The Scottish Court of Session held that, in providing further education courses funded by a grant from the Scottish Education Funding Council, the taxpayer was operating under a special legal regime applicable to the provision of education and was a public body governed by public law engaging in activities as such. Therefore it was not a taxable person for VAT purposes.

Facts

The taxpayer college was one of the larger educational establishments in the UK. It employed 550 staff, had an annual income of £25m and offered a wide range of subjects to about 20,000 students. The college buildings and facilities were extensive and spread over several sites. To centralise the facilities a new campus was constructed. This was a new build development of 30,000 square metres on a regeneration site and the cost was estimated at approximately £70m. In the course of its activities, the taxpayer received income for business and non-business supplies, business income amounting to 20 per cent of the total. The business income was further split between taxable and exempt supplies in a ratio of ten per cent to 90 per cent. Whilst the commissioners did not dispute that the taxpayer was entitled to adopt the approach in relation to the treatment of input tax arising from the decision in the case of Lennartz v Finanzamt M®unchen III (Case C-97/90) [1993] BTC 5,202; [1991] ECR I-3795, where goods or services were acquired for both private and business purposes (‘the Lennartz mechanism’), they decided that the taxpayer was not entitled to full recovery of input tax. The additional input tax recoverable under Lennartz was subject to the restriction of the taxpayer's partial exemption ratio a of 1 to 9. Even applying the Lennartz mechanism, deductible input tax was limited to ten per cent of the total VAT.

In accordance with art. 4(5) of the sixth directive, the taxpayer contended that it was a public body governed by public law and was engaging in activities as a public authority. It maintained that it was not, therefore, a taxable person and that its activities hitherto treated as exempt were non-business activities. Consequently, the taxpayer was not a partially exempt person and input tax was deductible in full. Alternatively, the taxpayer was, in any event, entitled to recovery of a substantially greater proportion of input tax on the development than the commissioners were prepared to allow. By restricting the recovery of input tax in relation to the non-business use by adopting the existing partial exemption ratio, the commissioners had failed to secure a fair and reasonable attribution of input tax.

The tribunal ([2005] BVC 2,328; Decision No. 18,913) concluded that, in supplying courses to students, the taxpayer operated under a private law regime and, accordingly, art. 4(5) did not have the effect of making the appellant a non-taxable person. It was the published policy of the commissioners to allow the Lennartz mechanism to be applied to construction services where at least part of the VAT had been incurred prior to 9 April 2003 (Business Brief 22/2003 (18 November 2003)). There was no dispute that the taxpayer had incurred construction costs well before that date. In calculating a reasonable value for the annual cost of private use, the commissioners adopted an economic life of 20 years. There was, therefore, no doubt that the taxpayer was entitled to input tax credit in respect of the construction services and that it was required to account for output tax on its non-business use as a deemed supply over a 20-year period. There was no real distinction between private use and use by an exempt supplier and no difficulty in applying the Lennartz mechanism by substituting exempt supplies for private use.

Finally, the taxpayer was entitled to a new ascertainment of a special method of attributing input tax which should provide for the treatment of construction costs as a separate sector. The commissioners were guilty of an error in law in maintaining that sectorisation did not produce a result that was fair and reasonable.

The taxpayer appealed against the finding that it was a taxable person within art. 4(5). The commissioners appealed against the finding that the taxpayer was entitled to recover the full amount of VAT on construction costs.

Issue

Whether, in providing further education courses funded by a grant from the Scottish Education Funding Council, the taxpayer was to be regarded as a taxable person; and whether, where the taxpayer engaged in non-business, taxable and exempt activities, it was entitled to immediate deduction of the total input tax charged on the construction costs of the campus.

Decision

The Court of Session (Lord President Hamilton, Lady Cosgrove and Lord Clarke) (allowing the appeal) said that the tribunal had erred in its approach in focusing exclusively on the nature of the relationship between the taxpayer and the individual student, as it might be perceived by the student, since that was nothing to the point in determining the main question in the case, namely, whether, in providing the relevant courses, the taxpayer was engaging in activities or transactions as a public authority.

Having regard to the plethora of statutory provisions which, both directly and indirectly, impacted on the way in which the taxpayer might provide funded courses, emanating initially from the executive's statutory duty to provide further education, in the light of the language of art. 4(5) of the sixth directive, the taxpayer, in providing funded courses, was acting as a public authority and not as a private trader. Some of the case law of the ECJ had provided authoritative guidance as to how the wording of art. 4(5) should be interpreted, and applied, by reference to the need to identify a special legal regime under which the public authority in question engaged in the activity or transaction in question. There was no real difficulty in identifying the existence of such a special legal regime arising from the provisions of the Further and Higher Education (Scotland) Act 1992 and its implementation in the documents and directions given by the Scottish Ministers and Funding Council. In the present case, the legal regime in question was special to the colleges which provided the courses in question. If there were private traders, which there were not in Scotland, who provided such courses they would not do so under that legal regime. Once it was accepted that the taxpayer was a public authority, it was clear that, having regard to the provisions of the statutory framework, it provided funded courses as an act of public administration and not as an act governed solely by the rules of private law. While the law did not always, and for all purposes, recognise a strict dichotomy between public and private law, there was no difficulty in reaching the view that, having regard to the jurisprudence of the ECJ, the activity of the college in question would be regarded as being governed to a significant extent under that jurisprudence by public, as opposed to private, law. There was no difference in principle between the situation of the taxpayer and that of the local authority providing secure residential accommodation under the Housing Act 1985, as discussed in West Devon Borough CouncilvC&ECommrs[2001] BTC 5,463, or that of the local authority providing cemetery places as described in Rhondda Cynon Taff County Borough Council [2000] BVC 2,226.

As regards the commissioners’ appeal, it was common ground that the tribunal had made certain errors in seeking to apply the Lennartz mechanism where goods or services were acquired for both private and business purposes. On any view, the taxpayer was not entitled to recover all of the input tax and the tribunal was wrong to say that no real distinction could be made between private use and use by an exempt supplier and that use of exempt supplies could be substituted for private use. Furthermore, while it was within the tribunal's jurisdiction to decide whether or not a determination by the commissioners was fair and reasonable, it did not fall to it to specify the method to be adopted. The parties had now agreed and put in place a special method as to how the taxpayer's position as regards deduction of input tax was to be dealt with where they were engaged in non-business, taxable and exempt activities. Accordingly the commissioners’ appeal would be allowed.

Court of Session (Inner House) (First Division).

Judgment delivered 22 February 2006.