Institute of Biomedical Science v Revenue & Customs [2008] UKVAT V20609 (12 March 2008)
20609

VAT – Recovery of input tax – Determination of amount of taxable supplies – Apportionment of fees of professional association between exempt supplies and taxable supplies relating to publications – ESC 3.35 – Appointment on basis of cost – Determining “cost” when no cash expense

LONDON TRIBUNAL CENTRE

	INSTITUTE OF BIOMEDICAL SCIENCE	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	CHARLES HELLIER (Chairman)
						PRAFUL DAVDA 

Sitting in public in London on 14 and 15 January 2008

Colin Peters, Specialist VAT Consultant, for the Appellant

Matthew Barnes, counsel, instructed by the solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	In this appeal the Tribunal was asked to adjudicate on the proportion of the Appellant’s subscription fee income which should be treated as representing VATable supplies by it.  This adjudication was required in the context of the Appellant’s right to recover (under s.26 VATA 1994 and Regulation 101 of the VAT Regulations 1995) that fraction of its residual input tax which was its taxable outputs divided by its total outputs.

2.	The Institute of Biomedical Sciences (the “Institute”) is the professional body for biomedical scientists in the UK.  It was founded in 1912 and has some 16,000 members mainly employed in the National Health Service, medical laboratories, the National Blood Authority and other such bodies.

3.	It is common ground that the Institute is a body within Item 1(b) Group 9 Schedule 9 VATA 1994.  This so far as relevant reads:

“Item No.1	The supply to its members of such services and in connection with those services, of such goods as are both referable only to its aims and available without payment other than a membership subscription by …
(b)	a professional association, membership of which is wholly or mainly restricted to individuals who have or are seeking a qualification appropriate to the practice of the profession concerned.”

Section 31 VATA provides that a supply of goods or services is an exempt supply if it is for the time being specified in Schedule 9.  As a result one’s initial inclination is to conclude that the Institute’s supply of membership and such other goods and services in return for the subscription is exempt.

4.	However, HMRC have published an Extra Statutory Concession (number 3.35) which provides that:

“Where a membership body supplies in return for its membership subscription, a principal benefit together with one or more ancillary benefits, it will normally have to treat the subscription as being in return for that principal benefit.  This means that the body will have to ignore the liability to VAT of the ancillary benefits and account for VAT on the whole subscription based on the liability to VAT of that principal benefit.

“However bodies that are non-profit making and supply a mixture of zero-rated exempt and/or standard rated benefits to their members in return for their subscription, may apportion such subscriptions to reflect the value and VAT liability of those individual benefits without regard to whether there is one principal benefit.  This concession may not be used for the purposes of avoidance.”

The importance of this concession to a body within Item 1(b) relates to the recovery of input VAT suffered by such a body in respect of supplies made to it.  If the only supply made by the body were that of membership, and if that membership supply is an exempt supply, then as a result of the rules in section 26 and Regulations 99 to 111 of the VAT General Regulations 1985, it would be able to reclaim none of that input VAT; by contrast if it can treat its supply as partly exempt and partly taxable it will be able to recover all the input VAT which relates to supplies used solely in making the taxable part of its supplies, and also a part of its “residual VAT” (the VAT which does not relate solely to either taxable or exempt supplies).  The part of the residual VAT it can recover is determined by Regulation 101 (if no other method has been directed or agreed – and in the present case none was), and is given by the formula:

Taxable outputs
Total outputs

5.	Now, in this case, the Institute does provide (or procure the provision of) a particular benefit to its members in the form of the Institute’s Gazette and its Journal which is delivered to them free of any further charge under arrangements made with a company called Step Publishing Limited (“Step”), and the Institute does incur residual VAT.

6.	Both the Respondent and the Institute agree that ESC3.35 applies.  And both agree that as a result the Institute is entitled to recover part of its VAT.  They also agree that the part of its residual VAT which it is entitled to recover is that fraction given by Regulation 101 namely its taxable supplies divided by its total supplies.  What they do not agree upon however is how to divide up the membership subscription to work out what should be the value of these taxable supplies and what should be treated as exempt.  We shall explain that difference of opinion later.

