20911

VAT – EXEMPT SUPPLIES – EXAMINATION SERVICES – Appellant supplied a package of software applications and IT support services to an examination board – whether the supplies constituted examination services – No – Appeal dismissed

LONDON TRIBUNAL CENTRE

	RM EDUCATION PLC
formerly known as
	RESEARCH MACHINES PLC  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      SUNIL DAS                                  (Member)	  

Sitting in public in London on 20, 21, 22 & 23 October 2008

Andrew Hitchmough and Oliver Connolly counsel instructed by Baker and Mackenzie, for the Appellant

Rebecca Haynes and Euan West instructed by the Solicitor of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The issue in this Appeal was whether specific supplies of services (known as the E - Marking Service) made by the Appellant to the University of Cambridge Local Examination Syndicate (known as UCLES) were exempt from VAT. The E-Marking Service in essence permitted UCLES as awarding body to mark exam papers on-line and perform a series of controls on the quality of the marking.
2.	The Appellant contended that its supplies fell within item 3 group 6 Schedule 9 VAT Act 1994, constituting the provision of examination services which were exempt from VAT.  Note 4 to group 6 provided a definition of examination services. 
3.	The Appellant supplied E-Marking Services to an eligible body, UCLES, which was then able to create a wholly new examination process designed to improve the quality of marking examinations and thereby enhance public confidence with the examination process. According to the Appellant, its supplies were integral to the new examination process, and, therefore, met the definition in Note 4 of other services provided with a view to ensuring educational and training standards were maintained. In the alternative, the Appellant argued that the definition of examination services in Note 4 was in any event non-exhaustive. Thus its supplies were examination services because they facilitated the improvement of marking standards.
4.	The Respondents contended that the Appellant’s supplies consisted of bespoke sophisticated IT software and associated support services which enabled UCLES to deliver its examination services. The essential character of the supplies was IT services, not examination services. In those circumstances, the Appellant’s supplies were standard rated for VAT purposes.
The Evidence
5.	We heard evidence for the Appellant from the following people:
(1)	David Knox Haggie, now the Assessment Services Director for the Appellant. In 2003 Mr Haggie was responsible for brokering the agreement for the Appellant to provide IT services to UCLES. Mr Haggie gave evidence about the Appellant’s services, their functionality and their benefits for the marking process.  
(2)	Geoffrey Hancock, Principal Examiner at Oxford Cambridge and RSA Examinations (OCR). Mr Hancock gave evidence about how e-marking transformed the traditional exam marking process  
(3)	Dr Helen Eccles, Head of Assessment Quality at OCR. Dr Eccles gave evidence about the improvements made to the examination process by the use of the Appellant’s services.
6.	No witnesses were called on behalf of the Respondents. The Tribunal received several bundles of documents in evidence, and observed a demonstration of the functionality of the E-Marking system.
The Law
7.	Article 13 of the Sixth Directive (77/388/EEC) exempts certain activities in the public interest. Article 13(1) states that
“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:
(i) children’s or young people’s education, school or university education, vocational training or retraining including the supply of services and of goods closely related thereto provided by bodies governed by public law having such as their aim or by other organisations defined by the Member State as having similar objects”.
8.	Section 31(1) of the VAT Act 1994 provides that a supply of goods or services is an exempt supply if it is of a description for the time being specified in schedule 9.
9.	Group 6 schedule 9 deals with the exemption for supplies of education. Item 3 which is of significance for this Appeal provides:
“The provision of examination services –
(a)	by or to an eligible body;
(b)	not applicable for this Appeal.
10.	Note 4 to group 6 defines examination services as:
“ including the setting and marking of examinations, the setting of vocational or training standards, the making of assessments, and other services provided with a view to ensuring educational and training standards are maintained”.
11.	The parties accepted that the Appellant provided services to an eligible body, which comprised a single supply for VAT purposes. The dispute centred upon the characterisation of the Appellant’s supplies as examination services.
The Facts
12.	The Appellant was a public limited company incorporated in England and Wales. The Appellant was incorporated as Research Machines (Finance) Limited on 30 November 1973. The Appellant subsequently changed its name to Research Machines Limited on 1 March 1984, to Research Machines plc on 25 November 1994 and most recently to RM Education plc on 8 January 2007. The Appellant was registered for VAT on 1 October 1994.
