had we decided this case in favour of the Respondents, we would have considered the result contrary to common sense, and to business reality.   

52.     We also note, with the Appellant, that there are indeed various provisions under which the provision of goods and services for no consideration is deemed to be a supply for consideration.    Whilst the logic of this in some situations slightly escapes us, it would certainly seem very curious for the VAT legislation to attack this topic in the two ways of disallowing some input tax, and of deeming there to be a supply for consideration, so generating output tax which nullifies non-disregarded input tax. 

The irrelevance of some of the authorities

53.      Counsel for the Appellant suggested to us that this case was governed by the two cases of Ian Flockton Developments Ltd v. C of C&E [1987] STC 394, and Kretztechnik AG v. Finanzamt Linz [2005] STC 1118.    Whilst we agree entirely with the whole general approach taken by counsel for the Appellant, neither of these cases appears to be that instructive.    In Flockton after all there was no suggested competing utilisation of the relevant horse.    We agree with the Appellant’s counsel that input tax was incurred and it was held that it was incurred for business purposes, and so was wholly allowable, but there was nevertheless not the competing use of the horse that leads the Respondents’ counsel to suggest in this case that there should be a partial disallowance of input tax. 

54.     Kretztechnik is somewhat helpful in that when input tax arose in relation to supplies that were outside the scope of VAT (the grant of new rights to new shareholders) and the taxpayer made only standard-rated supplies, the input tax was again wholly deductible.      It might be extraordinarily unhelpful to suggest that there might be two categories of supply outside the scope of VAT, namely free provisions of services that would have been taxable supplies had there been consideration, and supplies whose nature (in the Advocate General’s words, at paragraph 60) defied categorisation as a supply of services.    We accept that the Appellant’s counsel would say, and we agree, that where there are no exempt supplies and there is only one business, it makes no difference to the application of section 24(5) and to Regulation 101 what the nature of the “non-supplies” might be, but we still understand, with counsel for the Respondents, that in a generalised sense it is more tempting to put provisions for no consideration in the scales against taxable supplies than it is to include the total “non-supply” of a share issue into that equation. .

The fundamental argument on the part of the Respondents and its error

55.     The ECJ cases on which the Respondents principally relied were those in Optigen Limited and others v. Commissioners of Customs & Excise [2006] STC 419, Securenta Gottinger Immobilienanlagen und Vermogensmanagement AG v. Finanzamt Gottingen  (Case C437/06) [2008] STC 3473 and Vereniging Noordelijme Land-en Tuinbouw Organistatie v. Staatsecretaris van Financien  (Case C-515/07) [2009] STC 935.

56.     None of these cases had anything to do with the situation where a taxable person provided services for no consideration but nevertheless as an integral part of its business activities.    It remains to be seen of course whether any of the cases deems the provision of services to rank as a non-business activity, whatever the facts and circumstances, but we still consider it appropriate to start by stating that none of these three cases deals with the point currently in issue. 

57.     Optigen dealt with carousel fraud and simply made the point that if a taxable person acquired and supplied goods in the course of his economic activity, or in UK parlance, in the course of his business, input VAT was deductible, and it was immaterial that earlier steps in the chain of transactions might have involved fraud.

58.     The latter two cases both dealt with the situation where it was common ground that the taxable person in each case was conducting economic and non-economic activities or, again in UK parlance, business and non-business activities.    The non-economic activities might indeed have involved no receipt of consideration, but the fundamental facts were that there were distinct activities that were plainly non-economic.    The conclusion of both cases was then that:

•	non-economic activities were outside the scope of VAT;
•	input tax apportioned to non-economic activities should not be deducted from the output liability in relation to economic activities;
•	Article 17 dealt with the different issue of the attribution of input tax all amongst economic activities, i.e. between taxable and exempt taxable supplies; and
•	the European Directives gave no guidance as to how to deal with the prior apportionment of input tax, as between economic and non-economic activities, and left this to the Member States.

59.     On the basis that the above is a fair summary of the subject matter and the fundamental decisions in the three cases, it is odd to find them quoted for the more extreme propositions that:

•	all provision of services for no consideration, even when inherently integral to the business or economic activities of a taxable person, should be deemed to be non-business and non-economic activities, utterly distinct from the business; or that
•	the provision of services for no consideration, inherently made in the course of the conduct of the taxable person’s business, should require some disallowance of input tax on some other basis.

60.     We accept that paragraph 34 of the Court’s decision in the third case referred to appears, read out of context, to support the first proposition mentioned in the preceding paragraph.   This paragraph reads:

“It is common ground that activities such as those by which an association promotes the general interests of its members are not activities “subject to VAT” under the terms of Art 2(1) of the Directive, since they do not consist of the supply of goods or services effected for consideration.”

It must be borne in mind, however, just as the first two lines of the passage just quoted make clear, that in the relevant case it was already common ground that the activity of promoting the general interests of the members was outside the course of the taxable person’s business.    In the words of the earlier decision by the Dutch Regional Court, the “activities relating to the promotion of the members’ general interests did not constitute a direct, durable and necessary extension of the taxpayer company’s economic activities”. 

61.     In our view, there is no authority for the proposition that the provision of services, inherently integral to the business interests and the business affairs of the taxable person’s business should be treated as non-economic or non-business activities, or the referable input tax disallowed for any other reason. 

Costs

62.      The Appellant requested an order for its costs in this case which we grant, the costs to be assessed by the taxing master in the absence of agreement between the parties. 

HOWARD M. NOWLAN (Tribunal Judge)

Released: 16 April 2010