Kumon Educational UK Company Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 January 2014 |
| Neutral Citation | [2014] UKFTT 109 (TC) |
| Date | 20 January 2014 |
| Court | First-tier Tribunal (Tax Chamber) |
[2014] UKFTT 109 (TC)
Judge Greg Sinfield, Mrs C E Farquharson.
Mr David Milne QC and Ms Sadiya Choudhury, instructed by Greenback Alan LLP, appeared for the Appellants
Mrs Melanie Hall QC and Mr Alan Bates, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - Output tax - Provider of standard-rated tuition programme set up subsidiary to provide worksheets - Whether subsidiary made zero-rated supplies of worksheets - Whether supplies of worksheets part of single standard-rated supply of services - Whether contractual arrangements a sham - Whether contractual arrangements abusive practice - Appeals allowed.
The First-tier Tribunal upheld the taxpayer companies' appeals against decisions of HMRC that restructuring of tuition to provide necessary worksheets through a subsidiary company did not result in the creation of separate zero-rated supplies of printed matter under Value Added Tax Act 1994 ("VATA 1994"), schedule 8 group 3Sch. 8, Grp. 3. Applying the principles established in the case of Telewest Communications plc v C & E CommrsVAT[2005] BVC 156, the tribunal held that the supplies of the two taxpayer companies under separate agreements could not be a single supply for VAT purposes. Finding that the arrangements were neither a sham nor an abusive practice, the tribunal allowed the taxpayers' appeals.
Kumon Educational U.K. Co Ltd (KE) provided education in maths and English, via self-employed instructors, which was based on a teaching programme called the Kumon Method. Until 1 November 2005 it granted a licence to instructors and provided worksheets for the students in return for a single inclusive royalty payment per student. KE accounted for VAT at the standard rate on the royalty payments received. Subsequently, the worksheets were provided to instructors by a subsidiary of KE, Kumon Book Services (UK) Ltd (KBS), in return for a separate fee, which KBS treated as consideration for a zero-rated supply. HMRC rejected the claim to zero-rating. They took the view that the worksheets were merely a part of an artificially divided teaching programme and that there was no free-standing zero-rated supply. Assessments were issued to KE for VAT on the fees paid to KBS for the worksheets and alternative assessments were issued to KBS on the basis that it was liable to account for VAT at the standard rate on the consideration received from the instructors. The VAT in question amounted to £6.94m.
The issues for the tribunal were: firstly, whether KBS supplied worksheets to the instructors; secondly, if they did whether the supply of the worksheets was a separate supply or an element of a single supply by KE of the Kumon Method; and thirdly, if there was a separate supply of the worksheets, whether the doctrine of sham or the principle of the prohibition of abusive practices required the arrangements to be redefined as a single supply.
The taxpayers acknowledged that the arrangements introduced on 1 November 2005 were intended primarily to achieve a VAT saving, but submitted that under these arrangements KBS made zero-rated supplies of worksheets to the instructors. They relied on the Court of Appeal decision in Telewest Communications plc v C & E Commrs in support of the proposition that separate supplies by separate companies under separate contracts cannot not be regarded as a single supply. HMRC argued that the revised arrangements were ineffective for a number of reasons, namely: that there was no supply of the worksheets by KBS to the instructors because the instructors never acquired any right to dispose of the worksheets as owner; that there was a single supply of services, namely the right to use the Kumon Method, and no separate supply of the worksheets; that the creation of two separate agreements under the new arrangements was a sham and should be ignored; and that the new arrangements were an abusive practice which resulted in the accrual of a tax advantage that was contrary to the purpose of the VAT directives. HMRC submitted that the outcome of each of these was the same in that the instructors received from KE a single standard-rated supply of the right to use the Kumon Method. They claimed that the worksheets formed an essential and inextricable part of the Kumon Method and had no economic or commercial function without the tuition. HMRC sought to distinguish the present case from Telewest and submitted that, in any event, the principles established therein could not be applied in cases of sham and abuse.