7.	There was a great deal of correspondence between the Appellant and the Respondents over this issue in which various methods of apportionment were debated. The Appellant made its VAT returns and reclaimed VAT on its preferred basis. The parties could not agree however and the Appellant sought and received a formal decision from the Respondents on 23 January 2007 setting out their decision on the matter, and enclosing an assessment for the period 12/03 representing the difference between the input VAT reclaimed in the returns and the VAT which should, on the Respondents’ basis, have been recovered. It is against that decision and that assessment that the Appellant appeals to this Tribunal.

8.	Mr Barnes put the question before us thus in his skeleton argument “It is the percentage of the input tax that is recoverable that is in dispute in this appeal, however the real issue between the parties is the value which should be put on the two publications when compared with the total subscription cost.”  Or as Mr Peters put it “The Commissioners have rejected all proposals put forward by the Appellant with a view to valuing their supplies and imposed their own method.  The question for the Tribunal is whether they have acted reasonably in so doing.”

The Tribunal’s jurisdiction

9.	Section 83 VATA specifies those matters in respect of which an appeal may lie to a tribunal.  These matters include:

“… (e)	the proportion of input tax which may be allowable under section 26;     	…
       (p)	 an assessment … under section 73(2) … or the amount of such an 	 	assessment.”

The letter from the Respondents of 23 January 2007 is a decision on the proportion of input tax which may be recovered, and the assessment falls within (p), thus we have jurisdiction to hear the appeal.

10.	However, we are a body set up under the statute to determine such appeals on the basis of the law prescribed by statue.  That law does not embrace the Extra Statutory Concession 3.35 promulgated by the Respondents.  This in reaching our decision we should ignore that concession.

11.	Neither party to this appeal liked that conclusion.  Both wanted the Tribunal to resolve this dispute.  Mr Barnes suggested that we might approach the issue thus: in approaching the making of the assessment his clients ought to have regard to the terms of the concession; that would involve the proper construction of the application and meaning of the concession; if the Respondents approach to the concession was so unreasonable as to be wrong, the assessment would not have been made to the Commissioner’s best judgment as is required by section 73.  (We note however that the requirement for best judgment appears in section 73(1) and not section 73(2) under which the assessment appears to have been made.)  He also referred us to the following ways in which other tribunals have appeared to address this issue.

12.	In The Royal College of Anaesthetists VTD 18632 the tribunal considered the method by which the College should apportion its income between that representing the provision of zero-rated publications and exempt membership (under Item 1 Group 9) without regard to the ESC.

13.	In Public and Commercial Services Union v Commissioners of Customs and excise [2003] EWHC 2845 (Ch), the High Court considered a similar question of apportionment between the amount of the subscription attributable to the supply of magazines by the Union and that otherwise attributable to other benefits.  Lindsay J aid at paragraph 1:-

“It was common ground both below and before me that the package of benefits did not represent one single composite provision by the Union.”

In other words, although no reference was made to the concession, the case proceeded on the basis that, despite the words of Item 1 Group 9, what was supplied by the Union was not a single supply falling within that Item.

14.	It seems to us that this may be the best way to proceed in this case.  Namely that, perhaps because the supply of the Gazette might not be “referable only to [the Institute’s] aims” it could on its own be regarded as a supply outside Item 1; that because it was so important to its members it could not be regarded as ancillary to membership (see Card Protection Plan v Commissioners of Customs and Excise [1999] STC 270); and not economically indissoluble therefore (see Briggs J in Tumble Tots (UK) Ltd v Revenue and Customs Commissioners [2007] STC 1171 at 11(8), accordingly it is permissible to regard it (as the parties both do) as a separate supply and not part of a single composite supply.  On this approach we address the issues, not on the basis of the terms of concession, but on the basis of common ground that for those reasons there was a separate supply relating to the Gazette and the Journal by the Institute. 

The Facts and the evidence

15.	We heard oral evidence from James Burchett, a freelance VAT Consultant who had advised the Institute since 1997, from John Henshaw an officer of the Respondents, and from Simon Kemp, executive head of accounting at the Institute.  Mr Burchett and Mr Henshaw provided witness statements.  Mr Kemp was called at the Tribunal’s instigation.  We also had a bundle of correspondence and other documents and a printout from the Institute’s website.

