Revenue and Customs Commissioners v Metropolitan International Schools Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 November 2017 |
| Neutral Citation | [2017] UKUT 431 (TCC) |
| Date | 10 November 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0431 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Mann, Judge Ashley Greenbank
Eleni Mitrophanous, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Roger Thomas QC, instructed by Grant Thornton UK LLP, appeared for the respondent
Value added tax – Distance learning courses – Classification of supply – Whether supply of books within VATA 1994, Sch. 8, Grp. 3, item 1 – Jurisdiction – Legitimate expectation of agreed classification – Whether assessment depended on prior decision – VATA 1994, s. 84(10) – Entitlement to repayment supplement – Whether taxpayer entitled to VAT credit – VATA 1994, s. 79.
The Upper Tribunal (UT) overturned a decision of the First-tier Tribunal (FTT) ([2015] TC 04675) that distance learning courses provided by the taxpayer amounted to a single zero-rated supply of books. It found that the supply was a blended course of educational services containing a number of elements.
HMRC appealed to the UT against a decision of the FTT that supplies made by Metropolitan International Schools Ltd (the School) of distance learning services should be treated as a single zero-rated supply of books, under VATA 1994, s. 30 and Sch. 8, Grp. 3, item 1, rather than a standard-rated supply of education (the principal issue). The FTT had also given its views on two issues that would be relevant if the School failed on the principal issue. It decided that, if it had not found in favour of the School on the principal issue, it would have rejected the School's claims in relation to the other issues. In the event that HMRC were to succeed in its appeal on the principal issue, the School cross-appealed those decisions.
The UT heard that an agreement was reached between HMRC and the School in 1999 by which supplies made by the School were treated as involving two separate elements: zero-rated books; and standard-rated educational services. In broad terms, the result was that 75% of the value of supplies made by the School were zero-rated and 25% were standard-rated. In 2009, following a decision of the House of Lords in College of Estate Management v C & E Commrs [2005] BVC 704, HMRC withdrew from the agreement on the ground that the supplies should be treated as a single supply of standard-rated education.
Assessments were issued to the School in March 2010 to recover VAT said by HMRC to have been underdeclared. Following an application by the School for judicial review, HMRC conceded that it would not pursue the assessments for prior periods. The current appeals related to the matters referred from the FTT, but included two issues derived from the judicial review proceedings. Both issues were only relevant if HMRC was successful on the question of the nature of the supplies made by the School. The first was a claim by the School that, when HMRC withdrew the agreed method, the School had a legitimate expectation that it would be permitted to continue to operate the previously agreed method in relation to contracts already entered into (the run-off issue). The second was a claim by the School for repayment supplement in relation to payments of VAT for periods prior to 2009 that had been withheld following HMRC's initial decision that the agreed method should be withdrawn retrospectively (the repayment supplement issue).
On the principal issue, HMRC submitted that the FTT had erred in its determination that manuals were the principal supply and the other elements were ancillary. In their view, it had asked the wrong legal questions, in particular by considering how the supply was used rather than how it would objectively be viewed by the typical customer and by asking whether each individual element was an end in itself or independently provided education. The UT found that the FTT, although apparently demonstrating a thorough consideration of the facts, failed to give adequate weight to a number of matters, particularly in relation to the application of the principal/ancillary test. In the UT's view, the transactions could not fall to be treated as involving a single supply on the basis of this test and so it was inappropriate to use the test as a means of characterisation of the single supply.
