The issue was the determination of the proportion of the appellant's subscription fee income which should be treated as representing taxable supplies. This determination was required in the context of the appellant's right to recover the fraction of its residual input tax which was its taxable outputs divided by its total outputs.

The appellant was the professional body for biomedical scientists in the UK and had 16,000 members. It was common ground that the Institute was a professional association falling within VATA 1994, Sch. 9, Grp. 9, item 1(b). Accordingly, its supplies of membership were, in principle, exempt from VAT. However, it was also common ground that the appellant was entitled to benefit from ESC 3.35 (Notice 48 (2002 edn)), which allows non-profit making bodies to apportion their subscriptions between standard-rated, zero-rated and exempt supplies. This concession enabled qualifying bodies to recover input tax attributable to the standard-rated and zero-rated elements of its subscriptions. In the appellant's case, a benefit was provided to members in the form of the Institute's Gazette and its Journal which were delivered to members as part of their membership benefits. The commissioners accepted that the appellant was entitled to recover the VAT cost of providing this benefit and the method used for this was the standard partial exemption method provided for in reg. 101 of the Value Added Tax Regulations 1995 (SI 1995/2518). However, the parties failed to reach agreement on how to divide the membership subscription in order to calculate the values of taxable supplies and exempt supplies.

The commissioners cited Public and Commercial Services Union v C & E Commrs [2004] BVC 446 in which the High Court considered the competition between a division of subscription income on the basis of market value of the relevant benefits received and on the basis of the cost of providing the benefits. It concluded that neither is necessarily wrong. In the present case, the appellant considered cost to be the appropriate basis. In the commissioners’ view, since, under a current agreement, the appellant gave away to the publisher 80 per cent of the profits of producing the publications, that was the true measure of the cost of providing the publications. This led to 37.25 per cent of the subscription in 2002–03 being treated as attributable to the publications.

The appellant argued that the ‘cost’ of the production was the figure which should be used as the proportion of the subscription income representing the provision of the publications. That, said the appellant, was the net value of the advertising revenue which it ceded to the publisher, and that was the gross advertising revenue of the publisher less its retained profit. In the appellant's view, the fact that this approximated to the cost of production of the publications supported the argument that this represented the production cost to the appellant. The effect of the agreement with the publisher was that the appellant gave away the advertising revenue which it had previously earned and that giving it away was the cost of getting the publications. The result was that 83.35 per cent of the subscription income was treated as attributable to the cost of the publications.

The tribunal considered the appellant's obligations under its agreement with the publisher and noted that it was obliged to deliver address labels and to help with the editorial process. In return, the appellant received delivery of the publications and 20 per cent of the publisher's net profit. There was such a legal contractual nexus between the things done by the appellant and those done by the publisher that they amounted to consideration from each party to the other. Thus, the appellant's consideration was not limited to the 20 per cent of profits received. Since agreement could not be reached between the appellant and the commissioners on the value to the appellant of the supply to its members, the tribunal identified three possibilities: first, the cost it would have to pay for the printing and distribution of the publications; second, the value of the gross advertising revenue the appellant gave up to the publisher; or third, the net profit of the publisher, that is the difference between its advertising revenue and its cost since this was the commercial expense which it incurred to acquire the distribution rights. Having considered these possibilities, the tribunal concluded that the third option represented what commercially the appellant was prepared to spend.

The question remained of whether an adjustment was required to reflect that some part of the subscription income was in return for the procuration of the delivery of the publications. The assessment issued by the commissioners was based on treating the net loss of revenue as the appellant's cost of producing the publication, because it was the expense incurred as a result of the arrangement with the publisher. Whilst the tribunal acknowledged that the gross revenue forgone might also be regarded as an expense, the commissioners’ approach was not wholly unreasonable. There was also some validity in the appellant's point that if the publisher's income or costs changed so that there was no profit, then there would be no part of the subscription allocated to the publications. However, that did not tip the scales to the point at which the commissioners’ method became unreasonable in respect of the period under appeal where there was a profit. The appellant's method effectively treated it as incurring the costs of the publisher for the purposes of the apportionment. The tribunal decided that these were not costs to be treated as incurred by the appellant. On balance, the appellant's method was not better than that of the commissioners, or not so much better as to make the commissioners’ method wrong.

The tribunal allowed the institute's appeal in part.

1. To the extent that the appeal was against the decision of the commissioners as to the method of apportionment of the subscription fee, the appeal was dismissed.
2. To the extent that the appeal was against the commissioners’ assessment, it was allowed in principle and in part in accordance with a formula set out by the tribunal.
3. The appeal was adjourned for the parties to agree the relevant values.

No. 20,609