16.	In addition to the facts and inferences of fact drawn from the common ground between the parties appearing expressly or by implication above, we find as follows:

(1)	The Institute provides the following benefits to its members without 	charge other than the membership subscription (save as noted):

(i)	representation of (and lobbying in relation to the interests of those working in biomedical science: the Institute is the primary body working in this area;
(ii)	the procuring for the members of the Institute of the delivery of monthly copies of the Biomedical Scientist (“the Gazette”) and quarterly copies of the British Journal of Biomedical Science (“the Journal”). The Gazette contains articles of general professional interest and job adverts. The Journal contains learned articles;
(iii)	access to the members’ section of the Institute’s website;
(iv)	professional indemnity insurance for the members;
(v)	access to regional and national events and meetings organised by the Institute (with professional and social benefits);
(vi)	access to professional support and advice (including referral to legal support);
(vii)	the opportunity to attend courses and conferences on payment of a fee less than that charged to non-members; although the budgetary planning system will work on the basis that the cost of a conference will be covered by payments made by members who attend;
(viii)	the award of recognised professional qualifications; and
(ix)	the provision of an examination structure for the award of such qualifications (for which fees were also charged).

(2)	Until about 2001 the Institute had published the Gazette and the 	Journal itself: it commissioned articles and conducted the editing of the 	magazine, sold advertising space, and paid for its printing and 	distribution. In September 2001 the publication of the Gazette as 	transferred to Step, and in January 2002 that of the Journal was 	transferred to Step.

(3)	An agreement (the 2001 agreement) dated 10 October 2001 was 	executed between the Institute and Step setting out the arrangements 	for the publication of the Gazette. We shall refer to that agreement’s 	terms later but among its major terms were (1) an obligation that Step 	publish and distribute the Gazette, (2) an obligation that the Institute 	provide details of the recipient members’ names and addresses and 	editorial assistance, and (3) an obligation on Step to pay 20%, of its net 	profit to the Institute. There was no copy before us of any formal 	agreement in relation to the Journal.  We find that it is more likely than 	not that there was one in the same form as that relating to the Gazette.

(4)	The effect of this agreement was that the Institute no longer received 	any advertising revenue, and no longer paid the costs of printing and 	distributing the Gazette. Broadly, its loss of the net profit generally 	obtained from producing the Gazette (since advertising revenue 	generally exceeded production costs) was compensated for in the 20% 	right.

(5)	Whilst we had before us consolidated accounts for the Institute and its 	subsidiaries for the years ending 30 September 2003 to 2004 we did 	not have a profit and loss account for the Institute itself.  Mr Burchett 	provided various figures for certain elements of the Institute’s 	expenditure. From the limited information available we find as follows 	in respect of the year ended 30 September 2003,

(i)	the Institute had subscription income of £1,250,224
(ii)	the Institute had other income deriving from investments and other activities. This income included examination fees, income from CPD accreditation and the sale of CPD printed matter, and from the sale of the Journal.

(6)	For the year ending 31 December 2003 the Institute became entitled to 	a payment of £76,569.39 + VAT in respect of its 20% share of Step’s 	profits under the 2001 agreement.

(7)	For the year to 30 September 2003 the Institute submitted its VAT 	returns on the basis that [83.35%] of its subscription income related to 	taxable supplies and the remainder to exempt supplies. It used this 	figure and the 	values of its other taxable and exempt supplies to obtain 	a fraction representing taxable outputs ÷ total outputs, and reclaimed 	that fraction of its residual VAT.

(8)	The 83.35% figure was calculated on the basis that £1,042,806 of its 	£1,250,224 subscription income represented the cost to the Institute of 	the Gazette.

(9)	The activities of Step in the relevant period appear to have been limited 	substantially to the publishing of the Gazette and the Journal.  In 2001 	its revenue from advertising and non-member sales of the publication 	was some £1.2m, its direct costs some £435k and its related 	distribution and administration expenses some £670k.

(10)	We conclude from those figures that the value to Step of publishing the 	Journal was in its advertising revenue, and we infer that its advertisers 	were principally interested in reaching the members of the Institute, 	and that consequently being able to represent to advertisers that the 	Gazette was distributed to the Institutes’ members was an important 	reason for the 2001 agreement requiring the Institute to provide labels 	for the names and addresses of the members.