13.	The Appellant was a subsidiary of RM plc which was the ultimate holding company of the RM group of companies. The RM group was a leading provider of educational products and services to schools, colleges and universities, local and central government education departments and agencies in the United Kingdom. The RM group developed innovative products and services, focusing on the interaction of education and information technology to improve teaching and learning methods. The RM group was a significant business with revenues of £262.3 million and profits before tax of £14.5 million in the year ended 30 September 2006.
14.	The University of Cambridge Local Examination Syndicate (UCLES) with the trading name of Cambridge Assessment was a charitable body that acted for and on behalf of the Chancellor, Masters and Scholars of the University of Cambridge. UCLES was established in 1858 as a schools examination board, and has since developed into a major international education body, which developed and delivered academic and vocational exams, tests and qualifications in over 150 countries. Over eight million students took UCLES’ examinations and tests each year.
15.	UCLES’ examinations and tests were delivered through three subsidiary companies which were limited by guarantee: 
(1)	Oxford Cambridge and RSA examinations (OCR) which was a United Kingdom Awarding Body creating, designing and delivering general and vocational qualifications such as A – levels and GCSEs to over 13,000 schools, colleges, employers and training providers in the United Kingdom.
(2)	The University of Cambridge International Examinations, which was one of the world’s leading providers of international school examinations and international vocational awards.
(3)	The University of Cambridge ESOL Examinations which provided exams and tests for students and teachers of English for speakers of foreign languages in 135 countries including the United Kingdom.
16.	In August 2003 Mr Haggie approached UCLES to explore the potential opportunities for the Appellant to provide it with electronic assessment services. At the time the United Kingdom’s examinations regulator, the Qualifications and Curriculum Authority, was urging examination bodies to employ modern marking methods by embracing developments in information technology to improve the quality of their examinations.
17.	The Appellant and UCLES entered into a Memorandum of Understanding dated 16 January 2004, according to which the parties agreed that the Appellant would provide the E-Marking Services under a series of pilots to be agreed over time. The service was supplied for the first time to UCLES in March 2004 under a pilot scheme to test the efficacy of it. 
18.	On 18 August 2004 the parties entered into a framework agreement under which the Appellant provided UCLES with managed services in consideration of a fee. Under the agreement UCLES gave a warranty that it was an eligible body within the meaning of note 1 to group 6 of schedule 9 to the VAT Act 1994. Further if as a result of a determination by the Respondents that VAT became due on any of the Appellant’s supplies UCLES would pay the amount of VAT due. 
19.	Under the framework agreement dated 18 August 2004 the E-Marking System was defined as
“The Appellant’s system for the marking of examination scripts which shall include any combination of any number of the following elements as determined by the Appellant: (i) the scanning of examination papers and storage of that data, (ii) the deployment of one or more electronic marking tools which may include the use of electronic recovery of marks (iii) computer based testing (iv) software to support examiners or computers marking examination scripts (v) the use of NCS Pearson Patents, and (vi) the Appellant’s software and  third party software, and which shall always include any improvements, enhancements, adaptations and modifications to such system whether created or made by the Appellant or UCLES”.
20.	The NCS Pearson Patents consisted of one patent which claimed the processes of: scanning examination scripts and splitting them into individual answers; categorising answers and sending categories to specialist markers; and four patents which claimed particular aspects of managing the marking process. The Appellant held a licence to use the patents.
21.	A further framework agreement entitled to “E-Marking Managed Services Framework Agreement” was signed by the parties on 1 May 2007. This agreement defined e-marking system as the overall system which was contemplated in schedule 2 (of the agreement), which is integral to and used to provide the MFI service including the E-marking applications and underlying hardware.  The MFI service meant the marking from image service set out in schedule 2 part 1 including, where applicable, the MFI default level of service.
