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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Johnston
Lord Kingarth
Lord Penrose
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[2007] CSIH 36
XA90/06
OPINION OF THE COURT
delivered by LORD PENROSE
in
APPEAL UNDER THE TRIBUNALS
& ENQUIRIES ACT 1992, SECTION 11
By
THE HIGHLAND COUNCIL
Appellants
against
A DECISION OF THE VAT AND
DUTIES TRIBUNAL RELEASED ON 10 APRIL 2006
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Act: Tyre, Q.C.;
Biggart Baillie (Appellants)
Alt: Mrs. S. Wolffe; Shepherd & Wedderburn (Respondents)
25 May 2007
[1] The
appellants, as local authority, provide a range of leisure facilities at a
number of locations within their area. In addition to the appellants' own
facilities, there are a number of not for profit community leisure facilities
which are supported by the appellants. In
order to stimulate use of the facilities, the appellants sell three types of
cards, described as "Highlife" cards.
[2] The
appellants and HMRC are in dispute as to the categorisation for purposes of
value added tax of the proceeds of sale of one type of card, the "All
Inclusive" card. There is no dispute
about the other two types of card. These
are the 'Budget' card, which is available without payment to households in
receipt of certain State benefits, and which allows recipients to enjoy leisure
facilities at a flat rate of 50 p. per activity, and the "Pay as You Go" card,
which is available without payment to those under eighteen, in full time
education or over sixty, and which allows recipients to enjoy leisure
facilities at half the standard price per activity. The provision of these cards does not
constitute a taxable supply for value added tax purposes because there is no
consideration: Value Added Tax Act 1994
section 5 (2).
[3] The All
Inclusive card is issued in return for payment in terms of the appellants'
standard application form. The form
advertises the advantages offered by the card to frequent users of leisure
facilities, and states:
"For unlimited access to all leisure
centre run activities
You Pay:
a set monthly amount by
direct debit or
equivalent
annual lump sum by cash,
cheque or debit/credit
card"
The category is defined further in these terms:
"ALL
INCLUSIVE
This
allows unlimited use of all facilities and activities in the scheme during
their normal opening hours for individuals or families (up to two adults and
dependants under 18 living at the same address) committed to paying an all
inclusive fee by direct debit for a minimum of one year. There are some
restrictions to All Inclusive use detailed in the terms and conditions above."
So far as is material, the terms and conditions exclude
certain specified forms of use of facilities, regulate payment where card
holders and non card holders play games together, exclude priority of access to
facilities over non card holders, and restrict advance booking of facilities. More particularly, it is provided:
"k) Highland council reserve the right to charge additional fees for selected
activities/classes.
p)
Cardholder fees
are non-refundable.
r) 'All Inclusive' card holders will not
be entitled to credit for any part of courses not attended
s) The scheme includes an annual 2 week
shut down of facilities. However, if the building is closed for an extended
period of emergency repairs then credit will be given for every additional full
week closed."
[4] The
activities available at the facilities were not explored in any detail. The majority of the facilities include
swimming pools, and the use of the pools was taken as sufficient illustration
of the factual background to the dispute. The supply of facilities for swimming, and
similar forms of physical exercise, for a consideration, are exempt in the case
of certain qualifying providers: Article 13A (1) (m) of the Sixth Directive and
Group 10 in Schedule 9 to the 1994 Act. The
appellants do not fall within the scope of the exemption, and such supplies by
them are liable to standard rate value added tax. However, tuition in sporting activities, such
as swimming lessons, provided for a consideration, are exempt in the case of
the appellants: Group 6 in Schedule 9. Typically, therefore, the holder of an All
Inclusive card would be able to participate in activities that, if provided for
a consideration paid at the time of enjoyment, would attract value added tax at
the standard rate or would be exempt from tax depending on the particular
category involved. The issue in the case
turns on the characterisation of the transaction between the appellants and the
All Inclusive cardholder. HMRC contend
that the issue falls to be resolved on the terms of the contract between the
parties, and that the contract provides a right to enjoy an undifferentiated
range of facilities and activities. At
the time of payment, nothing was provided that qualified for exemption. The whole consideration was standard rated. The appellants contend that what was provided
by them was the use of the facilities; that the use comprised standard rated and
exempt activities; and that the
exemption for provision of education applied subject only to apportionment of
the consideration.
