The Scottish Court of Session held that the supply of services relating to the training of student nurses and midwives by the taxpayer university through a subsidiary company formed for that purpose constituted an exempt supply of education for VAT purposes.

Facts

In 1996, the taxpayer and the Secretary of State for Scotland entered into an agreement by which the taxpayer undertook to provide nursing and midwifery teaching previously carried out by the NHS. In 2001, the taxpayer decided to construct a new facility to house its faculty of health and social care, which included the school of nursing and midwifery. The taxpayer's accountants proposed a VAT-efficient structure for the delivery of nursing training, involving the assignment to a subsidiary (‘the company’) of the contract with the Scottish Executive. The company was formed by the taxpayer in 1995 as a wholly owned subsidiary to provide courses primarily to commercial clients. It had no employees of its own, but was run by employees of the taxpayer. The intended result was that the services supplied by the taxpayer would become standard-rated, thereby allowing the taxpayer to recover input tax on attributable expenditure.

Customs maintained that the taxpayer had neither staff nor resources to meet its obligations under the 1996 agreement. The assignment of the agreement did not alter the substance of what the taxpayer was providing, namely education and necessary ancillary services. The only change was that the taxpayer now provided education to its subsidiary rather than to the Scottish Executive. The contract between the taxpayer and the subsidiary did not, in the view of Customs, determine the issue. They submitted that the taxpayer was attempting to de-construct a single supply into components, which had the effect of distorting the VAT system.

The taxpayer argued that there was a single stage at which teaching took place and, accordingly, there should be only one supply of education for VAT purposes. That was not the supply made by the taxpayer to the company in return for payment, but the supply by that company. The taxpayer stated that its obligations under the 1996 agreement to provide education had been assigned to the company and that that was effective as a matter of law. The taxpayer had undertaken to provide the company with services and staff. The only issue was whether it was making a supply to the company and, if so, whether that supply was of education. It was not legitimate for Customs to search for some other economic reality in order to recharacterise a transaction which was genuine, which created enforceable rights and obligations and which involved the making of supplies for VAT purposes. The commercial reality for the company was that it was required to enter into a contract with the taxpayer to be provided with staff and other services to enable it to fulfil its contractual responsibilities.

The tribunal decided that the supply was one of services which were not exempt ([2004] BVC 4,080; Decision No. 18,541) but on Customs’ appeal the Court of Session quashed that decision and referred the matter back for further findings of fact and for further argument on the evidence. The tribunal then allowed the taxpayer's appeal, concluding that there was no supply of education by the taxpayer to the company but only supplies of administration and staff services which were standard-rated ([2006] BVC 2,295; Decision No. 19,317). Customs appealed.

Issue

Whether the supply by the taxpayer university to its subsidiary was an exempt supply of education or a taxable supply of services and staff.

Decision

The Scottish Court of Session (Lord Penrose, with Lord Macfadyen and Lady Paton) (allowing the appeal) said that the starting point in discussing the central issue between parties was in the opinion of the Advocate General and the decision of the European Court of Justice in Stichting Regionaal Opleidingen Centrum Noord-Kennemerland/West Friesland (Horizon College) v Staatssecretaris van Financien (Case C-434/05) [2007] ECR I-4793 (a case not available to the tribunal). From that case it appeared that the supply of teaching staff by one educational establishment to another for the recipient to apply in the presentation of its own courses was not the provision of education but a supply of services falling outwith the scope of art. 13(A)(1)(i) of the Council Directive 77/388 (‘the sixth directive’).

It is not possible in this case to characterise the services supplied by the taxpayer to the company as a mere supply of one or more teachers. Nor could the supply be characterised as at most, simply to facilitate the provision of education by the company. On any view, the supply to the company was much more comprehensive in its scope than the supply considered in Horizon College. There was a combination of elements in the supply. The question was whether, as the law was now to be understood, the tribunal was entitled to conclude that that combination in the circumstances did not amount to the provision of education by the taxpayer. The tribunal adopted an approach that could not have been and was not informed by the decision in Horizon College. In a number of respects the tribunal's approach could not be reconciled with the authorities, including Horizon College.

In the present case, it was agreed that there was a supply by the taxpayer to the company. The issue was as to the characterisation of that supply. In that context, Customs had sought to persuade the tribunal and the court that the totality of the services provided amounted to a provision of education. However, by describing the arrangements as artificial, Customs had provided a focus for debate that might well have contributed to the tribunal mis-directing itself. It was not possible to support the tribunal's approach in the light of Horizon College. Apart from that it failed to address the issue of characterisation in any real sense. In those circumstances it was appropriate to approach the issue afresh in the light of the guidance in Horizon College.

The terms of the formal lease of a building to be used by the company reflected an intention that the company should be in a position to provide all forms of nursing education and training: it was not restricted to pre-registration education and training, but was comprehensive enough to include that level of education and training. In relation to teaching staff, the taxpayer remained the employer, responsible for all of the obligations of an employer, and solely empowered to discipline employees and to ensure their performance of their obligations, and that in the context of the provision of the university's own courses, which, in terms of the broader arrangements had to meet the requirements of the public authorities.

The company's sole right, as regards discipline over employees, was to report to the taxpayer, at whose exclusive discretion it lay to take action. Control over teaching, a core element in the provision of education, lay with the taxpayer which also retained ownership, and on the express terms of the contracts, possession of and control over the equipment required for the provision of nursing training and education. The lease effectively provided separately for the company's occupation of the building but ownership of the property was not material so long as it was available for the prescribed purpose.

It was clear that a degree of influence over the taxpayer's performance of its obligations was conferred on the company. Unless one were to dismiss the whole arrangement as a sham, which was not suggested by Customs, there was at least a sense in which the taxpayer was answerable to the company for the performance of its services under the arrangements. But that did not entitle one to ignore the realities of the situation. The interposition of control by the company was nominal and immaterial. It was unnecessary and unhelpful to characterise the whole arrangements as artificial for the purposes of resolving the issue between parties. What the taxpayer supplied to the company fell properly to be characterised as a provision of education, just as much as did the supply the university made to the Scottish Executive prior to the arrangements with the company.

Scottish Court of Session (Inner House, Extra Division).
Opinion delivered 6 March 2008.