The Highland Council v  Revenue & Customs [2006] UKVAT V19542 (10 April 2006)

                                                                                            19542
Supply:  Local Authority producing various leisure facilities standard and exempt, card sold to entitle purchaser to unlimited access without further payment to all facilities at the purchasers choice – output tax due at standard rate on price of card or on a calculated proportion of the price – no means of ascertaining what proportion of any card sold to a purchaser was for specific exempt supplies.  Appeal refused – VATA 1994 Sch 9, Group 6.

EDINBURGH TRIBUNAL CENTRE

THE HIGHLAND COUNCIL	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

Tribunal:	 (Chairman):  T Gordon Coutts, QC

Sitting in Inverness on Tuesday 21, Wednesday 22 and Thursday 23 February 2006.

for the Appellant		Mr Derek Francis, Counsel

for the Respondents	Ms Sarah Wolffe, Counsel

© CROWN COPYRIGHT 2006.

DECISION

This appeal concerns a decision by the Respondent that the income generated by the Appellant through the sale of various “Highlife cards” requires to be standard rated.  At the appeal, heard in Inverness, parties were represented by Counsel, evidence was led from Messrs Jonathan Warde, Ian Murray and Brian Porter for the Appellants.  So far as these witnesses spoke to matters of fact as opposed to giving their opinions to the Tribunal there was little dispute.

The oral evidence was supplemented by a substantial volume of correspondence and illustrative material with statistical records.  No real issue for the Tribunal turned on that material, interesting though it was.

Background
The leisure facilities with which the Tribunal was concerned in the Highlands consist, insofar as they are not commercial undertakings, of 15 leisure facilities 11 of which include swimming pools, which are operated by the Appellant.  Thirteen of these are associated with the Highlife card.  In addition there are 10 not for profit community leisure facilities 7 of which include swimming pools, which are supported by the Council.  These are built and operated by community organisations, companies and council trusts and are managed by volunteer committees or boards.  Five of these facilities are associated with the Appellant in operating the Highlife scheme. 

The public leisure facilities noted above were not adequately used by the inhabitants and various schemes were contemplated to enhance their utilisation.  These schemes culminated in the Highlife card, the subject of the present appeal.  That initiative by the Appellant appeared to have been successful and has resulted in greater use for the benefit of the community of the said facilities.

The Highlife Card
Highlife cards were issued by the local highlife facility.  These included premises throughout the whole area administered by the Appellants from Thurso to Kingussie and from Ullapool to Nairn.  Three types of card were on offer.  They were plastic cards which all looked similar.  They could be presented for admission to the facilities.  They could also be used at any library in the Highland area to borrow books.

One of the 3 types of card were known as “budget”.  They included the adult and partner and dependents under 18 years of age who qualified for various government benefits and allowances.  When presented these entitled the holder to admission to any facility for 50 pence.  No charge was made for the card itself.  

The second type was similar save that the holder paid the standard price on admission unless they were under 18, in full-time education or over 60.  It also offered a facility of being loaded with cash so that admission could be effected by payment taken from the card as opposed to requiring to carry cash.  Again no charge was made for that card.

The third card, the “all inclusive or standard variety” gave unlimited access for a year to all leisure centre run activities.  It was paid either by a set monthly amount by direct debit or an annual cash sum.  There were individual and family cards based on monthly rates of £13.35 and £18.45.

The Facilities
The facilities provided by the Council and to which cardholders had access if paid individually at the cash desk might be either standard rated or exempt if they were classed or could be classed as educational facilities.

It should be noted at the outset that some of the discussion which took place in the correspondence before the Tribunal and indeed at the Tribunal itself proceeded upon false categorisations.  The description of the card as entitling one to “membership” for which the purchaser paid a “subscription” was misleading insofar as it led to an attitude by the Respondent that this scheme was in some way similar to a club or organisation to which the participant belonged.  The general terms and conditions of use imposed by the Appellant correctly described the purchaser or user as a “cardholder” and it is the view of the Tribunal that that description should not have been added to in any way in the discussions which took place before the appeal was heard.