22.	Schedule 2 of the agreement outlined the MFI service, namely:
“….. a complete service to enhance the quality and efficiency of marking and to support UCLES’ business processes by allowing handwritten examination scripts to be marked on screen. The MFI service comprised the following interrelated processes and elements:
1.	Training – training examiners in the use of the e-marking system and process including standardisation and marking ….
2.	Web-based standardisation – the provision of systems and services to support examiner teams in selecting and preparing examination scripts for standardisation and for examiners to practise and carry out standardisation and the provision of reports to UCLES identifying the performance of individual examiners during standardisation including those marking outside acceptable ranges of accuracy.
3.	Coaching of examiners ….
4.	Item/response item group/ examination script level marking – a process allowing examination scripts to be marked by item, response item group or as a whole examination scripts.
5.	Double marking – a process allowing items to be distributed to more than one examiner so marks can be compared in order to test the consistency of a marking team and provide a means of collecting more than one mark for a particular candidate’s response  for examiner quality assurance and marking accuracy purposes.
6.	Seeding – a process allowing items to be pre-marked by senior examiners and then distributed to examiners to test the accuracy of their application of the mark scheme. Reports highlighting examiners’ marking outside acceptable tolerances are provided to support examiner quality assurance.
7.	Answer booklet marking – a process allowing examiners to mark unstructured response booklets on screen including linking pages together and adding comments and annotations in order to make clear to examiners and examiner management why particular marks have been awarded.
8.	Referral of examination scripts – a process allowing examiners to refer items they find hard to mark for marking by the senior team or for re-allocation to other examiners.
9.	Quality reporting – a provision of key reports to UCLES to enable examiner quality management and to support the overall awarding process;
10.	The MFI service includes the provision of the MFI default level of support.
23.	The Appellant’s supplies comprised three broad elements: exam paper management; standardisation; and marking. The exam paper management commenced when the Appellant collected candidates’ exam papers from schools, colleges and examination centres. The Appellant would then perform a number of reconciliations including   collected packets of exams papers with expected packets, and actual candidates’ details with expected details. Following the reconciliations, the Appellant used a sub-contractor to scan the exam papers into a secure computer database through which examiners accessed electronic copies of the papers. The standardisation process enabled a final review of the marking scheme by principal examiners and for them to test objectively whether individual examiners could apply the scheme. The Appellant then ensured that each eligible examiner had a suitable number of exam papers to mark. At the marking stage the e-marking system enabled principal examiners to monitor the performance of individual examiners, which included assessing their marking on seeded exam papers. After completion of the marking process the Appellant supplied an electronic return of marks and information to principal examiners on the marks awarded to candidates for different items in the exam papers, and gave them access to papers in ranges where a grade boundary might apply.
24.	The Appellant’s witnesses focussed their evidence on the changes and benefits to the examination process brought about by the e-marking service. The purpose of an examination was to deliver a fair and impartial assessment of a candidate’s performance against a clearly set of objective criteria. The examination process comprised three broad stages: setting an exam paper; presenting the exams to candidates; and marking the exam papers. The overriding aim of the marking process was to form an accurate judgment of each candidate’s performance in the exam relative to that of his peers. 
25.	The integrity of the marking process depended upon the process of standardisation which was a series of controls and procedures, designed to ensure examiners mark candidates’ exam papers to a consistent standard. Traditionally the standardisation process consisted of an initial meeting of the principal examiner with a small team of examiners to finalise the mark scheme for an exam, followed by a meeting attended by all examiners at which the principal examiner would explain the mark scheme. Once the papers had been marked using the scheme, the examiners would submit a sample of marked exam papers to senior examiners for remarking.  The traditional marking process, however, suffered from a series of inherent limitations which could significantly impact on the quality of an examination.  At each stage exam papers were bundled together and sent to examiners around the country by courier which created risks of delays and problems with lost or damaged papers. Further the controls available to principal examiners on the marking standards of individual examiners were constrained by the tight deadlines for marking papers and the lack of information on the competence of individual markers prior to the beginning of the marking process. 
26.	According to Mr Hancock the application of the Appellant’s software by the examiners had brought about the following benefits to the marking process:
(1)	Working on-line enabling examiners to share and discuss exam papers and resolve problems with senior examiners in real time.
(2)	Enhancing the ability of examiners to apply accurately a mark scheme, ensuring that they mark each question in an exam paper within the allowable range permitted by the marking scheme. 
(3)	Automatically calculating the marks awarded by an examiner in an exam paper.
