Article by Sylvia Elwes, Barrister, FTII, ACCA, lectures in law at the University of Luton. She teaches VAT and Europe on the Law of Business Taxation course leading to a LLM degree.
This article appeared in the March 2002 issue of Tax Adviser.
The statutory rules about exemptions from value added tax (VAT), including those relating to education, have often been the subject of judicial proceedings and statutory interpretation. The House of Lords in Card Protection Plan v C & E Commrs  BVC 158 had to decide whether a card protection plan offered by an insurance company in addition to insurance cover was exempt from VAT. Under the plan credit card holders were protected against financial loss arising from the theft or loss of cards and other items such as car keys, passports and insurance documents. The issue was whether there were two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether there was only one composite supply, one of the two supplies being the principal supply to which the other was ancillary.
Their lordships said it was necessary to look at the essential features of the transaction to see whether it was in fact two principal services or a single service. What is economically a single service should not be artificially split. The dominant purpose of the scheme was to provide insurance cover, although there were ancillary services not possible to independently categorise as insurance. As the elements of the transaction could not be economically dissociated from each other they were all categorised as exempt.
In Pilgrims Language Courses Ltd v C & E Commrs  BVC 328 a company which ran residential courses teaching English as a foreign language provided services to its students quite apart from the language tuition. Catering and accommodation for the residential courses, excursion trips and transport to and from the airport were included. It claimed that the provision of these services was exempt from VAT. In the first place, the services formed part of a composite supply of education, exempted from VAT as the provision of education by an eligible body under Value Added Tax Act 1994 (VATA 1994), Sch. 9, Grp. 6, item 1. Alternatively, the services were ‘closely related’ to the provision of education and came within the express wording of the exemption in VATA 1994, Sch. 9, Grp. 6, item 4.
The Court of Appeal applied the ruling of the European Court of Justice (ECJ) in Card Protection Plan v C & E Commrs  BVC 155. It was necessary to look at the essential features of each transaction. There was a single composite supply where one or more elements made up the principal supply and others were ancillary because they did not constitute aims in themselves for customers, but simply a better way of enjoying the principal service. It was necessary to identify the supplies involved, to establish whether one or more principal supply was involved and – if there was more than one principal supply – to establish to which particular principal supply each ancillary supply was ancillary. On this test, the provision of meals and accommodation was not an aim for the students in themselves, but a means of better enjoying the principal service supplied and thus exempt as part of a composite supply of education. In addition they were services ‘closely related’ to the supply of education and were therefore exempt under VATA 1994, Sch. 9, Grp. 6, item 4.
Students’ Unions and soft drinks
Recently, the Court of Appeal ruled in C & E Commrs v University of Leicester Students’ Union  BTC 5,064 that the sale of soft drinks by the Students’ Union was not a VAT exempt supply . The appeal in this case was not over whether the supply was closely related to the supply of education. That issue was to be determined at a later date. The dispute was whether the Students’ Union was an integral part of the University of Leicester and therefore entitled to the same exemption as the university on the provision of goods and services closely related to education.
The Value Added Tax Act 1994, s. 4 provides that a taxable supply of goods is a supply of goods and services other than an exempt supply.
Section 31(1) of the same act provides that a supply of goods and services is an exempt supply if it is of a description specified in Sch. 9.
Schedule 9 Grp. 6 applies to education. It exempts:
‘1.The provision by an eligible body of –
(4) The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1.(the principal supply) by or to the eligible body making the principal supply provided –
(a) the goods or services are for the direct use of the pupil, student or trainee (as the case may be) receiving the principal supply; and
(b) where the supply is to the eligible body making the principal supply, it is made by another eligible body.
1 For the purposes of this Group an “eligible body” is–
(b) a United Kingdom university, and any college, institution, school or hall of such a university;
(e) a body which–
(i) is precluded from distributing and does not distribute any profit it makes; and
(ii) applies any profits made from supplies of a description within this Group to the continuance or improvement of such supplies.
The VAT tribunal found that the union was an integral part of the university and so the drinks sold by the union could be regarded as sold by the university.
