Supply of goods and services – Education – supply of staff and other services to subsidiary company who provided services of education to Scottish Ministers in  place of Appellant – contract between Appellant and company for staff and other services – whether standard rated or exempt – VATA 1994 Sch 9 Group 6.

EDINBURGH TRIBUNAL CENTRE

	THE BOARD OF GOVERNORS 
	OF THE ROBERT GORDON UNIVERSITY	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	     Respondents

			Tribunal:	 (Chairman)   T Gordon Coutts, QC
					 (Member)	  Mr K Pritchard, OBE., BL., WS

Sitting in Edinburgh on Monday 16 February 2004

for the Appellants		Mr Colin Tyre, QC

for the Respondents	Mr James Campbell, QC

© CROWN COPYRIGHT 2004.

DECISION

Introductory
The Appellant registered for VAT with effect from 8 January 1996.  It is an educational establishment and as such an exempt provider in terms of Schedule 9 Group 6 of the VATA 1994.  The appeal itself concerns the entitlement to repayment of Input Tax made by way of voluntary disclosures.  The full background does not need to concern the Tribunal since it was agreed that the issue for determination by the Tribunal was whether what was supplied by the Appellant to its subsidiary Univation Ltd (the Company) in terms of an agreement between them is an exempt supply of education or a taxable supply of services and staff.

The Appellants were represented by Mr Colin Tyre QC and the Respondents by Mr James Campbell QC.  The Tribunal is indebted to both Counsel for their careful, but succinct, presentation of the issue.  Mr Tyre led evidence from Mrs Briggs the Appellant’s Director of Finance and a Director of Univation Ltd.

Formation and Function of the Company
The facts on this matter were not in dispute.  In or before 1995 the Appellant had been involved in various contracts supplying services to commercial undertakings by way of expert opinion; by way of offshore oil fitness assessments and training; and diverse engineering and construction advice.

In order to further the legitimate commercial enterprise of the University, essential to it for raising and maintaining funds, the Company was formed to deal with these commercial matters.  Its object was commercially to exploit the intellectual capability of the University.  It received a DTI grant.  It has a separate legal entity.  It has no employees.  It makes a profit which, as a wholly owned subsidiary of the University it remits to the University.  Its direction is provided by the Dean, Professor Harper, and by Mrs Briggs.  There was and could not have been any dispute as to its legitimately undertaking commercial enterprises.

The University had a contract with at first the Secretary of State, then succeeded by the Scottish Executive, to provide nursing and midwifery training.  This was part of the academic work undertaken by the relevant University department.  After advice received from accountants, and with the consent of the Scottish Executive the said contract to provide nursing and midwifery training was assigned to the Company.

As a consequence an agreement required to be entered into between the Company and the University.  That Agreement was produced and in terms thereof the University agreed to provide administration services, additional services and staff to enable the Company to fulfil its obligations under the Contract.

The end result was that the training was provided to the Scottish Executive by the Company.  It was plainly education and the Company not being an eligible body in terms of the statute its provision of services to the Scottish Executive was standard rated.  Similarly standard rating would apply, if appropriate, to the supply to the Company by the University of administration and other services.  

In the event, the training which was initially supplied by the University to the Scottish Executive was supplanted by training provided by the Company, by way of University personnel, to the Scottish Executive.  A student would have noticed no difference after the assignation in the course.

Analysis of the Tax Consequences of the above events
The Respondent contended, in summary, that viewed as a matter of “commercial reality” there had been no change with the intervention of the company and that what was supplied by the Appellant was and remained services of education.  The inter-position of the Company artificially distorted the true nature of the supply.

The contention for the Appellant was that when one has regard to the actual supply it is plain that what was supplied by the University to the Company was not education.

Concession by the Respondents
An important concession which underlies consideration of the whole events was explicitly made by the Respondents firstly in a letter to KPMG dated 10 December 2002 where it is stated “our concerns were purely on liability grounds and we did not consider the arrangements to be a tax avoidance issue” and secondly in their skeleton argument in the following terms:

Respondents accept that the Appellant and Univation are engaged in economic activities and are making supplies; nor do they contend that the correct analysis is that the Appellant is making supplies to the SE and that Univation can be “ignored”.  They accept that the Appellant is making a supply to the Univation and Univation is making a supply of education to the Scottish Executive.  The Commissioners simply contend that the true nature of the supply by the Appellant to Univation is one of education which falls to be exempt.