The tribunal could find no material distinction between the present case and Telewest. Following the principles established by the Court of Appeal in that case, the tribunal held that supplies by two suppliers under two contracts could not be a single supply for VAT purposes. The proper analysis was that KE supplied the right to use the Kumon Method under a licence agreement and KBS supplied worksheets under a worksheet sales agreement. This conclusion was predicated on the assumption that the arrangements were neither a sham nor an abusive practice. Having considered the submissions of both parties, the tribunal held that the arrangements in this case were not a sham. That in itself did not dispose of the issue of abusive practice, since the principle of abusive practice is wider than the doctrine of sham. However, in the opinion of the tribunal, the transactions under the agreements put in place on 1 November 2005 were not wholly artificial arrangements and reflected the economic and commercial reality of the supplies made by and between KE, KBS and the instructors. HMRC had failed to establish that the revised arrangements under which KBS supplied worksheets to the instructors were an abusive practice. The judgment of the tribunal was that the supplies of the worksheets by KBS should not be regarded as elements of a single supply by KE of the right to use the Kumon Method. KBS made zero-rated supplies of the worksheets within VATA 1994, schedule 8 group 3Sch. 8, Grp. 3. The appeals were allowed.
Having waited more than ten months from the hearing date, the First-tier Tribunal finally released its decision upholding the taxpayers' appeals. Even though the appellants admitted that the restructuring of the tuition programme was implemented with the primary intention of saving VAT, the tribunal rejected HMRC's contention that the arrangements were artificial. It found that the agreements correctly reflected the supplies made by each party and that the arrangements were neither a sham nor an abusive practice.
[1]Kumon Educational U.K. Co., Limited ("KE") provides education in Maths and English to children in the UK based on a teaching programme called the Kumon Method via a network of self-employed instructors.
[2]Until 1 November 2005, KE granted a licence to instructors to exploit the Kumon Method and provided worksheets for the instructors' students in return for a single inclusive royalty payment per student. This was treated as a single supply of services. KE charged and accounted for VAT at the standard rate on the royalty payments that it received.
[3]From 1 November 2005, KE continued to grant the instructors a licence to use the Kumon Method and a subsidiary of KE, Kumon Book Services (UK) Limited ("KBS"), provided the worksheets to the instructors in return for a separate fee. KE accounted for VAT at the standard rate on the royalty payment. KBS treated supplies of the worksheets as chargeable to VAT at the zero rate. The aggregate amount paid by the instructors to KE and KBS was materially the same as the instructors had previously paid to KE alone.
[4]In March 2009, the Respondents ("HMRC") decided that, notwithstanding the changes from 1 November 2005, KBS should not be regarded as making zero rated supplies of the worksheets. HMRC considered that there was no free-standing zero rated supply of the worksheets. The worksheets were merely a part of an artificially divided teaching programme. On the basis of that analysis, HMRC decided that KE continued to make a standard rated supply of the right to use the Kumon Method, which included the worksheets. HMRC assessed KE for VAT on the consideration paid by the instructors to KBS for the worksheets. In case their primary analysis was shown to be wrong, HMRC also issued alternative assessments, for identical amounts, to KBS on the basis that KBS was liable to account for VAT at the standard rate on the consideration received by it from the instructors. The amount of VAT at stake is £6.94 million.
[5]KE and KBS now appeal against the assessments. The only question for determination is whether KBS made a zero rated supply of worksheets but this requires several issues to be considered.
[6]For the reasons set out below, we have concluded that KBS made zero rated supplies of the worksheets and those supplies should not be regarded as elements of a single supply by KE of the right to use the Kumon Method. Accordingly, our decision is that the appeals by KE and KBS are allowed.
[7]There was no dispute between the parties that, during the period under consideration, article 28(2)(a) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment, and article 110article 110 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (together "the VAT Directives") allowed the UK to apply VAT at a zero rate to the supply of books, booklets and leaflets.
[8]Value Added Tax Act 1994 section 30Section 30 of the VAT Act 1994 ("the VATA") provides that a supply of goods or services is zero rated if the goods or services are of a description specified in schedule 8Schedule 8 to the VATA. ...
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