[5] The Tribunal
preferred the approach of HMRC and refused the appellants' appeal, finding
support in particular in Kennemer Golf
& Country Club v Staatssecretaris
van Financien [2002] QB 1252. The scope
of the argument before the Court differed considerably from the argument before
the Tribunal. In particular, counsel for
the appellants abandoned much of the argument before the Tribunal based on an
extensive citation of authorities relating to the distinction between single
and multiple supplies for a single consideration, founding his submissions
mainly on two cases: British Railways Board v Customs & Excise Commissioners [1977]
STC 221 and Mothercare (UK) Ltd v Customs & Excise Commissioners [1993]
VATTR 104.
[6] The
Tribunal's decision reflected the argument before it. So far as material for
present purposes, the decision was:
"Applying
the principles outlined in the authorities above cited the Tribunal finds that
what was supplied to the participant by the Council was, as contended for by
the Commissioners, a single supply of a right to exercise and enjoy the use of
the Council's facilities as and when and to whatever extent the purchaser
required.
Having
regard to the transaction the Tribunal has no doubt that what was sold in
consideration for the price was a right. The exercise of that right, given that
there may be various tax treatment or various services, being a matter for the
customer cannot be pre-determined and since it could not be known what the
purchaser would do with his card to attempt to dissect the transaction into
unrealistic or at best speculative components would not reflect reality and so
would be an error.
The
BRB case provides a clear example of
the supply of the discount card being related to only one class of service. The Mothercare
discount card is in the same position. To attempt to allocate an artificial
proportion, which might bear no relation to the reality of the only transaction
between the Council and the purchaser, the essential matter, which has to be
regarded as artificial, unrealistic and bearing no relation to the reality of
the situation. Accordingly, as presently administered, the admirable Highlife
scheme requires to be standard rated upon an analysis of the transaction in
question and also having regard to the unreality of attempting to sub-divide
the single transaction into a 'package' of potentially separate items of
standard rated and exempt supplies."
[7] In setting
out the factual background to his submissions, counsel for the appellants
contended that the Tribunal's decision reflected a misconception of the
appellants' administrative arrangements. The comments made about the "artificial" and "unrealistic"
character of the analysis of the transaction for which the appellants contended
reflected an error that was obvious in the brief narrative provided by the
Tribunal of the background. The Tribunal
stated:
"The
annual card made available unlimited access to activities with differing VAT
liabilities. The Appellant sought to differentiate these and apportion the
annual payment on a broad statistical basis which purported to show.. that the
general usage of facilities which could be regarded as exempt in terms of VATA
1994 Schedule 9 could indicate that some 13.37% of Highlife all inclusive
cardholders might have participated in activities which fell within the exempt
category."
[8] Counsel
submitted that the Tribunal's comments reflected a misunderstanding of the
uncontroversial evidence presented. The
appellants' witness, Mr Brian Parker, had explained that the appellants
accounted for value added tax for the period in which payment of the price of
All Inclusive cards was received. For
that period, the appellants' computerised records disclosed the actual use made
of the facilities by all holders of All Inclusive cards, analysed by category
of use. Thus, in the case of a swimming
pool, the records disclosed the number of swimming lessons and other
educational activities enjoyed and the number of admissions to the pool for
exercise. The appellants then valued the
supplies of these activities at the rates published in the current tariffs. That produced a fraction for standard rated
supplies and for exempt supplies during the period which could then be applied
to the period's cash receipts for the sale of All Inclusive cards to obtain a
reliable apportionment. The figure of
13.37% was simply illustrative of the outcome of applying that methodology for
a specified period. The approach was not
unrealistic, nor was it artificial or unrelated to the realities of the
situation.
[9] The question
for the Tribunal and for the court was expressed in a number of ways, but it
was agreed that the formulation adopted by Lord Weir in delivering the opinion
of the Court in Ivory & Sime
Trustlink Ltd v Customs & Excise Commissioners [1998] STC
597, at page 600, was correct: "the proper question is: what specifically and
essentially was the (taxpayer) supplying in consideration of the payment" by
the customer.
[10] Counsel for
the appellants submitted that the answer to that question was that the card was
simply a method of payment for the use of the appellants' facilities, both
taxable and exempt. Exactly the same
services were available to members of the public who did not purchase a card. The only difference was the method of payment.
