The High Court held that an independent school was not liable to pay VAT on charges made to parents for participation in optional arrangements for the refund of school fees since the charge was part of the consideration in respect of a single exempt supply of educational services to parents who participated in such schemes.

Facts

The taxpayer was an independent day school and a registered charity. Parents of the pupils were sent an invoice at the commencement of each term requesting payment of fees for the forthcoming term. On the invoice, the taxpayer offered parents the chance to participate in a scheme described as a fees refund arrangement. For a payment of 1.5 per cent of the fees, the fees would be refunded on a pro rata basis in situations where the pupil became unable to attend school through illness, accident, etc. The invoice for fees each term was prepared on an opt-out basis so that parents were required to delete the scheme charge from the invoice if they did not wish to participate. The taxpayer was able to operate the scheme by purchasing an insurance policy under which it was indemnified for any fees it refunded.

Customs had previously accepted that the grant of a right by the taxpayer to participate in the scheme, and similar grants by other schools, were part of the exempt supply of education for VAT purposes within art. 13(A)(1)(i) of Council Directive 77/388. However, following a review of the position, they took the view that the supply was a separate standard-rated service. The tribunal dismissed the taxpayer's appeal ([2007] BVC 2,426; Decision No. 20,122). It held that, whilst the fee refund scheme related to the supply of education by the taxpayer, it could not in itself be described as a supply of education since there were two separate supplies by the taxpayer, one of education and one of entitlement to the refund of school fees in prescribed circumstances. The taxpayer appealed.

Issue

Whether the charges to parents for joining the fee refund scheme where pupils were unable to attend school fell within art. 13(A)(1)(i) of Council Directive 77/388 (as recast by Council Directive 2006/112/EC) which provided a mandatory exemption against VAT for children's or young people's services.

Decision

Henderson J (allowing the appeal) said that the scheme conditions expressly provided that participation in the scheme altered the parent's contract with the school for the provision of educational services. As the tribunal had correctly noted, there was nothing to prevent the parties to a contract from effecting a variation of it by mutual agreement, and the terms of a written instrument might be varied by a subsequent agreement, whether written or oral. However, its finding that the standard terms were not varied when parents joined the scheme by paying the fees due from them but that there was a separate and additional consideration for the scheme, involved a clear error of law and could not be supported. There was no reason not to give effect to the stated intention of the parties that participation in the scheme should alter, or vary, the contract previously entered into between a parent and the taxpayer. The mere fact that a separate and additional consideration was paid for the variation did not lead to the conclusion that there was a separate contract. Apart from anything else, the provision of further consideration was necessary to make the variation contractually binding. The result of participation in the scheme was that there was then a single, but varied, contract for the provision of educational services by the taxpayer, on the standard terms and conditions as modified by the provisions of the scheme.

The general trend of recent authorities had been away from artificial splitting of transactions, and (where possible) towards a unitary or single classification which corresponded with the objective business reality of the transaction looked at from the perspective of the average customer, rather than that of the supplier. The economic reality was that the parent was provided by the taxpayer with two payment options for the same educational service. That was how a typical parent would view the matter, and that was the appropriate level of social and economic reality at which to examine the question. The parent was simply offered two different ways of paying for the child's education (Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) [2007] BTC 5,186; [2005] ECR I-9433 applied).

While it was true that the original contract for the supply of education was concluded on the taxpayer's standard terms and conditions, and participation in the scheme followed later, and was subject to its own terms and conditions, what mattered for present purposes was the position if and when a parent decided to participate in the scheme. At that point the original terms and conditions were varied, and while the parent chose to remain a member of the scheme, the terms on which he paid for his child's education would be varied accordingly. That variation did not affect the essential nature of the educational services supplied by the taxpayer to the parent.

Although it was well established that an appellate court should show appropriate deference to the decision of the tribunal in a borderline case, that principle could have no application where, as in the present case, the reasoning of the tribunal exhibited clear errors of law, and it was not just a question of how the primary facts should be evaluated.

Furthermore, it was important not to overstate what was entailed by the principle that exemptions from VAT should be strictly construed. In any event, that principle was not really engaged in the present case, because there could be no doubt that the educational services provided by the taxpayer came within the exemption for education, and the scheme was merely concerned with the means by which participating parents paid for those services. It was a measure of the artificiality of Customs’ case that it had to characterise the scheme as involving a supply of the entitlement to the refund of fees in prescribed circumstances. No-one would ever have described the scheme in those terms except for the purposes of a VAT appeal (Expert Witness Institute v C & E Commrs [2002] BTC 5,088 considered).

Chancery Division.
Judgment delivered 5 March 2008.