Use of Facilities
The annual card made available unlimited access to activities with differing VAT liabilities.  The Appellant sought to differentiate these and apportion the annual payment on a broad statistical basis which purported to show (production page 265) that the general usage of facilities which could be regarded as exempt in terms of VATA 1994 Schedule 9 could indicate that some 13.37% of Highlife all inclusive cardholders might have participated in activities which fell within the exempt category.  Plainly, therefore, the preponderance of use was of standard rated activity, taking the 13.37% as an accurate in the way it was arrived at.

Contentions for the Parties
The contention for the Respondents was that the all inclusive Highlife card was one standard rated supply of an entitlement.  The contention for the Appellant was that the supply was of a basket of parallel services both standard rated and exempt and accordingly required to be apportioned.

It was not in contention that no restriction or differentiation was made in the supply of the card to the all-inclusive user about what he might specifically be purchasing other than a general right.  Any purchaser might never use any exempt facilities, might, indeed, never use any facilities at all or might utilise a mixture of facilities at differing locations.

The pay-as-you-go cardholder and indeed the budget cardholder when paying to participate in activities would be subject to the VAT regime appropriate to the particular activity at the time in question and an identifiable transaction took place on each occasion of payment.  No identifiable consideration passed if and when the all-inclusive cardholder utilised his card.

For the Appellant
A wide range of case law was canvassed in order to support the argument that apportionment of the payment for the card should be apportioned according to the usage of the card.  In other words that a package of supplies was made when the card was purchased.

Case Law
In support of their contentions the Respondents arguing that the question before the Tribunal was one of law founded on British Railways Board v Customs and Excise Commissioners 1977 STC 221 and British Airways Plc v Customs and Excise Commissioners 1990 STC 643.  It is the legal effect of the transactions that has to be determined.

The question of law was what was the subject matter of the supply although that, it was conceded, depended upon, amongst other things, common sense and commercial realities.

In support of the contention that when one considered the transaction between the Appellant and the cardholder that what was supplied was a single supply of a right of access to facilities over 12 months and that the type or extent of use does not define what the taxpayer supplied there was cited Acorne Sports Ltd v Customs and Excise Commissioners 2003, no 18090, Tayside Aviation Limited v Customs and Excise Commissioners 2003, no 18241, Bass Plc v Customs and Excise Commissioners [1993] STC 42, Granada Plc v Customs and Excise Commissioners 1997, no 14803 but in particular Kennemer Golf and Country Club v Staatssecretaris van Financièn, [2002] QB 1252 and Beynon & Partners v Customs and Excise Commissioners [2005] 1WLR 86.

In Beynon the House of Lords held that a transaction should not be artificially dissected, and that the level of generality which is correspondent with social and economic legality was what had to be considered.  In Kennemer, which did not appear to have been cited in Beynon, the Court of Justice, considering an incidental question, which was whether the fact that members of a sports association who did not use the association’s facilities still had to pay an annual membership fee entailed that the fees did not constitute consideration within the meaning of Article 21 of the Directive held:

That although, in circumstances such as those of the first case, a member’s annual membership fee was a fixed sum that could not be related to each individual use of the association’s facilities, the service provided by the association consisted of the making available of its facilities to members on a permanent basis, so that there was a direct link between the membership fees and the association’s services; and that, accordingly, annual membership fees paid by a sports association’s members could constitute the consideration for the association’s services even though members who did not use the association’s facilities or did not use them regularly still had to pay their annual membership fee.

In the Judgment the ECJ said:

In that regard, according to the case law of the court, the basis of assessment for a provision of services is everything which makes up the consideration for the service provided and a provision of services is taxable only if there is a direct link between the service provided and the consideration received:  Apple and Pear Development Council, paragraphs 11 and 12, and Tolsma v Inspecteur der Omzetbelasting (Case C-16/93) [1994] ECR I-743, 759, para 13.  A supply of services is therefore taxable only if there exists between the service provider and the recipient a legal relationship in which there is a reciprocal performance, the remuneration received by the provider of service constituting the value actually given in return for the service supplied to the recipient:  Tolsma, paragraph 14.

As the Commission argues, the fact that in the case before the national court the annual membership fee is a fixed sum which cannot be related to each personal use of the golf course does not alter the fact that there is reciprocal performance between the members of a sports association such as that concerned in the main proceedings and the association itself.  The services provided by the association are constituted by the making available to its members, on a permanent basis, of sports facilities and the associated advantages and not by particular services provided at the members’ request.  There is therefore a direct link between the annual membership fees paid by members of a sports association such as that concerned in the main proceedings and the services which it provides.