No right was created on issue of the card that the purchaser did not have as a
member of the general public. The card
did not create any priority in favour of or preferential treatment of the
holder. The appellants supplied whatever
use of the facilities the cardholder chose to request. While it was difficult
to find a short and all-encompassing phrase that reflected the position, in
essence what was supplied was whatever of the facilities or activities the
cardholder used. Those uses had their
natural character, and in particular uses that would constitute exempt supplies
if purchased contemporaneously with payment retained that character when
enjoyed by a cardholder. In the case of
non-use throughout the period covered by the card, there was no difficulty: the
appellants would not have made any exempt supply, and the whole payment would
be standard rated. In other
circumstances, it was a matter of computation how properly to apportion the
sum. Counsel then put the matter another
way: it was making available the facility for use by the cardholder that
constituted the supply.
[11] If, contrary
to his submission, the card did create a right, on a correct analysis of the
transaction, the whole consideration would be taxable at the standard rate,
because in that event there would be an immediate service supply even if later
there was a use for educational purposes. There would be no element of exempt supply in
the purchase transaction itself. But one
required to consider the sale of the card and the subsequent use together as
elements of a single transaction.
[12] Counsel
submitted that the approach adopted by the respondents had previously been
rejected by the Court: British Railways Board
and Mothercare (UK) Ltd. He referred to observations of Lord Denning,
M.R.; Brown L.J., and Sir John Penicuick in British
Railways Board at pages 590, 597 and 599 respectively, and to observations
of the tribunal in Mothercare (UK) Ltd at page 398. The question focused in these cases was the
same as he proposed: what was the consideration for payment of the price of the
card. That approach required one to look
at the transaction as a whole, in particular where it was not known at the
initial stage what types of supply would result. The court should ask the same question. The Tribunal had not asked the right question.
[13] Counsel
submitted that the question did not have to be answered in relation to a
particular cardholder. One could
identify and characterise the supply when the facilities were used. The Tribunal had relied on Kennemer Golf & Country Club, but
the case was not helpful. The All
Inclusive card did not confer on the holder any exclusive benefit. That had been a central feature of the case:
page 1253, paragraph (3) of the findings. There was a subsidiary issue relating to the
non-use of facilities. In the light of
the decision at page 1271 of the report, counsel could not argue that the
appellants did not make a supply to a person who did not make use of the
facilities throughout the currency of the card. But the significant factor was that there was
nothing in the decision that supported the respondents' contention that the
grant of the right was the supply. The
case was concerned with membership of the club, and that was not relevant. No Highlife
cardholder was a "member" of any body. He understood that counsel for the respondents
would refer to the Tribunal decision in MacDonald
Resorts Ltd VAT Decision 19599. But
the Court should be aware that that case had been appealed and would itself
come before the Court for decision.
[14] Counsel
summarised his criticisms of the Tribunal's decision as follows:
1.
The
Tribunal erred in concentrating on the point of issue of the card. That they
did so was clear. That was contrary to the reasoning of the Court in British Railways Board which required
one to look at the transaction as a whole.
2.
The
Tribunal considered that British Railways
Board and Mothercare (UK) Ltd
each related to transactions in one class of goods. That was wrong. Mothercare
(UK) Ltd was an example of a case relating to a mix of standard rated and
zero-rated goods, and involved two classes of supply accordingly.
3.
The
Tribunal's criticisms of the appellants' accounting methodology failed to take
account of the fact that actual use of the facilities was recorded, and erred
in failing to treat apportionment as a secondary stage in the process of
accounting for tax. It treated
apportionment as determinant of the character of the transaction. On a proper
approach to characterisation of the supply, the appellants' analysis was
neither artificial nor unrealistic. The appellants supplied the use of the
facilities, and that was all.
4.
Finally,
counsel repeated that the line of authority discussed before the Tribunal,
focused on Card Protection Plan v Customs and Excise Commissioners (2) [2001]
1 AC 202, was not relied on in this appeal.
[15] Counsel made
submissions on the respondents' written submissions that can best be narrated as
a response to the respondents' oral argument. Counsel for the respondents submitted that the
appeal should be refused. The Court's analysis of the issue in Ivory & Sime Trustlink Ltd showed
that the starting point in characterising supplies was the contractual
provisions specifying the service provided. The contract was not conclusive. The inferences from the contractual terms and
conditions might be displaced by other relevant facts and circumstances. But the starting point was clear. Where the terms and conditions relating to the
same class of service in two types of investment vehicle were the same, it was
illogical that the VAT treatment should differ. The focus in the present appeal should be the
same: the contract between the parties for the supply of services by the
appellants. Further, in dealing with
that issue, the issue for the Court was whether the Tribunal, properly
instructed on the relevant law, could not reasonably have reached the
conclusion which it did: Edwards v Bairstow [1956] AC 14, applied in Ivory & Sime Trustlink Ltd at page
598. It was of note that counsel for the appellant did not suggest that that
test had been satisfied in the present case.