(4)	Detection of aberrant marking by examiners at an early stage in the exam process through the use of seeded exam papers. The E-Marking system periodically distributed seeded exam papers to examiners, which have previously been marked by senior examiners in order to test the examiner’s accuracy. The examiners were unable to detect the seeded papers. The principal examiner received ongoing reports on the performance of individual examiners and able to take prompt action if the individual examiner fell below the required standard.
(5)	Enabling double marking to take place on a much larger scale.
(6)	Permitting item level marking whereby particular parts of a candidate’s paper can be marked by examiners with specialist knowledge.
(7)	Providing detailed reports and statistical information to principal examiners, which also assisted the process of setting exam questions for future papers.
27.	UCLES was able to implement a more effective quality assurance system as a result of the e-marking system. Essentially under e-marking, quality assurance was a continuous process whereas under a paper-based exam structure quality assurance  occurred at the end of the examination process, when it  was often too late to provide a resolution of the problem.
28.	  According to Dr Eccles the new quality assurance system yielded benefits in two particular areas: training and monitoring. Under e-marking the training package delivered competent examiners before they started marking. Further, the performance of individual examiners could be monitored throughout the marking process. 
29.	Dr Eccles identified improvements in two quality measures brought about by the application of the Appellant’s software. They were the proportion of examiners not marking correctly, and the number of enquiries by centres on their results,. The quantitative improvements, however, on the face of it, appeared relatively small: problem examiners: 1.97 per cent (paper based) to 0.09 per cent (e-marking); number of enquiries 0.59 per cent (paper based) to 0.26 per cent (e-marking). Dr Eccles suggested that the use of the Appellant’s software had created an entirely new examination process.
30.	Mr Haggie confirmed that the Appellant supplied UCLES with a package of complex bespoke software applications with IT support services. The software applications included a sophisticated data base allowing on-line marking, a work-flow engine which distributed exam papers and an integrated web service allowing access to the services. The support services included scanning services, and various teams of people dealing with management of the system, user helpline, and product development.  The Appellant’ software provided UCLES’ examiners with a menu of tools and applications from which the examiners could make choices in order to do their job effectively.  The rules and parameters of the tools and applications were determined by UCLES, for example, the principal examiners defined the rules of the marking system which were then incorporated in the software. The Appellant’s role was, therefore, to ensure that the software applied those rules. Likewise UCLES’ personnel determined the functionality of the software with the Appellant responsible for developing the software to realise the expectations of UCLES. 
31.	The intellectual property rights in the E-Marking system were held by the Appellant and relevant third parties. The Appellant granted UCLES a non-transferable and non-exclusive licence to use the system. Equally UCLES owned the intellectual property rights in the source materials which included the examination question content, marking schemes and the digital images of candidates’ responses.
32.	 Initially principal examiners decided whether examiners who had been identified as aberrant markers by the standardisation and seeding processes should continue marking. Since 2008 aberrant markers were automatically excluded from marking without reference to principal examiners.  
Findings of Fact
33.	 The Respondents broadly agreed with the Appellant’s description of its supplies. The Respondents, however, disagreed with the Appellant’s assertion that its services represented an entirely new examination process. In their view a more accurate description was that the Appellant provided a service which applied IT to the traditional marking process with a view to making it more efficient, consistent and accurate. 
34.	We find the following facts:
(1)	The United Kingdom’s examinations regulator, the Qualifications and Curriculum Authority, encouraged examinations boards to  improve the quality of examinations by using modern marking methods which embraced developments in information technology. The Appellant identified exam board services as a new area of profitable business which utilised the Appellant’s existing expertise in IT solutions. 
(2)	The Appellant supplied UCLES with a package of complex bespoke software applications with IT support services which enabled UCLES to deliver effective examination services. The software drivers of the Appellant’s supplies   consisted of applications, such as databases, workflow management, electronic imaging and web services, which were the mainstays of IT support systems cutting across a wide range of businesses.
(3)	The Appellant employed established third party software applications in conjunction with its own software in providing the IT services to UCLES.
(4)	UCLES determined the functionality required from the software, and set the rules for the operation of the IT applications to ensure that examiners met the required standards. The Appellant’s role was to find IT solutions to deliver the  functionality to the required standards.