The Royal Charter of 1958 set up the union at the same time as the university. The union only operated in the context of the university and its buildings.
While the union had registered separately for VAT in 1973 this should be seen in the light of the imposition of a new tax. The Commissioners had agreed to register the union separately even though they acknowledged it was part of the university. Also the union registered for VAT with the consent of the university. The union came within the EU sixth VAT directive, art. 13(A)(1)(i), being ‘another organisation’.
On appeal, the High Court found, however, that the union was not an integral part of the university and that, therefore, the soft drinks sold in the union shop could not be regarded as supplied by the university.
As the drinks were not supplied by the eligible body making the principal supply (of education) they were not exempt from VAT.
Court of Appeal
It was argued on a further appeal to the Court of Appeal by the Students’ Union that under Note (1)(b) above, all colleges, institutions, schools and halls of a university are to be treated as part of that university. The Students’ Union is part of the whole body that makes up the university. It was set up under cl. 13 of a 1958 Royal Charter which also set up the Convocation of the University of Leicester. Clause 10 had set up the University Court and cl. 12 the University Senate. Under cl. 22 of the Royal Charter, any changes to its provisions could only be made with the consent of the Privy Council.
Moreover, under s. 13 of the University Statutes, the Representatives of the University who were entitled to permanent representation at the University Court included three representatives from the Students’ Union.
The Students’ Union could only operate within the university and it had an integrated function with the university to develop educational policy and promote educational issues. Moreover, the fact that it had a charitable status confirmed that its only purpose was to further the purposes of the university.
These arguments were rejected by the Court of Appeal.
Gibson LJ. said that,on the contrary, the University’s Charter showed that the university and the Students’ Union were separate institutions.
Clause 2 of the Royal Charter expressly mentioned that the Court, the Council and the Senate were incorporated as part of the University, but it did not mention the Students’ Union.
While it was true that three representatives from the Students’ Union sat on the University Court as ‘Representatives of the University’, they were only a very small proportion of the total number of the ‘Representatives of the University’ and an even smaller proportion of those who could sit in the Court. It did not show that the union was an integral part of the university.
While the Students’ Union plays an important role in the university and assists the educational process, this does not mean it is an integral part of the university. It is an unincorporated association with aims and purposes set out in its constitution. It is treated as an educational charity, but this does not mean that it is the same educational charity as the university. Nor does the fact that the university exercises control over the union, particularly in financial affairs, mean that it is not a distinct entity. The fact that the union is required on certain occasions to obtain the consent of the university points towards them being separate entities. Also, an agreement between the university and the union over the use of a particular building indicates that the university and the union are separate entities.
The union argued in the alternative that even if the union was not an integral part of the university, it was an ‘eligible body’ within VATA 1994, Sch. 9, Grp. 6, Note (1)(b) as it was an institution of a United Kingdom (UK) university.
Gibson LJ construed Note (1)(b) to mean the university itself, but in those cases where there are separate entities which are still part of the university, any of those separate entities. The common characteristic of the entities is that they supply education. For example, in the case of London University, University College London and the School of Oriental and African Studies would be included as separate entities, which are part of London University, both supplying university education.
Had the provision been intended to cover entities which supply services other than the provision of education it would have been explicitly stated. Provisions conferring exemptions from VAT must be restrictively construed. Thus the Students’ Union was neither included in ‘a United Kingdom University’ as being a separate entity, nor was it an ‘institution’ of the university, as it did not supply education.
Arden LJ came to the same conclusion as Gibson LJ – that the Students’ Union is not an institution of the University of Leicester within Note (1)(b) – but for different reasons. While the word institution does not necessarily involve education, it does denote the promotion of a public object. A Students’ Union does promote an object of public utility and so is potentially an institution of the university.
However, in Note (1)(b) the inclusion of the words ‘of the University’ after ‘institution’ gives the word ‘institution’ a narrower meaning. Arden LJ disagreed that the institution had to be a supplier of education, in the sense of supplying systematic instruction. Many educational institutions such as some Oxford colleges provide no teaching, but would still come within the term ‘institution’ in VATA 1994, Sch. 9, Grp. 6, Note (1)(b). In this context, an institution comes within Note (1)(b) if it has academic links with the university rather than pastoral or recreational links or exists to provide representation for one section of the university community on the organs of the university.