[16] The test in
characterising transactions had been expressed in different terms in the
authorities. But it was accepted that the Ivory
& Sime Trustlink Ltd formulation was appropriate. One had to look at what was supplied in return
for the consideration. It was not proper to concentrate on what was received. Similarly, it was wrong to analyse the
question in terms of what transpired after the transaction event. The terms and conditions of the contract on
which the issue turned were found in the application form. Those terms and conditions provided the
cardholder with an immediate right of access to the appellants' facilities
without further payment. The product of
the transaction was of a different type from those found in British Railways Board and Mothercare (UK) Ltd. In those cases there was no completed
transaction until the card came to be used as part of a subsequent transaction.
In the present case, it begged the
question to "look at the whole transaction", as counsel for the appellants had
argued. One had to identify the transaction. Counsel for the appellants had shifted
position on that issue. Before the
Tribunal the appellants had argued that the supply in this case was the use of
the facilities. When the question arose
of the proper treatment where no use was made of the facilities, counsel had
reformulated the position: the supply was in making the facilities available
for use. But that caused problems when
one sought to identify the point of supply. If it was at the point of subscription, there
was no means of characterising the supply other than as an undivided right.
[17] On a proper
view of the contract, an immediate right of access was supplied without further
payment. It was immaterial that the word
"right" was not used. That did not
detract from the contractual analysis. The provisions relating to the other two
classes of Highlife card provided a helpful contrast: there was no
consideration and no supply at the point of issue of the card. The terms on which later supplies were made
were regulated, but there was no relevant transaction unless and until such
supplies were made. The "two-tariff"
analysis in British Railways Board
provided a comparison for the types of transaction in this case, and explained
the requirement, in appropriate cases, to look at the transaction as a whole. In that context it was fundamental that there
were two stages to the transaction. In
the case of the All Inclusive card, mutuality of rights and obligations arose
immediately on issue of the card. The
holder had unlimited access to the facilities without further payment. The appellants had an obligation to allow such
access, if available. The holder's
obligation to make payment was immediate. And the payments were not refundable as a
matter of right if the cardholder sought to terminate the arrangement. The appellants' revenue from the scheme was
guaranteed.
[18] A consequence
of operating the All Inclusive card scheme was that the provision of some
services that in other circumstances would be exempt supplies for tax purposes
were provided without attracting the exemption. But that was not irrational or inappropriate. The Card
Protection Plan line of authority demonstrated that such a result was
acceptable. In the case of composite
supplies, the characterisation of a transaction by reference to its principal
elements might result in subordinate or ancillary elements being taxed at
standard rate when, if supplied separately, they would have been exempt or zero
rated. In the present case the contract was
the starting point, and the heart of the issue. It was a straightforward mutual contract
leading to one possible characterisation of the supply.
[19] The
respondents' approach did not result in complexity. It accommodated the case in which no use was
made of the facilities. It accommodated
all degrees of intensity of use. There
was no need to look at what the cardholder got. The supply had already been made.
[20] Further, the
respondents' analysis satisfied the requirement in Apple and Pear Development Council v Customs and Excise Commissioners [1988] ECR 1443 (Case 102/86) to
characterise the transaction by considering the relation between payment and
supply. Here there was a close and
direct relationship between the payment and the rights conferred on the holder
of the All Inclusive card. There was no
need to consider any more convoluted approach. In evidence before the Tribunal there was a
great deal of discussion of the appellants' accounting procedures. But the focus was not on the methodology as
such. It was on the appropriateness of
relating the transaction with the individual cardholder to the use made of the
facilities by others. The accounting
treatment was tested in the struggle to find any correlation between the
factors used in making the allocation. There
was no substantial relationship. In the
end the exercise was notional.