(5)	The functionality of the Appellant’s software provided UCLES with a range of options not available under the traditional paper system for marking exams. The options included on-line marking, use of standardised and seeded exam papers, and electronic returns of marks.
(6)	The Appellant trained the examiners on how to use the software but not in marking exams.
(7)	The Appellant was not responsible for setting the curriculum, devising exam questions, establishing marking schemes and standards of marking, monitoring the performance of examiners, and the validation and accreditation of exams. These tasks were performed by UCLES.
(8)	Mr Haggie portrayed the automatic exclusion of aberrant examiners since 2008 as the Appellant’s decision. We, however, concluded that UCLES did not relinquish control over aberrant markers.  Only the method for excluding aberrant markers was changed, and that decision was taken by UCLES. 
(9)	 UCLES was dependent upon the Appellant’s software for the delivery of a substantial proportion of its examination services. UCLES, however, still used the paper based examination process for some subjects.
(10)	The use of the Appellant’s software package and services eliminated inefficiencies associated with the paper marking system, produced improvements in the quality of marking and enabled UCLES to implement a comprehensive and effective quality assurance process.
(11)	The application of the Appellant’s software, however, did not produce an entirely new examination process. The three broad stages of the Appellant’s supplies: the exam paper management; standardisation; and marking corresponded with the stages of the traditional paper based examination process. We preferred the Respondents’ description that the Appellant provided a service which applied IT to the traditional marking process with a view to making it more efficient, consistent and accurate.
The Parties Submissions
35.	The Appellant contended that the character and purpose of its services was to improve the accuracy and efficiency of the examination process including the standard of marking, which in turn led to an improvement in educational standards and enhanced public confidence in the examination system.
36.	The Appellant adopted a construction of note 4 to group 6 to the effect that the final phrase of note 4 with a view to ensuring educational and training standards are maintained provided the overall purpose for examination services. Thus, although Note 4 identified four separate categories of examination services: the setting and marking of exams; the setting of educational or training standards; the making of assessments; and other services, those four separate categories shared the same purpose as articulated by the final phrase of note 4.
37.	The Appellant developed its argument by considering the aims of examinations and their marking. The Appellant contended that the examination process of itself did not improve the standard of education. The purpose of the process was to determine whether educational standards have been met. Marking was an integral part of the examination process because it provided the method for deciding the achievement of standards. In effect examinations and marking constituted quality control  mechanisms which ensured the maintenance of educational standards. Thus in the Appellant’s view note 4 to group 6 was all about quality control. 
38.	The Appellant’s line of argument was in response to the Respondents’ statement of case, which appeared to draw a distinction between improvements in the standard of marking and educational standards. In the Appellant’s view this distinction was misconceived. On its analysis marking exams and educational standards were inextricably linked. Thus improvements in marking would result in a better system of quality control, which in turn would give assurance that educational standards were being maintained.
39.	Having established the link between examination services and educational standards, the Appellant focussed its submissions on the construction of other services provided with the view to ensuring educational and training standards are maintained. In the Appellant’s view, the use of the word other before the word service should be read as any other service (apart from those specifically referred to in note 4) which has the purpose of maintaining educational standards. The Appellant considered that the facts demonstrated that the Appellant’s supplies were integral to UCLES examination services, and had produced discernable improvements in the quality of marking which in turn contributed to the maintenance of educational standards. In those circumstances the Appellant’s supplies qualified for exemption from VAT.
40.	In the alternative, the Appellant contended that if the Respondents were correct to distinguish between the marking process on the one hand and educational or training standards on the other, then the definition of examination services in note 4 was non-exhaustive because it started with the word includes.  The Appellant’s E-Marking Service was by its very nature a comprehensive marking process which UCLES had adopted. It was a process designed to improve the standard and efficiency of marking. These improvements started with the collection of candidates’ scripts and continued through to the grading process. In the Appellant’s view it was wholly unrealistic to suggest as the Respondents did that the E-Marking Service was anything other than an examination service.
41.	The Respondents contended that the essential objective character of the Appellant’s supplies were bespoke complex IT  services, which in their view did not fall within the definition of examination services. 