(11)	The distribution of the Gazette features prominently in the Institute’s 	website under the heading “Why join the IBMS?” followed closely by 	the Journal. We heard no direct evidence of its importance to members 	or of the value they might ascribe to the publications, but we conclude 	from the Institute’s website that the delivery of the Gazette and the 	Journal was of importance to the Institute and something it wished to 	secure, and that its receipt was one of the more valued services 	received by the members.

The Parties’ Arguments

(a)	The Appellant’s argument

17.	The Appellant says that following the 2001 agreement it initially calculated the portion of the subscription fees attributable to the Gazette and the Journal as being the amount of the cost of sales recognised therefor in Step’s accounts.  However following a visit by the Respondents’ officers in October 2002, the Respondents wrote on 14 January 2003 requiring it to use “the foregone advertising revenue” (i.e. the advertising revenue which as a result of the 2001 agreement and the transfer of the Journal to Step now accrued to and remained with Step) as the measure of the amount of the subscription income which represented the provision of the Gazette and Journal.  

18.	It is not immediately absolutely clear whether the phrase used in the 14 January 2003 letter, “the forgone advertising revenue” refers to the gross advertising receipts no longer received or the net profit or “revenue” obtained from advertising.  In a letter from a different officer of 16 June 2004 the Respondents set out their then view that it should be the latter – and that such amount would be the 80% of net profit retained by Step.

19.	The Appellant now accept and contends that foregone advertising revenue is the only proper means of valuing the provision of the publications but say that this is the amount of the gross receipts forgone – subject to the following deductions.

20.	The Appellant accepts that in determining the advertising revenue foregone 100% of the net profit made by Step should be deducted from the gross advertising revenue.

21.	Whilst the Appellant notes that the publications are sold to non-members – so that it is possible to determine what the market value of the publication is – it accepts that, given that there is relatively little income derived from, and comparatively few such sales (although they are not insignificant), the market cover price of the publications should not be used to determine the amount of the subscription attributable to the publications.

22.	Mr Peters and Mr Burchett argue that since Step’s activities are effectively limited to the production of the Gazette and the Journal the amount obtained by deducting its net profit from Step’s gross revenue represents the cost of production of the publications which would have been incurred directly by the Institute in the past, and is therefore the best figure to use to estimate the cost of the publication to the Institute.

23.	The Appellant argues (as do the Commissioners) that the “cost” to the Institute of the production of the publications is the figure which should be used as the proportion of the subscription income which represents the provision of the Gazette and the Journal, and the “cost”, the Appellant says is the net value of the advertising revenue which the Institute ceded to Step, and that is the gross advertising revenue obtained by Step less Step’s retained profit.  That this approximated to the cost of production of the publications supports their argument that their figure represents the cost to the Institute of the production of the publications.

24.	The Appellant says that the effect of the 2001 agreement is that it gave to Step the advertising revenue which the Institute had previously earned, and that giving it away was the cost of getting the publications.  A cost it says is just as much a cost when it is alienation of income as when it is payment of cash.

25.	Mr Peters says that the major benefit of membership for most members is the receipt of the Gazette.  As a result it is hardly surprising that the majority of the membership subscription should be treated as relating to it. The Appellant’s method he says is fair and represents reality.

(b)	The Respondents’ Argument

26.	Mr Barnes takes me to the judgment of Lindsay J in Public and Commercial Service Union.  At paragraphs 29 and 30 Lindsay J considers the competition between a division of subscription income on the basis (1) of the market value of the relevant benefits received and (2) alternatively by reference to the cost to the Union of provision of the benefits. He concludes that neither is invariably wrong and that the choice to be made between the two depends upon a number of factors.  In the instant case the Appellants concede that cost is the appropriate basis.

27.	Here Mr Barnes says that in pure cash terms the publications are produced at no cost to the Appellant. In fact the reverse.  But he says the Commissioners accept that it would be unfair to treat none of the subscription income as relating to the publication.  It is accepted, he says, that there should be an apportionment on the basis of cost, but “cost” must mean the loss of access to profit.

28.	He says that the effect of the 2001 Agreement was that the Appellant gave away 80% of the profits of producing the publications. Previously it kept 100% of the advertising revenue and bore 100% of the publication costs, retaining thereby 100% of the net profit; now it receives only 20% of the net profit. It has therefore given away 80% of the profit and that is the true measure of the cost to the Appellant of the provision of the Journal.