[21] The issue for
the Court, and the Tribunal, was not in dispute. There was no significant issue of primary
fact. The appellants' attack on the inferences drawn by the Tribunal was not
expressed in terms of the test in Edwards
v Bairstow and that test could
not be met. Ivory & Sime Trustlink
Ltd illustrated one way in which the decisions of a tribunal might be
reviewed. But counsel for the appellant
had not addressed any of the tests. The
Tribunal had not, in any event, erred in any of the respects relied on. The evidence before the Tribunal demonstrated
that while a retrospective analysis might provide some basis for allocation of
overall income from cardholders, there was nothing to characterise the
transaction when it occurred. The
accounting exercise was retrospective. Even then, it failed to establish the
requisite direct relationship between what the cardholder paid and what was
supplied to him. The Tribunal's approach was fairly robust. But it was correct.
[22] Further, the
Tribunal had adopted the same approach in the later case of MacDonald Resorts Ltd. It explained its decision in the present case
in terms that were instructive. The "division
of services according to some calculated formula which did not necessarily
apply to any transaction was not in accordance with the reality of the supply"
properly reflected the basis of the decision in the present case.
[23] Counsel for
the respondents made observations on some of the authorities. She accepted
generally the formulation of the question in British Railways Board. However, the observation of Lord Denning
M.R. at page 592 F - G that a railway season ticket was payment in advance for
travelling on the railway "whether the passenger uses it or not" was clearly
obiter. The case, properly understood,
depended on the "two tariff" characterisation of the transaction, as did the
case of Mothercare (UK) Ltd. Further the effect of that case had to be
considered in view of the fact that a special retail scheme applied, blurring
any possible distinction between elements of the transactions. Since
these cases, it had been decided that the grant of a right might be the subject
of a taxable supply: Granada Group plc Decision No
14803. Kennemer Golf & Country Club had been tendered purely as an
illustration. It answered the problem of
non-use. But, on its facts, it was the
closest of the cases to the present. The
aspect of membership that was relied on did not figure in the present case. But that was not material. In that case, making available the facilities
of the club was the critical element of the transaction. The respondents' approach in this case was
consistent with that. The appellants'
approach could not be accommodated.
[24] The Tribunal
had not been shown to have erred in any material respect. On the contrary its approach and decision were
correct. The Court should in any event be slow to interfere with
a decision on fact arising from the Tribunal's evaluation of the evidence
before it. The appeal should be
refused.
[25] Counsel for
the appellants commented on the written submissions of the respondents and
replied to the oral discussion. Properly,
there was no authority for the proposition that the grant of a right might be a
taxable supply. In the present case, the
terms and conditions applicable to the Highlife cards contained no references
to the grant of rights. And the cards
did not confer rights. The cardholders
obtained no right that they did not have independently of the purchase of a
card. The payment simply secured access
free of further payment to facilities to which they had rights of access in any
event on payment according to generally available tariffs as a member of the
public. He submitted that, on a proper
construction, what the respondents said amounted to a reversal of the question:
asking what the cardholder got for payment instead of what the appellants
provided in return for payment. The
transaction had to be looked at as a whole, including the actual provision of
access and use.
[26] In his
response to the submissions of the respondents' counsel, counsel acknowledged
that he had characterised the supply in inconsistent ways, and sought to
clarify the appellants' position in relation to the supply. What was supplied was the use of the
facilities. That might have different
implications in different circumstances. In some cases, the supply of the use of
facilities might amount to no more than allowing people to enter. In others the supplier was involved more
actively, for example in providing lessons. That was what made the difference, and
affected the characterisation of the service. The case of no use of the card was properly
characterised as one in which no actual service was supplied. That did not mean that Value Added Tax was not
chargeable. The tax point, in terms of
section 6 of the 1994 Act, was the point at which the appellants receive
payment. The supply was treated as
taking place at that time. If no actual
service was supplied, the payment was standard rated. No exempt supply was made.
[27] So far as the
two tariff cases were concerned, the proper view of Lord Denning's comment was
that he considered the season ticket case to be a fortiori of the two tariff examples. The observation supported the appellants and
undermined the respondents' approach.
[28] The Granada Group plc case was
distinguishable. It was a single supply
case. It fell into the group of cases dealing with the distinction between
single and multiple supplies dating from before Card Protection Plan and it was not surprising that the decision of
the Court was as it was. It did not
decide that there was a supply of a right separate from admission to the site,
with all of its facilities.