42.	The Respondents argued that the exemption under schedule 6 of group 9 related to the provision of education and training. Item 3 dealing with examination services must be read in that context of having a connection with education. Thus examination services would embrace such matters as, curriculum guidance, the establishment of standards of achievement in a particular subject or discipline, the devising and setting of examinations or assessments, and the evaluation of the candidate’s performance in such examinations or assessments. The Respondents pointed out that the Appellant accepted that it did not perform any of those functions. Further the Appellant conceded in its skeleton argument that the service did not consist of the setting and marking of exams. 
43.	The Appellant’s attempt to bring itself within other services was flawed in two respects. First the Appellant was wrong to adopt a wide construction of Note 4 in respect of its definition of examination services. The correct approach to Note 4 was to construe other services narrowly and with reference to the previous parts of Note 4, in that other services should have an examination service colouring. This approach was consistent with the general rule that exemptions from VAT should be strictly interpreted. Thus the Appellant was incorrect to stretch the meaning of other services to any service provided with a view to maintaining educational standards. Second, the Appellant’s proposition that an improvement in marking led to an improvement in or the maintenance of education and training standards was false as a matter of logic. In the Respondents’ opinion, measurement itself did not affect what was being measured. An improvement in the marking of examinations may equally demonstrate a decline in educational standards as much as any maintenance or improvement in those standards.
44.	The Respondents concluded that the statutory context for other services demanded a restrictive interpretation, which did not cover the Appellant’s supplies because they were not strictly speaking examination services.
45.	Likewise the Appellant’s alternative argument was misconceived which was based on the notion that its services were integral to UCLES’ operations, and, therefore, by definition examination services. The Respondents submitted that the Appellant was seeking with its argument to bring in any service that formed a functional part of the marking process within the exemption. The Respondents considered the Appellant’s submission to be an unwarranted extension of the scope of exemption for examination services.  The Respondents demonstrated the flaws in the Appellant’s argument with illustrations of supplies, such as a typing service transcribing poorly written exam scripts, a postal or dispatch service for delivering scripts or the supplies of ergonomic chairs for examiners which would be caught by the exemption if the Appellant’s argument was correct.
Reasons for Our Decision
46.	The parties agreed that the Appellant was a supplying a single supply of services to an eligible body. Thus the sole question to be determined was whether the Appellant’s supplies to UCLES constituted examination services.
47.	Our starting point was to decide the objective character of the services supplied by the Appellant to UCLES. We found as fact that the Appellant supplied UCLES with a package of complex bespoke software applications with IT support services which enabled UCLES to deliver effective examination services. Although the software was bespoke in the sense that it was geared to UCLES’ business requirements, we formed the view from the evidence that the software drivers of  the Appellant’s supplies   consisted of applications, such as databases, workflow management, electronic imaging and web services, which were the mainstays of IT support systems cutting across a wide range of businesses. In short the core applications and methodologies deployed by the Appellant to meet UCLES’ business requirements were not unique to the educational sector.
48.	Further we found that the Appellant was not responsible for setting the curriculum, devising exam questions, establishing marking schemes and standards of marking, monitoring the performance of examiners, and the validation and accreditation of exams. On the evidence there was a clear division of responsibility between UCLES and the Appellant. Essentially UCLES decided on all matters that related to examinations, and determined the rules and the functionality of its processes for delivering the exams. The Appellant’s role was to devise IT solutions to meet the requirements of UCLES, and to manage the IT solution in accordance with the service standards agreed with UCLES. The Appellant’s supplies in themselves had no intrinsic educational content.
49.	We found that the Appellant’s evidence obscured the distinctive roles of UCLES and the Appellant in the examination process.  The witnesses focussed on the improvements to the examination process brought about by the increased functionality and efficiencies generated from the application of the Appellant’s supplies rather than what was actually done by the respective parties to the business arrangement.  This focus produced in our view exaggerated claims of the nature of the Appellant’s supplies, which were portrayed as an e-marking system even though the Appellant accepted that it did not set and mark exams. Further the Appellant’s characterisation of its supplies as to improve the accuracy and efficiency of the examination process was devoid of content. The characterisation did not inform the Tribunal about the nature of those supplies and what the Appellant actually did. Also it overlooked the fact that any improvements to the accuracy and the efficiency of the examination process would depend upon how UCLES defined and applied the functionality of the IT system supplied by the Appellant. In short the Appellant played a supporting role which helped UCLES with the delivery of examination services.