29.	He, like the Appellant, agrees that there is no perfect way of dissecting the subscription income but he says that the Commissioners’ approach is the best available.

30.	This approach leads to 37.25% of the 2002/03 subscription income being treated as attributable to the publications. That he says is about right when you consider what the members get for their subscriptions – the Institute spends that money not on the publications (they are an income source), but on the other services it provides.

31.	He says that the effect of the 2001 agreement is that the Institute surrender to Step 80% of the net profit in return for the provision of the Gazette and the Journal. That surrender is the cost to the Institute.

32.	He criticises the Appellant’s approach saying that it effectively equates Step’s costs with the Institute’s costs: advertising revenue less profit is effectively Step’s costs; but the Institute does not bear those costs, Step does: instead the cost to the Institute is what it has given up and that is the profit.

33.	He says that to treat 83.35% of the subscription income as attributable to the cost of the publications (which is the result of the Appellant’s method for determining “cost”) is unrealistic: it bears no relationship to the limited cost to the Appellant of producing the magazines when compared to the costs incurred in providing other benefits.

34.	Mr Burchett and Mr Peters say this cannot be right. What if advertising revenue fell and Step made no net profit, would that mean that there was no cost to the production of the magazine?  Likewise if costs increased e.g. if there was a sudden large bad debt (e.g. for advertising) it could wipe out any profit.  Did that mean that there was no cost? That would be a wholly unreasonable conclusion.

Discussion

35.	Section 19(4) VATA provides that where a supply of goods or services is not the only mater to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.

36.	It seems to us that where there is a cost, the relative costs of the benefits provided can form a fair basis for the apportionment of income, and can therefore produce a figure for the consideration properly attributable to a particular element of a package of supplies.

37.	However where there is no cash cost – where, as here, the cost of the supply is in fact negative this method is very difficult to apply.  The parties assert that there is in reality an economic cost by reference to which apportionment should be made, but the nature of that cost is very different from the kind of cost considered in Public and Commercial Services Union and in The Royal College of Anaesthetists.

38.	We also note that this appeal does not relate to a “special method” of residual input tax recovery such as might be approved or directed under Regulation 102 and to the issues of fair and reasonable attribution which might arise in relation to such an appeal.  No such method has been proposed by either party.  But it is in the context of residual input tax recovery that the appeal has been brought, and we note that some of the correspondence between the parties referred to the fair and reasonable criterion.

Supplies under the 2001 agreement

39.	But it seems to the Tribunal that there is a prior consideration.  This is the consideration of the supplies made under 2001 agreement.

40.	It seems to us that the key provisions of the 2001 agreement are these:-

(i)	clause 2.1 : the Institute appoints Step to publish the Gazette.
(ii)	clause 3.1 and 6.1 : copyright in the Gazette and its contents and 	trademarks and goodwill remain with the Institute.
(iii)	clause 3.3 and 11.1.1 : Step agrees to limit its activities broadly to the 	publication of the Gazette. 
(iv)	clause 5 : the Institute controls the editorial policy of the Gazette and 	appoints an editorial board.
(v)	clause 7 : Step appoints an editor with the approval of the Institute.
(vi)	clause 8 Obligation of Publisher : Step is required to produce 12 issues 	of the Gazette a year and to distribute them to members of the Institute 	and to non-member subscribers. Step maintains non-member records 	and the Institute produces the address labels.
(vii)	clause 12 : the Institute agrees to provide address labels for member 	copies of the Gazette and to provide editorial advice and assistance.
(viii)	clause 14 : the Institute is entitled to subscribe 17.5% of Step’s share 	capital and to examine its books.
(ix)	clause 15 : “In consideration of the [Institute] granting [Step] the right 	to publish the Gazette … [Step] will pay [the Institute] twenty per cent 	of the Net Profit of [Step].  Net profit is defined to exclude this 	payment and certain other expenses.
(x)	clause 16 : Step is to use reasonable endeavours to develop the 	advertising.