[29] The parties in
this case were not in dispute as to the provisions of the 1994 Act that
applied, nor in relation to their construction. Section 1 (1) provides that
"Value
added tax shall be charged, in accordance with the provisions of this Act -
(a)
on the supply of goods or services
in the United
Kingdom
(including anything treated as such a supply)."
Section 5 (2) provides, so
far as is material, that:
"(a)
"supply" in this Act includes all
forms of supply, but not anything done otherwise than for a consideration;
(b)
anything which is not a supply of goods
but is done for a consideration (including, if so done, the granting,
assignment or surrender of any right) is a supply of services."
Section 6 identifies the time
of supply. In the case of services, the
general rule is that supply is treated as taking place at the time when the
services are performed: sub-section (3). But sub-section (4) provides:
"If,
before the time applicable under subsection..(3) above, the person making the
supply.. receives a payment in respect of it, the supply shall, to the extent
covered by the.. payment, be treated as taking place at the time.. the payment
is received."
Section 4(1) limits the scope
of the charge to business supplies, and subsection (2) provides that:
"A
taxable supply is a supply of goods or services ... other than an exempt supply."
Schedule 9 to the Act specifies under group headings the
classes of goods and services which may be supplies exempt from value added tax
in appropriate circumstances.
[30] It was agreed
that in relation to group 6, education, the appellants are an eligible body,
and that accordingly the provision of education, such as swimming lessons, for
a consideration, in the course of business operations carried on by the
appellants, would in the ordinary course be exempt from value added tax. The superficially simple issue that arose
before the Tribunal, therefore, was whether in issuing a Highlife All Inclusive
card for a fixed consideration the appellants were, in part, providing
education and in part providing other services which fell outwith the scope of
the exemption, an issue to be resolved with the degree of particularity derived
from the formulation of the general question in Ivory & Sime Trustlink Ltd, namely by a consideration of what,
specifically and essentially, were the appellants supplying in consideration of
the payment by a cardholder of the annual or monthly price payable in terms of
the appellants' terms and conditions of contract.
[31] It was agreed
that in the present case the tax point was the time payment was received by the
appellants. It is clear that, in the
case of a family or individual making payment by lump sum, for the minimum
period of a year stipulated in the terms and conditions published by the
appellants, the components of the activities and uses available which the
cardholder subsequently enjoyed during the currency of the card were not known
and could not be forecast at the tax point. Where payment was made monthly, information
about actual use might in theory be accumulated progressively during the
currency of the card. But neither party sought to develop that topic before the
Tribunal or before the Court.
[32] For the
purpose of characterisation of the transaction, it was not disputed that the
ability of the appellants to compute on an acceptable arithmetical basis the
sums attributable to different classes of service was of little moment. If, on a sound characterisation of the
transaction, apportionment was necessary, it would be for the parties in the
first place, and, failing agreement between them, for the Tribunal on appeal to
determine an appropriate approach to apportionment. In our opinion, it is similarly clear that the
mere fact that one might find grounds for objecting to the approach hitherto
adopted by the appellants could not determine the question whether in principle
apportionment was necessary on a proper characterisation of the transaction. If the current method was unacceptable, again
the parties or the Tribunal would determine an appropriate alternative. Counsel for the appellants was correct in
submitting that the current accounting procedures and methods used by the
appellants could not be determinative of the issue.
[33] Before the
Tribunal the respondents explored in evidence the practical implementation of
the appellants' accounting methodology with a view to demonstrating that there
was no relationship between the payment for services and the receipt of the
individual or family cardholder's payment. The Tribunal, with little detailed analysis,
considered that because use could not be pre-determined in the individual case,
an attempt to dissect the transaction into unrealistic or at best speculative
components would not reflect reality. It
is not clear that the appellants have laid a basis for attack on the Tribunal's
findings, given the strictness of the test in Edwards v Bairstow. It does appear that on the appellants'
presentation of the position before the Court the accounting methods adopted by
the appellants do not assist them in providing a basis for answering the
question that arises.
[34] The
appellants' computerised systems record for each card the particular uses made
by the individual cardholder (including the individual members of a family
group), throughout the term for which the card is held. The appellants account for value added tax in
respect of the accounting period in which payments for All Inclusive cards are
received. They have hitherto apportioned those payments as between standard
rated and exempt supplies by applying a fraction derived from all recorded uses
within the respective periods. On that
approach, the reference data used in deducing the fraction may, at best,
include some data referable to the customers making relevant payments within
the accounting period. But essentially
that data must be derived from all uses by all current All Inclusive card
holders. The supply of services of all
kinds to the whole class of All Inclusive cardholders does not provide a basis
for characterising the supply of services to any single member of the class at
any given time.