Case Law Relied Upon by the Respondent
The Respondent founded strongly on the opinion of Advocate General Jacobs in De Winter 1997 STC 665 in contending that the VAT analysis did not necessarily follow the contractual position in the case of transactions between connected parties who might seek artificially to convert the consideration for the taxable supply of goods and services into consideration for an exempt grant.  It was therefore contended that what Appellant and the Company were connected and had as a common objective the minimisation of the University’s VAT costs.  They have sought to convert what is in substance an exempt supply of education by the Appellant to the Company into a taxable supply of services by attempting to split that supply artificially, thereby distorting the VAT system.  One had to have regard to the circumstances to ascertain what was actually being supplied.  The economic or commercial reality was education.  Support was sought for departure from the terms of the actual contractual position from First National Bank of Chicago 1998 STC 850, and Rudolf Maierhofer v Finanzamt Augsburg-Land 16/1/2003, Auto Lease Holland BV v Bundesamt fur Finanzen C-185/01 and HJ Glawe [1994] ECR 1-1679 to identify “the commercial reality of the transaction”.  This approach has been adopted in the United Kingdom in Eastbourne Town Radio Cars [2001] STC 606 by Lord S Lynn at paragraphs 14-16 where he approved Reed Personnel Services [1995] STC 588.

The Appellant’s Approach
The Appellant’s counsel began his consideration of the transactions from a different standpoint.  The essential matter for consideration was the definition of supply.  A supply is anything done for the consideration and the matter has to be viewed in the light of the opinion of Lord Hope of Craighead in Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 at page 165:  where he said

“The word ‘services’ is given such a wide meaning for the purposes of VAT that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration.  The name or description which one might apply to the service is immaterial, because the concept does not call for that kind of analysis.  The service is that which is done in return for the consideration.  As one moves down the chain of supply, each taxable person receives a service when another taxable person does something for him in the course or furtherance of a business carried on by that other person for which he takes a consideration in return.  Questions such as who benefits from the service or who is the consumer of it are not helpful.  The answers are likely to differ according to the interest which various people may have in the transaction.  The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax.  Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted VAT?  The fact that someone else, in this case, the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction”.  

Lord Millett also in the same case at 171 said 

“anything done for a consideration which is not a supply of goods constitutes a supply of services.  This makes it unnecessary to define the services in question… unless the services are rendered for a consideration they cannot constitute the subject matter of a supply”.

While one analyses the matter, staff, administration and other services were supplied to the Company.  Training was supplied by the Company to the Scottish Executive.  Taking these matters singly, as is the correct approach the Commissioners contentions are unsound.  In The Open University v Commissioners of Customs and Excise Decision 1196 it was held that the BBC were not providing a service of education when they broadcast educational material for The Open University.  It was said in that case that the provision of education was made by the University and the BBC was supplying the University with services.  It is of no assistance to look at who benefits.  This case is not concerned with a supply to the students it is concerned with a supply to Univation.  The Company is not being educated.

Direction and control of the Company is not an appropriate test but if it were, the evidence shows that it was fulfilled in that appropriate officers of the Company did have control and were responsible to the Scottish Executive to whom they were answerable.

There was nothing unreal or inessential about any of the features here.  There is indeed no artificiality created by the Company structure.  The artificiality if any is introduced by the concept of exempt supplies of education being supplied by selected bodies.

Decision
The Tribunal considered the above quoted concession by the Commissioners to be basic and fundamental.  When it is accepted that there was no artificiality about the economic activity said to be undertaken and that supplies were in fact made by the Appellant to the Company and by the Company to the Scottish Executive artificiality or commercial reality plays little part in the analysis.

The concept that if by organising transactions in a particular way an overall benefit in relation to taxation can be achieved does not make these transactions unreal.  It might well be argued that commercial reality demands that the most tax efficient method of operation should be adopted.  In any event plenty good sound commercial reasons can be envisaged for a division between the University and the Company.  There is significantly an advantage in relation to liability for legal proceedings.  The liability of the Company is limited.  The liability of the University, probably not.  That consideration applies to the whole of the commercial enterprises undertaken by Univation.

Further the Company does not “supplant” the Appellant in the teaching of nursing studies and granting of degrees and plays no part therein.  Its function is to provide training to the Scottish Executive in relation to the contract with the Scottish Executive and to provide intellectual services to other entities as and when required.

The analysis of the Appellant is in our view correct.  There is no supply of education to the Company.  In other words the supply to the Company is that for which they pay their consideration which is administration and staff services.  The supply by the Company to the Scottish Executive, although not strictly relevant, is of training and would be and is education albeit that has no tax effect since the Company is not an eligible provider.  It might even be said that constructed in this way the true concept of VAT is followed through.  The University supplies a taxable service, the Company supplies a taxable service.  These are not distorted by any considerations of exempt supplies and the Company accounts for the VAT it receives and deducts the VAT it pays.  Nothing is artificial in that.

Result
In the result the Tribunal answered the issue which was put before it by determining that the supply by the Appellant to the Company was a taxable supply of administration and staff services and was not an exempt supply of education.

Counsel stressed to the Tribunal that the consequences of such a decision required to be applied and worked out and accordingly it is only to that extent that the appeal is upheld.  No determination is made as to amount and if that matter cannot be agreed or resolved parties may apply to the Tribunal for a decision upon it.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:

EDN/02/179