By this test, the Students’ Union was not an institution of the university and was not, therefore, an eligible body within VATA 1994, Sch. 9, Grp. 6, item 4.
Even had the court found that the union was an eligible body, it was still unlikely to rule that the provision of soft drinks by the union was exempt as VATA 1994, Sch. 9, Group 6, item (4) provides that the exemption only extends to the supply of goods or services closely related to the principal supply by an eligible body making the principal supply. The union even if an eligible body, does not make a supply of education, the principal supply. If the union was an integral part of the university, it could be argued that the supply of the soft drinks was made by the university in the same way as the sale by a division of a company is a supply by the company. The High Court had ruled, however, that the union was not an integral part of the university.
The union therefore argued on appeal that the sixth directive which VATA 1994 had implemented did not impose a requirement that the eligible body should have been responsible for making the principal supply. A Member State can define which organisations – that are not bodies governed by public law – may qualify for exemption, but they are not entitled to impose limitations on the scope of the exemption. It had been incorrectly implemented by the UK in VATA 1994 and it was entitled to rely directly on the directive.
Article 13(A) Council Directive 77/388 relates to ‘Exemptions in the public interest’.
‘1.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 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 organizations defined by the Member State concerned as having similar objects.’
The EU sixth VAT directive, art. 13(2) allows member states to attach further conditions to the granting to bodies other than those governed by public law of the exemption provided for in art. 13(1)(i), including that the body concerned shall not systematically aim to make a profit and that if profits nevertheless arise, they shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied.
It was argued that the words of the directive meant that provided a supply of children’s or young people’s education, school or university education, vocational training or retraining; or the supply of services and of goods closely related thereto is made by a body governed by public law or by any other organisation defined by the Member State concerned as having similar objects, then that supply is exempt.
The taxpayer argued that VATA 1994, Sch. 9, Group 6, item 4 implements this incorrectly by providing that only the person who makes the principal supply can obtain exemption for supplies closely related to the principal supply.
This argument was rejected by the Court of Appeal.
Firstly, the general scheme is that VAT should be imposed on the supply of goods and services by a taxable person unless the supply comes within an exemption. The exemptions must be strictly interpreted.
In EC Commission v Germany  ECR 2655 the court held that although exemptions were granted for activities with specific objectives, the provisions also define the bodies which are authorized to supply the exempted services.
Also, in Stichting Uitvoering Financiële Acties v Staatssecretaris von Financiën  ECR 1737 (the SUFA case) it was held that it was immaterial that the body claiming the exemption was closely related to another body which, had it made the supply, was exempt.
The word ‘including’ in art. 13 (1)(i) means that the supply of closely related services and goods is not on a par with the provision of education and training. It is an ancillary supply. As a matter of construction, the bodies which make the supply must have education or training as their aim or object. It is not enough to have as an aim or object the supply of services or goods closely related to education or training.
Arden LJ, however, held that as the union was not an eligible body, it was unnecessary to establish whether it had to make the principal supply under the EC directive and she was not prepared to give a ruling on this question.
In conclusion, the provision of goods or services in an educational context, but which are not to do with the supply of education as such, may cause problems to practitioners in deciding their status for VAT purposes. In the first place, there is the question of whether there are several distinct principal services or whether the supply is composite. In this latter case, where the principal supply is exempt from VAT, the other ancillary supplies are also treated as exempt. Alternatively, the supply of non-academic goods or services may be exempt by statute as ‘closely related’ to educational services.
Secondly, where an organisation – which is not an eligible body as defined by VATA 1994, e.g. a Students’ Union – supplies the goods or services which are not to do with the provision of education as such, it cannot claim exemption from VAT on the supply.
Finally, only an eligible body which provides principal services in this context, educational services, can claim exemption for goods or services closely related to those services.
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