The Scottish Court of Session, allowing an appeal against the decision of the VAT tribunal ([2005] BVC 2,445), held that the exemption in art. 13(A)(1)(j) of Council Directive 77/388 (‘the sixth directive’) did not apply to the provision of tuition by teachers employed by the taxpayer acting as employees on the taxpayer's behalf.

Facts

The taxpayer company, trading as the Upleger Institute, carried on business as a provider of training courses in craniosacral therapy. Customs visited the taxpayer and became aware that tuition provided by a director of the company was being treated as an exempt supply for VAT purposes. Customs determined that, since the taxpayer company was not an eligible body under VATA 1994, Grp. 6, item 1, all supplies of tuition were standard-rated. An assessment was duly issued in the sum of £7,977 plus interest.

The taxpayer challenged that decision submitting that art. 13(A)(1)(j) of the sixth directive had not been properly implemented by the domestic legislation and, therefore, that it could rely on the directive. In particular, the taxpayer contended that art. 13(A)(1)(j) included supplies not only by individuals, but also by any other legal entity. It followed that tuition provided by the director and other employees of the company qualified for exemption.

Customs argued that items 1 and 2 of Grp. 6 properly reflected art. 13(A)(1)(i) and (j). The taxpayer was not providing private tuition in terms of the domestic legislation and the teachers, including the director, were not acting independently of the taxpayer. In Customs’ view, to qualify for exemption, the tuition had to be given privately and the taxpayer was not providing private tuition.

The VAT tribunal, allowed the taxpayer's appeal, concluding that the exemption in art. 13(A)(1)(j) had not been properly transposed into domestic legislation. Item 2 of Grp. 6 unjustifiably limited the scope of the exemption. Since the relevant provision in the sixth directive was sufficiently unconditional and precise, the taxpayer was entitled to succeed ([2005] BVC 2,445; Decision No. 18,963). Revenue and Customs appealed to the Court of Session.

Issue

Whether art. 13(A)(1)(j) of the sixth directive was properly implemented into domestic legislation, in respect of the provision of private tuition, by VATA 1994, Sch. 9, Grp. 6, item 2.

Decision

The Scottish Court of Session (Lord Macfadyen, Lord Abernethy and Lord Marnoch) (allowing the appeal) said that the court's task was to construe art. 13(A)(1)(j) of the sixth directive. In doing so, the court accepted: (1) that VAT was a turnover tax, the focus of which was on the nature of the transaction, not the identity of the supplier; (2) the principle of fiscal neutrality, that supplies of goods and services which were the same should be treated in the same way for VAT purposes; and (3) that differences relating to the identity or form of the supplier were generally irrelevant. On the other hand, the principle of fiscal neutrality could not provide the answer to every question of interpretation: as was recognised by the Advocate General in Re Hoffmann (Case C-144/00) [2005] BTC 5,010; [2003] ECR I-2921, at para. 60, it was not always the deciding factor. An exemption might be expressed in language which dictated, contrary to the principle of fiscal neutrality, that its scope depended on the identity or form of the supplier.

The relevance of the principle of fiscal neutrality in construing an exemption was therefore that if the language used admitted of two constructions, one which treated the identity of the supplier as relevant and one which did not, the latter was to be preferred. The principle of fiscal neutrality could not, however, constitute the basis for a construction which was contrary to the clear language of the provision in question (Gregg v C & E Commrs (Case C-216/97) [1999] BTC 5,341; [1999] ECR I-4947 per the Advocate General at para. 29).

The court accepted the submission of Customs that, while in general the principle of fiscal neutrality meant that the precise legal form adopted by a supplier of services did not matter, and that an exemption should prima facie be construed in a way which accorded with that principle, the application of the principle could be overcome if the wording of the provision made it clear that an exemption was available only to a supplier operating in a particular form. In the case of subparagraph (j), the words used, ‘tuition given privately by teachers’, made it clear that the exemption was available only where tuition was given by teachers acting in a personal or individual capacity, and not available where the tuition, albeit given by teachers, was given by them on behalf of some other person or body, such as an employer. That interpretation of the wording of the English version of sub-paragraph (j) was strongly reinforced by consideration of the other language versions. It was also consistent with a coherent scheme in which sub-paragraphs (i) and (j) did not overlap. The wording of sub-paragraph (j) thus demonstrated that, notwithstanding the principle of fiscal neutrality, the exemption was not intended to be available to organisations such as the respondent company, which provided tuition through employed teachers. So to construe sub-paragraph (j) was in accordance with the principle of strict construction of exemptions.

Examining the language of art. 13A(1)(j), there was no dispute that the taxpayer supplied tuition of the sort specified in the later words of the sub-paragraph. The focus, for the purpose of interpretation, was therefore on the words ‘given privately by teachers’. Subparagraph (j) was an example of an exemption expressed in language which, despite the principle of fiscal neutrality, made the nature or identity of the provider of the tuition an essential element in the definition of the scope of the exemption. On a sound construction of sub-para. (j), it applied only where the tuition was provided by a teacher acting in an individual or personal capacity, and did not apply to tuition provided by a teacher as an employee of a company or other organisation (Ambulanter Pflegedienst Kugler GmbH v Finanzamt fur Korperschaften I in Berlin (Case C-141/00) [2004] BTC 5,690; [2002] ECR I-6833 distinguished. Institute of the Motor Industry v C & E Commrs (Case C-149/97) [1998] BTC 5,484; [1998] ECR I-7053 considered).

Neither party had initially contended that a preliminary reference to the ECJ should be made but both had suggested that the court should not find against them without first doing so. The approach to be adopted in deciding whether to make a preliminary reference was set out in R v International Stock Exchange of the United Kingdom and the Republic of Ireland Ltd, ex parte Else (1982) Ltd [1993] QB 534 per Sir Thomas Bingham MR at 545D-G. Applying that approach, the court was satisfied with sufficient certainty that Customs’ interpretation of art. 13A(1)(j) was correct, and so it was not appropriate to make a preliminary reference.

Court of Session (Inner House, Extra Division). Judgment delivered 10 October 2006.