When we look at what the Institute had to do and did under this agreement,, its practical obligations were principally to deliver the address labels and to help with the editorial process.  Both of these were of value to Step: the value of the Gazette to advertisers lay we have found in their ability to reach members of the Biomedical profession through it.  That meant that ensuring it reached the Institute’s members was important to Step.  The Institute’s assistance with editorial policy would also help ensure the relevance of the Gazette to its readership.

41.	What did the Institute get in return?  It got two things – first the delivery of the Gazette with an editorial policy of which it approved, and it got 20% of Step’s “Net Profit”.

42.	It seems to us that the consideration received by the Institute for what it did was those two things, and not just the 20%.  These two things were prescribed by the agreement and it was important to the Institute that both were done.  There was in our view such a legal contractual nexus between the things done by the Institute and those things done by Step, that for the purposes of VAT there was such a direct connection between them that those things done by Step were consideration for the things done by the Institute.

43.	Thus the Institute made a taxable supply to Step but the consideration was not limited to the 20% of Net Profit and encompassed the delivery of  the Gazette to its members.  (See also in Empire Stores paragraph 21 of the Advocate General’s opinion: “the taxable amount is everything which constitutes the consideration …” – his emphasis.)  What was the value of the supply made by the Institute?  Whatever that value is, it is that amount on which the Institute was liable to pay VAT (see section 2(1)(a) VATA) and by reference to that amount, as a component of each of the numerator and denominator in Regulation 101, by reference to which the Institute’s residual VAT recovery should be determined.  (The supply by the Institute to Step being clearly a supply taxable at the standard rate.)

44.	In Empire Stores Ltd v Customs and Excise Commissioners [1994] STC 623, the ECJ considered the amount of the value of the consideration received by Empire Stores (from a person who gave consideration to Empire Stores in the form of introducing a customer) in return for which Empire Stores had provided an article offered by Empire Stores.  The Court said:

“17.	Moreover since the services provided to Empire Stores are remunerated by the supply of goods the value of the services can unquestionably be expressed in money.

18.	As for the determination of that value … the consideration taken as the taxable amount in respect of a supply of goods is subjective value, since the taxable amount is the consideration actually received and not a value estimated according to objective criteria.

19.	When that value is not a sum of money agreed between the parties, it must in order to be subjective, be the value which the recipient of the services constituting the consideration for the supply of goods attributes to the services which he is seeking to obtain and must correspond to the amount which he is prepared to spend for that purpose …”

So, can the value to the Institute of Step’s delivery of the Gazette to its members be expressed in money, and if so what is its subjective value?  This brings us back, albeit in a different context to the issues debated between the parties and described above.  We conclude below that this amount can be expressed in money and should therefore form part of the numerator and denominator of the Regulation 101 fraction.  But before we set out our reasoning we should address the parties’ criticisms of this approach.

45.	Mr Barnes says that realistically viewed the 2001 agreement is not a contract for the supply of address labels by the Institute; it is the delivery to Step of the opportunity to make profit from the advertising revenue: Step does not want address labels, it wants the advertising revenue and the contract delivers that to them.  But it seem to us that even if what the Institute does is to supply that opportunity – even if that is a proper description of what it does – it does that for a consideration consisting of the delivery of the magazines and the 20% of the Net Profit.

46.	Mr Peters notes that the Institute is not simply providing address labels under the contract; it is also making available its intellectual property and editorial experience.  We agree, but the question is what is the value of its total supply?  Is it simply 20% of Net Profit or something greater?

47.	We suggested to the parties that the value to the Institute of Step’s delivery of the magazines was what the Institute would be prepared to pay for the production and delivery of the magazines since that would be the amount it would otherwise “be prepared to spend for that purpose”.

48.	Mr Barnes says that that is not right.  It fails to take into account the advertising expenditure.  What the Institute was prepared to spend is what it gave up, namely the profit which accrued to Step.  He would say that by `spend’ the ECJ did not mean paying in cash but the suffering of an economic cost.

49.	He says that Step is not paying the Institute by taking over its operational costs, it was purchasing an opportunity to made revenue and the value put on the consideration by the Institute would be seen (by it) in that light.

50.	Mr Peters’ earlier argument may also be relevant.  In the argument recited above we note that he said that if advertising revenue dipped in a particular year so that Step made a loss, that could not mean that there was no cost to the provision of the Gazette.  Likewise here: would the value to the Institute of having the Gazette published and sent to its members be nil where the cost of producing it exceeded the advertising revenue?  Surely in that case what the Institute would pay for someone to take the Gazette’s publication off its hands would be at least an amount equal to the loss.  That should point to cost of production being the value to the Institute.