The manuals could not be described as the “principal element” of the supply as the term is used in case law, in the sense that all of the other characteristic elements of the supply were not an end in themselves but were for the “better enjoyment” of the manuals (Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] BVC 155). Nor were the other elements “subservient, subordinate or ministering” to the provision of the manuals (College of Estate Management v C & E Commrs [2005] BVC 704). So far as the FTT proceeded on the basis of a principal/ancillary test, it failed to acknowledge that some elements were not ancillary at all, and failed to give sufficient weight to others. For this reason, the decision of the FTT demonstrated an error of law. In the judgment of the UT, the supply by the School was not one of books on the basis of case law. Following the approach of the ECJ in Město Žamberk v Finanční ředitelství (Case C-18/12) [2013] ECR I-0000, the UT weighed the importance of the various elements of the supply by reference to objective factors and concluded that the School provided a blended course containing different elements. The books were part of an overall package and it was not possible to say that they predominated. Accordingly, the supplies did not fall within the zero-rating given to the supply of books. It was not necessary for the UT to go further, but if it had to it would characterise the supply, in the eyes of the typical consumer, as one of educational services with no predominant feature. On this basis, HMRC's appeal on the principal issue was allowed.
Having determined the principal issue in favour of HMRC, the UT turned to consider the run-off issue, which concerned contracts entered into by the School before the withdrawal of the agreement by HMRC. The School claimed that it had a legitimate expectation that it would be permitted to continue to operate the previously agreed method in relation to these contracts. Having examined the evidence, the UT concluded that it was unnecessary for it to consider legitimate expectation and its applicability by the FTT or itself on an appeal. It confined itself to observing that, on the facts, while HMRC plainly reserved a right to re-visit the question of the correct treatment of supplies, there was equally plainly a legitimate expectation that its action would not be applied retrospectively. The School was entitled to rely on that, but legitimate expectation did not go so far as to allow the School to have a three year run-off period for long-term contracts. The School was not entitled to assume that it was entitled to conduct its business affairs in such a way as to impose a period of this length on HMRC, and there was no evidence that HMRC had indicated that such things were acceptable in the possible context of their revisiting the matter.
Finally, the UT considered the repayment supplement issue. It found that although the merit of the point lay with the taxpayer, its resolution lay in considering the technicalities properly. When thus viewed, it was HMRC that was correct. On the basis of the UT's finding on the principal issue, the return submitted by the School was technically incorrect and should have contained a higher output tax figure, which would have been greater than the input tax and prevented there being any net credit. Since repayment supplement only applies where a taxpayer is entitled to a VAT credit, as matter of law the School was not so entitled. It may well have had a legitimate expectation-type claim, but that could not be dealt with on this appeal. Acknowledging that the School might choose to pursue the matter within its ongoing judicial review proceedings, the UT rejected its claim and dismissed its cross-appeal.
This decision emphasises the difficulty for taxpayers in distinguishing between single and multiple supplies. The UT unusually found that the FTT had asked the wrong questions and had made an error of law in reaching its decision. Education providers that have relied on the FTT's decision and treated their educational courses as zero-rated will now need to review their position in the light of this judgment.
[1] This is an appeal from a decision of the First-tier Tribunal (Judge Howard Nowlan and Mr Julian Stafford) (the “FTT”) which was released on 2nd October 2015 (the “FTT Decision”). The FTT Decision is reported at [2015] TC 04675.
[2] In that decision, the FTT found that the supplies made by Metropolitan International Schools Limited (the “School”) of distance learning services to customers should be treated as a single zero rated supply of books (under section 30 and item 1 of Group 3 of Schedule 8 to the Value Added Tax Act 1994 (“VATA”)) and allowed an appeal by the School against a decision by HMRC that supplies made by the School should be treated as standard rated for VAT purposes. HMRC appeals against that decision. We have referred to this issue as the “principal issue” in this decision.
[3] The FTT Decision also set out the FTT's views on two issues that would have been relevant if the School had failed on the principal issue. These issues are summarised at paragraph [10] below and described in more detail later in this decision. In summary, the FTT decided that, if it had not found in favour of the School on the principal issue, it would have rejected the School's claims in relation to these other issues. In the event that HMRC succeeds in its appeal on the principal issue, the School cross-appeals against those decisions.
[4] The background to this dispute is set out in the FTT Decision (FTT...
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