[35] Apple and Pear Development Co dealt with
a different factual and legal context from the present. But the opinion of the Court is helpful in so
far as it dealt generally with the characterisation of the activities of the
Council in the context of value added tax. In paragraph 12, the Court stated:
It
must be.. stated that the concept of the supply of services effected for
consideration within the meaning of art 2 (1) of the Sixth Directive
presupposes the existence of a direct link between the service provided and the
consideration received."
In the present context, since all relevant supplies by the
appellants are taxable supplies unless they are exempt, the requirement for a
direct link between the service provided and the consideration provides a
helpful starting point. The opinion of
the court also illustrates the requirement for that direct link to apply as
between the body paying the consideration and the provision of the supply. The reasoning at paragraph 14 indicates that the
accrual of benefit to a class in the aggregate is insufficient where different
groups within the class may benefit in different ways. The appellants' current accounting methodology
proceeds on aggregate values, averaged out among the class of people currently
making payments. The connection is
broken not simply in terms of differential usage by current cardholders, but by
the lack of any relationship between the current subscribers and the
constituency of cardholders as a whole.
[36] The
respondents' approach before the Tribunal appeared to be aimed at showing that,
conceptually, it was impossible to use the appellants' accounting information
to formulate any relationship between the agreement entered into and the
provision of access to and use of the facilities. In our opinion it is not appropriate to
approach the issue in that way. Since
the appellants' primary accounting records relate to the uses of individual
cards, it is not inconceivable that the appellants might compute for each
individual cardholder a precise analysis of uses which would enable the
character of supplies to that cardholder to be calculated, retrospectively or
progressively, over the term for which the card is held. The issue of principle can be tested most
rigorously on the assumption that that can be done, and that there would be no
mechanical obstacle to the production of precise individual analyses of use
after the event.
[37] We proceed,
then, on the hypothesis that a card is purchased, by lump sum or by
instalments, for a period of a year, allowing access to all of the appellants'
facilities, and certain related facilities, without further payment. A particular card may not be used at all. It may be used for one class of facility only,
for example regular squash games, or regular swimming. It may be used for educational purposes only,
for example for swimming lessons for the children under eighteen of a single
family unit. Or it may be used for a
mixture of games and education. The
appellants have leisure centres throughout the region, provided for public
benefit by the appellants as regional authority. In the application form produced, fifteen
centres are identified in widely spread locations. The facilities are open to members of the
public on payment of an appropriate fee in terms of the appellants' published
tariffs.
[38] At the point
of issue, the card is, by definition, all inclusive. One could not pre-determine its actual use
positively, or by exclusion of certain classes of use. From the appellants' point of view as
suppliers, actual use over the term for which the card remains valid would be
unpredictable, depending on purely casual factors, over which they had no
control or influence other than that arising from control of numbers taking
advantage of number-limited facilities.
[39] In our
opinion, any attempt to characterise the transaction retrospectively by
reference to the uses actually made of the card would be contrary to the
approach taken by the Court in British
Railways Board: see, in particular,
Browne LJ at page 597. The issue turns
not on the uses made of the card, but on what the appellants supplied in
consideration of the payment. In the
hypothetical case of non-use throughout the term for which the card is issued,
that is plain from Kennemer Golf &
Country Club. In the case of a
cardholder who makes use of a wide range of facilities, retrospective analysis
could not resolve issues of characterisation, in any practical sense, within
the relevant accounting period for value added tax purposes. The pattern of
standard rated and exempt activities within the initial accounting period in
which payment was made, and for which the appellants would be accountable for
value added tax, could not provide a basis for forecasting the pattern of use
over the remainder of the year. Some
activities would inevitably be seasonal. Some of their nature would be relatively
short-term and some of longer term.
[40] More
particularly, however, one could not define the services provided by the
appellants at the point of supply in terms of the uses the cardholder actually,
in the event, came to make of the card. A
cardholder might, at some stage in the period covered by a card, take a
swimming lesson or course of such lessons, if he or she decided to do so and if
there was a place on the course for him or her at the time he or she made a
non-priority application to join the lesson or course. The appellants could not be said, at the time
of receiving payment, to have provided such lessons in consideration of the
payment, not least because, on the terms applicable to the card, the appellants
reserved the right to remove any activities from the programme at any time, and
would not be obliged to provide any lessons until the time of actual provision.