50.	Having decided that the Appellant’s supplies consisted of a package of complex bespoke software applications with IT support services with no intrinsic educational content, the next question is whether those supplies constituted examination services within the meaning of item 3 group 6 schedule 9 of the VAT Act 1994. 
51.	We start with the principle governing the construction of exemptions from VAT, namely, that as a general rule VAT applies to all supplies of goods and services effected for consideration. Exemptions to VAT must be construed strictly but not to the extent of reading into an exception a meaning which was not apparent from the words and from any legislative purpose. Article 13(1)(i) of the Sixth Directive exempts education and vocational training including the supply of services closely related thereto. The Sixth Directive makes no specific reference to examination services, from which we conclude that only those examination services that are closely related to education would qualify for exemption.
52.	We consider that the principle of strict construction and the wording of Article 13(1)(i)  provides the context for the interpretation of the meaning of examination services within item 3 group 6 schedule 9 of the VAT Act 1994, and in particular Note 4 which defined examination services as:
“ including the setting and marking of examinations, the setting of vocational or training standards, the making of assessments, and other services provided with a view to ensuring educational and training standards are maintained”.
53.	We hold that when Note 4 is viewed in the context of strict construction and the wording of Article 13(1)(i) the Respondents’ construction of  Note 4 was correct. Thus each limb of note 4 should be considered separately, and that the final limb of other services must be construed as its own distinct residual category but coloured by  the nature of the services described in the first three limbs. In short other services did not stretch to any service provided with the view to maintaining educational standards but was restricted to those services that were closely related to education with a view to maintaining educational standards. 
54.	The Appellant conceded that the only limb of Note 4 that might apply to its supplies was other services provided with a view to ensuring educational and training standards are maintained. We found that the Appellant’s supplies consisted of a package of complex bespoke software applications with IT support services with no intrinsic educational content. We hold that the Appellant’s supplies were too remote and not closely related to education to qualify for exemption under Note 4. Their essential character was the provision of IT services which could be applied across a range of activities not just examination services. The Appellant’s supplies in themselves did not ensure the maintenance of educational standards. They were one step removed from that aim because their link with examination services and ensuring educational standards depended upon how they were applied by UCLES. Their purpose was to enable UCLES to perform its functions. We consider that the Appellant’s proposition that its supplies were somehow connected with educational and training standards was based on a misconception that the Appellant’s supplies and UCLES services were inextricably linked forming one continuous supply of examination services. The reality was somewhat different, the Appellant supplied IT services to UCLES which then adapted the Appellant’s technology to make its supplies of examination services.  The Appellant’s supplies were separate and distinct from UCLES’ supplies of examination services. UCLES still continued to provide examination services for some subjects using the traditional paper based examination process.
55.	The Appellant’s wide construction of Note 4 was prompted by a comment in the Respondents’ statement of case that the Appellant’s services at best improved marking but that did not give rise to ensuring the maintenance of educational standards. We consider the comment did not constitute the substantive part of the Respondents’ case which was in effect that the Appellant’s supplies did not carry out the services normally identified with examination services. Also we note that Respondents’ counsel at the hearing focussed her arguments on the strict construction of the legal provisions dealing with exemption for examination services.  
56.	We consider the Appellant’s alternative argument equally flawed. First the principle of strict construction favoured an exhaustive definition of examination services as set out in Note 4. Second, if we are wrong on an exhaustive definition, we return to our principal finding that the Appellant’s supplies comprised supplies of IT services not closely related to education, and, therefore, did not have the character of examination services.
Decision
57.	For the reasons given above we decide that the Appellant’s supplies were not examination services. We, therefore, dismiss the Appeal. The Respondents made no application for costs. The Appellant requested that we reserve its position on costs in the event of dismissal, which we so do and direct that the Appellant inform the Respondents and the Tribunal of its intentions in respect of costs within 28 days of release of this decision. In the event of no notification within the 28 days, its purported application for costs would lapse.

                          

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 9 January 2009

LON/2006/0857