The primary issues were whether publicly funded research (PFR) undertaken by the appellant university was a business activity and whether the exclusion by the commissioners of teaching grants from the university's business/non-business calculation knowingly understated the business income of the university.

The university was a charity providing education and undertaking research. Most of the supplies that it made were exempt from VAT, but some were taxable so it was partially exempt for VAT purposes. In 1998, the university agreed with the commissioners a partial exemption special method in which residual input tax was attributed by reference to the value of supplies using the formula: value of taxable supplies divided by value of taxable and exempt supplies excluding teaching grant. The teaching grant referred to the teaching element of the grant received from the Higher Education Funding Council.

In 2004, the commissioners issued assessments to the university, totalling £2,340,032, to recover input tax claimed. The assessments reflected the commissioners’ decision that the university's PFR was a non-business activity, that input tax attributable to PFR was wholly irrecoverable and that input tax attributable to commercial research projects should be treated as non attributable if students were involved in the project. In the opinion of the commissioners, PFR was neither concerned with the making of taxable business supplies nor linked to other business activities.

The university argued that VAT incurred on expenditure which formed a cost component of its PFR was deductible input tax since such activity was an ‘economic activity’ for VAT purposes. The university appealed on the grounds that first, the assessments were made after the one-year time-limit in s. 73(6)(b) of the Value Added Tax Act 1994 because the commissioners had been informed by the university in 2001 that PFR was treated as a business activity. Secondly, the university contended that the assessments had not been made to best judgment because exclusion of the teaching element from the partial exemption calculation undervalued the exempt supplies, yet the commissioners chose to exclude this element from the business/non-business apportionment used for the assessments. Finally, the university contended that by excluding the teaching element from the business/non-business calculation the commissioners knowingly understated the business income to its detriment.

The university contended that the commissioners excluded the teaching grant from the business/non-business calculation to correct what they believed to be an imbalance in the partial exemption special method. The commissioners argued that in determining the method of apportionment, their objective was to achieve a result that was fair and balanced. Had the teaching grant been included in the calculation, it might have unbalanced the result because of the fact that the grant could support both exempt business education and non-business research. Had the grant been included, it would have been inconsistent to exclude other grant income. Also, had all income been included in the denominator with business income in the numerator, the result would have been far larger assessments.

The tribunal dismissed the university's appeal.

1. By restricting the apportionment method to unsubsidised business income and unsubsidised non-business research income, the commissioners used figures that were known and, in the tribunal's view, that were balanced. Inclusion of the teaching grant in the business income would have overstated the university's business use of inputs without allowing for the inclusion of additional non- business grant income.
2. The assessments were made to the commissioners’ best judgment and the quantum should not be disturbed. The commissioners had always accepted that inclusion in the partial exemption calculations of the teaching grant was a proxy because the exempt supply of education was undervalued. Such action might not be appropriate in all cases, but in the present case it produced a result that was fair and reasonable.
3. The commissioners did not possess sufficient facts to assess until they had given the university ample time to demonstrate that it was entitled to treat PFR as a business. The assessments were, therefore, not issued out of time.

No. 20,174