Moreover, as the United Kingdom Government rightly points out, the Netherlands Government’s approach would make it possible for practically any service provider to escape VAT by recourse to all-inclusive charges and thus to set aside the taxation principles which constitute the basis of the common system of VAT established by the Sixth Directive.

In response Counsel for the Appellant surveyed a wide range of authorities in addition to those above noted.  He pointed out the mis-description in the Respondents’ Statement of Case characterising the payment as a supply of “membership”, which mis-description has already been adverted to by the Tribunal above.  In an endeavour to persuade the Tribunal that what was being supplied was a subscription or prepayment for underlying services and so that VAT did not require to be charged on the subscription to the extent that those related to education, it was argued that the proper approach was, according to Ivory & Sime Trustlink v Customs and Excise Commissioners [1998] STC 597 what specifically and essentially were the Appellants supplying in consideration of the payment.  The case of British Railways Board, [1997] 1WLR 588 referred to in Ivory & Sime was authority he said for the proposition that you could look at what was supplied in return for the subscription (sic) i.e. an exempt supply of transport.  For guidance of what may be a single service from an economic point of view Counsel referred to Faaborg-Gelting Linien A/S v Finanzamt Flensburg [1996] ECR 1-2395, Card Protection Plan Ltd v Customs and Excise Commissioners [1999] 2AC 601 and British Telecom v Customs and Excise Commissioners [1999] 1WLR 1376.  Other examples were said to be Automobile Association v Customs and Excise Commissioners [1974] 1WLR 1447 considered in BRB v Customs and Excise Commissioners [1977] 1WLR 588 and further in Mothercare (UK) Limited v Customs and Excise Commissioners [1993] VATTR 391 (a fixed priced discount card) where there was found to be a direct link between prepayment and supply and held that the privilege card was prepayment for goods.

When Madgett and Baldwin, 1996 case C308 was before the ECJ the Court in considering whether or not travel was ancillary to a principal supply of hotel accommodation held on the facts that it was not.  In Card Protection Plan above it was said in particular at paragraphs 29 and 30 of the judgment:  “In this respect, taking into account, first, that it follows from Article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.

There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service.  A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (Joined Cases C-308/96 and C-94/97 Commissioners of Customs and Excise v Madgett and Baldwin [1998] ECR I-6229, paragraph 24)”  The authorities it was argued lead to the view that the education component of the all-inclusive card is an exempt supply.  On this approach Counsel drew the Tribunal’s attention to Pilgrims Language Courses v Customs and Excise Commissioners [1999] STC 874, Commission v France [2001] ECR 1-249 Case C-76/99, Commission v Federal Republic of Germany ECR [2002] 1-05811, Case 287/00 and Card Protection Plan v Customs and Excise Commissioners (2) [2001] 1AC202.

Decision
Applying the principles outlined in the authorities above cited the Tribunal finds that what was supplied to the participant by the Council was, as contended for by the Commissioners, a single supply of a right to exercise and enjoy the use of the Council’s facilities as and when and to whatever extent the purchaser required.

Having regard to the transaction the Tribunal has no doubt that what was sold in consideration for the price was a right.  The exercise of that right, given that there may be various tax treatment or various services, being a matter for the customer cannot be pre-determined and since it could not be known what the purchaser would do with his card to attempt to dissect the transaction into unrealistic or at best speculative components would not reflect reality and so would be an error.

The BRB case provides a clear example of the supply of the discount card being related to only one class of service.  The Mothercare discount card is in the same position.  To attempt to allocate an artificial proportion, which might bear no relation to the reality of the only transaction between the Council and the purchaser, the essential matter, which has to be regarded as artificial, unrealistic and bearing no relation to the reality of the situation.  Accordingly, as presently administered, the admirable Highlife scheme requires to be standard rated upon an analysis of the transaction in question and also having regard to the unreality of attempting to sub-divide the single transaction into a “package” of potentially separate items of standard rated and exempt supplies.

It follows that the entire reliance by the Appellant on the cases surrounding Card Protection Plan in this appeal is misconceived and the straightforward approach of the Commissioners is to be preferred.

The appeal is accordingly refused.

Expenses
No motion was made at the Tribunal in relation to this matter.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  10 APRIL 2006
EDN/05/16