51.	We note that this contract is different from, for example, a sale of goodwill or a business in return for annual profit linked payments.  In those cases the vendor retains no ongoing interest in the use made of what is transferred.  Here the Institute demands and gets the Gazette sent to its members.

52.	In Customs and Excise Commissioners v Bugeju [2000] STC 1 Carnwath J said at p.7f:

“To summarise, in my view, the true criterion is the subjective value to the supplier of the goods or services received as consideration.  …  The method adopted to attribute a monetary amount to the consideration will vary according to the facts.  It must, however, be `one which proves most direct and least distorting and which is most in conformity with the general scheme of the Sixth Directive’ …”

53.	In Bertelsmann v Finanzamt Wiedenbrück [2001] STC 1153, the ECJ noted the holding in Empire Stores that the subjective value must be the amount which the recipient attributes to the services and correspond to the amount he is prepared to spend to that end, and continued, at paragraph 24, that in the case in hand “all the expenses borne by the recipient of the supply to obtain the supply in question including the cost of incidental services … make up the value of the supply.”

54.	In H J Glawe Spiel v Finanzamt [1994] STC 534 the question was whether the provider of a gaming machine was taxable on the gross amount put into the machine or the net retained by the owner.  The Advocate General said of the argument for the gross amount:

“… that view is inconsistent with the commercial reality of the transaction … for all practical purposes the operator’s turnover consists in the amounts he is able to remove from the machine, and not in the total amounts inserted by the players.”

Lord Slynn in Eastbourne Town Radio Cars v Customs and Excise Commissioners [2001] STC 606 at paragraph 15 noted this as a general pointer to the use of commercial reality in VAT.

55.	Bearing this guidance in mind we have to decide which approach to the value to the Institute of the supply of the magazines to its members is the most direct, most consistent with commercial reality and least distorting and is in conformity with the general scheme of the Direction.  There seem to be three possibilities:-

(i)	the value is the cost it would have to pay for the printing and distribution of the Gazette and the Journal;
(ii)	the value is the value of the gross advertising revenue it gives up as a result of the contract because that is what it has spent;
(iii)	the value is represented by the net profit of Step – the difference between its advertising revenue and its cost because that is the commercial expense which it did and was prepared to spend to acquire the distribution of the Gazette and the Journal.

56.	In favour of (ii) is that it would leave the Institute’s residual recovery function the same before and after the 2001 agreement.  Before it would have been

					        A__  
A + S
            
Where A was its advertising output and S its subscription income (assuming for the moment that none of that income was separately apportioned to the Gazette), and under (ii) it would be the same. But (ii) is what it has given up, not what it would be prepared to spend.  Absent the agreement the Institute would receive the advertising income but also spend the production cost.  

57.	And (i) represents what the Institute would spend to have a magazine printed and distributed whose content it had organised, and whose advertising it had sold; but the Institute is not receiving just that: it is instead receiving the distribution of a magazine where someone else has sold the advertising.  

58.	It seems to us that (iii) represents what commercially the Institute was prepared to spend.  It also seems to produce a result more in conformity with the general scheme for recovery of VAT and in particular residual VAT because one would presume that in hiving off the production of the magazines this would be a reduction in residual VAT (or in the related overhead costs) and one would thus expect the fraction of residual VAT recoverable thereafter to diminish since less would be indirectly attributable to the provision of the Gazette.

59.	Thus in our view the value of the supply to Step should be treated as:

(a)	the 20% Net Profit figure plus
(b)	the 80% Net Profit retained by Step.

Splitting the Subscription

60.	That, of course still leaves the question as to whether there should in addition to the addition of the amount determined by (b) in the preceding paragraph to the numerator and denominator of the Regulation 101 fraction, also be an adjustment reflecting a split of the subscription income to reflect that some part of it is in return for the procuration of the delivery of the publications.