Even then, the appellants would be
entitled to refuse participation if in the event maximum numbers were exceeded.
And the appellants would not know at the
material time that in due course the cardholder would seek a lesson. There could be no contractual obligation to
provide a swimming lesson until the time the cardholder was admitted to the
lesson or course.
[41] In making it
clear that the appellants' approach was that what was supplied was the use of
the facilities, counsel departed from his alternative position that making the
facilities available for use constituted the supply. In our opinion, there is no reasonable sense
in which any of the facilities, as such, can be understood to be provided in
consideration of the payment of sums for issue of Highlife cards. The cards allow the holders the use of all of
the facilities, at the holders' choice, on terms which differ from those
applicable to members of the public generally. There are minimal restrictions on the use that
individual cardholders may make of their cards. These are practical and
intelligible. No card holder is entitled
to make advance bookings of more than two different sessions of activity on a
single day, for example. The facilities
are shut for maintenance for certain periods. The cardholder does not have priority over
members of the public seeking to make use of the facilities on general tariff
terms. Subject to such general
qualifications on use, actual use is not regulated as between the appellants
and the cardholder by the terms and conditions of issue of the cards.
[42] The commercial
transaction between the appellants and the cardholder is completed when the
payment is made and the individual or family become entitled to cards. Use or non-use thereafter is a matter entirely
for the cardholder to enjoy or not at will. The facilities will be provided and
maintained, irrespective of such use, by the appellants as local authority. The difference, which provides the basis for
characterising the transaction, is that in the case of cardholders the appellants
undertake that the facilities will be available for such use as the cardholder
cares to make of them without further payment. In our opinion, counsel for the respondents
was correct in arguing that the closest parallel to the present case is Kennemer Golf & Country Club. There are obvious distinctions. The advantages supplied for payment were
membership of and enjoyment of the facilities provided by an exclusive club,
not preferential terms for enjoyment of public facilities. The relevant issue is focused at paragraph 36
of the judgment, and may be paraphrased as whether annual membership fees of a
sports club could constitute the consideration for the services provided by the
club even though the members who made little or no use of the club facilities
paid the full annual membership fees. The
question was answered in the affirmative: the necessary direct link between the
service provided and the consideration received, applying the test in Apple and Pear Development Council, was
established by the legal relationship between the club and the member under
which the member paid his subscription and the club made the sports facilities
and associated advantages of membership available. Actual use or non-use thereafter was
immaterial. The transaction was
characterised at the time the legal relationship was created.
[43] In the present
case the legal relationship governing the cardholders' use of the facilities is
created on payment. In our opinion, that
can only be characterised as a right to make such use of the facilities
operated and made available to the public by the appellants within their
boundaries as the All Inclusive cardholder chooses, all without further
payment. What happens in fact thereafter
is of no relevance. In essence, therefore,
in our view, the transaction between the appellants and the cardholder (which
can be the only relevant transaction, despite certain arguments which appeared
to invite consideration of the relationship between the appellants and the body
of All Inclusive cardholders as a whole) is properly characterised as the
provision of a contractual right to use the appellants' facilities, for a fixed
period, as described in the application form, at the point of payment.
[44] We did not
understand counsel for the appellants to dispute that, if that were the proper
characterisation of the supply, the appeal would not succeed, notwithstanding
that the right created included a right to unlimited use of sports and other
facilities that would be standard rated in ordinary course, and a qualified
right to enjoy educational services which would be exempt from value added tax
if supplied directly in ordinary course.
[45] In British Airways plc v Customs and Excise Commissioners [1990]
STC 643, Lord Donaldson of Lymington MR said of the issue of characterisation
that arose in that case:
"The
answer to the question which we have to consider - was there one supply or two
- may well be one of first impression, but for my part, despite the
persuasiveness of counsel for the commissioners, it has proved a lasting and
indeed indelible impression. There is a single supply of air transportation."
If it is right to approach the issue as one of impression,
the impression we have formed, having considered the written and oral
submissions of counsel, is that the transaction is properly characterised as
the provision of a contractual right of use of the appellants' facilities, for
a fixed period, but indeterminate in its application at the point of supply,
and incapable of being understood as a mixed supply of taxable and exempt
services at that point. On that basis,
also, the appeal must be refused.