61.	If the Institute’s sole supply to its members were the publications then, even though procuring their delivery to its members would not cost it anything that would not stop the procuration of that supply from being a taxable supply by the Institute to its members in return for the subscription fee.  Thus where it is agreed that separate and distinct services are comprised in a package remunerated by the subscription fee it cannot be correct to say that because a particular service costs nothing to supply none of the subscription fee can be treated as attributable to it.  Thus the issue of proper apportionment of the fee remains.

62.	We start by noting that if the method of that apportionment is made by reference to the cost to the Institute of the service and the same method is used for determining the value of the provision of the magazines by Step that would not necessarily be double counting.  It is not because the cost would be used for different purposes in each calculation: in one to determine a subjective value and in the other as part of a practical way to apportion an amount actually received.

63.	In Madgett v Baldwin [1998] STC 1189 the ECJ in seeking a way to make an apportionment favoured one which had the benefit of simplicity, but in this case neither method is significantly simpler than the other.

64.	Next we note that as Lindsay J said in Public and Commercial Services Union at paragraph 35, “it is to be remembered that the Commissioners’ assessment stands until it is defeated … it is for the taxpayers to prove that it is wrong …”

65.	We also note that we are not dealing with a statute which expressly permits or requires apportionment on the basis of cost – where the statutory meaning of `cost’ could be considered – but with a practical approach – illuminated by settled cases – to the statutory question (in section 19(4)) as to what part of the consideration “is properly attributable” to the supply: we are trying to find a proper attribution, not a definition of `cost’.

66.	The Commissioners’ assessment is based on treating the net loss of revenue (i.e. broadly the net profit of Step) as the Institute’s cost of producing the Gazette, because it is the expense (or loss) it incurs as a result of the arrangement with Step.  Whilst we can see that gross revenue forgone may also be regarded as an expense, the Commissioners’ approach does not seem to us to be wholly unreasonable.  The criterion of simplicity seems to us to point no more to the Commissioners’ method than to the Appellant’s method.

67.	If we had had evidence that the typical member regarded his subscription as being, say, 60% for the Gazette then it might have been possible to say that this cost apportionment did not reflect the bargain understood by members and Institute, and that any cost apportionment was wrong.  But we did not.  Mr Peters asserted it to be the case but there was no substantial evidence to that effect.

68.	We understand Mr Peters’ point that if Step’s income or cost changed such that there was no profit then there would be no part of the subscription allocated.  But that does not tip the scales so far as to say it makes the Commissioners’ method unreasonable and wrong in circumstances such as those relating to the years under appeal where as we understand it there was a profit

69.	The Appellant’s method effectively treats the Institute as incurring the costs of Step for the purposes of the apportionment.  We tend to the view that these are not costs to be treated as incurred by the Institute.  Thus it does not seem to us that this method is clearly better than that promoted by the Appellant.

70.	On balance therefore we have not been persuaded that the Appellant’s method is better than the Commissioners or so much better as to make the Commissioners’ method wrong.  Nor are we able on the material before us to provide a better method of our own.

The result

71.	As a result, to the extent this is an appeal against the decision of the Commissioners as to the method of apportionment of the subscription fee set out in their letter of 23 January 2007 we dismiss the appeal.

72.	To the extent however that this is an appeal against the assessment in respect of the period 12/03 we allow the appeal in principle and in part.  The assessment should be based upon the difference between the residual VAT actually claimed and that which result from the application of the following fraction to the Institute’s residual VAT for the period:
					S(G) + T + Step
					S + T + Step + E

Where:
S(G)  :	is the portion of the subscription income determined to be related to taxable supplies including the supply of the periodicals with the portion attributable to the periodicals determined according to the Commissioners’ method;

S:	is the total value of subscriptions;

T:	is the value of taxable supplies by the Institute other than as derived from Step or from subscription income;

Step:	is the value of the supply made by the Institute to Step as determined according to the methodology set out in this decision;

E:	is the value of any other exempt supplies by the Institute.

73.	Since we did not have before us sufficient evidence of the value of these elements to determine the assessment we adjourn this appeal for the parties to agree the relevant values and in default of agreement to return to the Tribunal.  (We have set out in the Annex to this decision an example of this calculation based on the figures we extracted from the documents before us but it is annexed by way of example only and we make no finding in relation to the figures used.)

CHARLES HELLIER
CHAIRMAN

RELEASED: 12 March 2008
LON 2007/0359