18632

INPUT TAX – apportionment of subscriptions of members of professional body – correlation of benefits of membership

LONDON TRIBUNAL CENTRE

	THE ROYAL COLLEGE OF ANAESTHETISTS	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Peter H Lawson (Chairman)
					 	Praful Davda FCA

Sitting in public in London on 4 and 5 March and 5 April 2004

Michael Sherry, Counsel, for the Appellant

James Maxwell-Scott, Counsel, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal by the Royal College of Anaesthetists, a body incorporated by Royal Charter on 16 March 1992.  The Charter sets out the aims and powers of the College and establishes its basic constitution.  The Ordinances, which are scheduled to the Charter, lay down more detailed rules governing the way in which the College functions and runs its activities.  Matters of greater detail, relating to all aspects of the administration of the College and its procedures, and to requirements in respect of training and examinations, are set out in various Regulations made by the Council of the College.  The College is a registered charity.
2.	The notice of appeal dated 11 February 2003 stated that the subject of the appeal was “the method of apportionment of the Membership Subscription” and the grounds of appeal were:

”The issue to be brought before the Tribunal is the method by which the College, a charity, should apportion the membership subscription received from its graduate members.

The College’s contention is that the most important benefit afforded to members is two publications, namely the British Journal of Anaesthesia (“the BJA”) and the CEPD Review.

The Appellant claimed that the publications have a combined market value of £320, the annual subscription to the College being the same figure.
3.	The College is the professional body responsible for the specialty of anaesthesia throughout the United Kingdom.  Its activities are varied, but include the setting of standards for practice in anaesthesia, establishing the standards for the training of postgraduate practitioners in the specialty, setting and running examinations, and the continuing medical education of all practising anaesthetists.  The College also has a duty to educate and inform the general public about anaesthesia.
4.	The College has a variety of categories of membership, such as Fellows by Examination who pay an annual subscription of £320 and Associate Members who pay a subscription of £100.
5.	Fellows by Examination are medical practitioners who have successfully passed the final examination of the College and been admitted by College Council.  They are entitled to use the post nominals FRCA, vote at all College Council elections and stand for College Council.  They are also entitled to receive three journals, The British Journal of Anaesthesia, the CEPD Review and the College Bulletin.
6.	Associate Members are registered medical practitioners, no longer in training but working in the UK at the time of the application, who have not passed the College Primary or an equivalent examination, but have completed two years of CEPD.  Associate Members are entitled to vote for NCCG appointments on College Council and to receive the same three journals as Fellows by Examination.
7.	On 19 July 2001, the Appellant’s accountants, Saffery Champness, submitted a Voluntary Disclosure to the Commissioners contending that the Appellant had under claimed input tax in the sum of £87,003 because:
”To date the College has treated the subscriptions received as being partly exempt and partly zero-rated for VAT purposes.  However, on reviewing this position it is noted that subscribers only really receive exclusive benefits in the form of a journal and accordingly the subscription should properly be treated as wholly zero-rated.  The shift of this income from partially taxable to fully taxable income results in additional input tax previously thought irrecoverable being recoverable.”
8.	In a letter dated 30 October 2001, the Commissioners decided that the Appellant’s claim should be refused.  That decision was confirmed in a letter dated 26 November 2001 following a local reconsideration undertaken at the request of the Appellant’s accountants.
9.	On 8 November 2002 the Commissioners wrote to the Appellant reiterating their decision on the appropriate partial exemption method to apply to membership subscriptions.  The Commissioners stated that the fairest method of apportioning the member’s subscription between taxable and exempt supplies is to compare the cost of the printed matter with the overall costs incurred in running the College.
10.	The Commissioners stated that the cost of producing the printed matter was £270,000 per annum.  The cost of running the College was £907,000 per annum.  This did not include the cost of examination and conference expenses and the cost incurred for training and setting professional standards because separate income was received in respect of those activities.
11.	The Commissioners decided that the recovery rate applicable to VAT incurred on non-attributable costs was 30%.  Their letter concluded:
”We see this method as being fair and reasonable and ask that you apply it from the start of your next tax year, 1 July 2003.  The actual figures may change from year to year, but unless the structure and activities undertaken by the College change significantly, the recovery rate should stay approximately the same”.
12.	The Appellant questioned whether the ability to attend an AGM, to have voting rights and to enjoy the perceived kudos of being a member of the College were in fact benefits of membership at all.  The Appellant College contended that it was fair and reasonable to treat the majority of the subscription income as attributable to the provision of the publications and accordingly as zero-rated pursuant to Schedule 8 Group 3 of the VAT Act 1994.  The remainder of the income should, they contended, be treated as exempt pursuant to Schedule 9, Group 9 of the Act.
13.	It is common ground between the parties that such proportion of the subscription income as is attributable to the supply of the publications should be treated as zero-rated and that the remainder of the subscription income should be treated as exempt.  The issue between the parties relates to the method of apportionment of the subscription income between the supply of publications to members and the other benefits provided to members.
14.	Under Schedule 8, Group 3, of the VAT Act, the supply of journals and periodicals is zero-rated.  
15.	Under Section 31(1) of the VAT Act, a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9, and Item 1(b) of Group 9 provides that:
 “The supply to its members of such services and, in connection with those services, of such goods as are both referable only to its aims and available without payment other than a membership subscription by any of the following non-profit making organisations ....
(b)  a professional association, membership of which is wholly or mainly restricted to individuals who have or are seeking a qualification appropriate to the practice of the profession concerned”
is an exempt supply.
16.	The Commissioners in their Statement of Case contended that the College is not merely a publishing house and that membership of the College conveys benefits in addition to the right to receive the College’s journals.
17.	The College has a variety of categories of membership with different annual subscriptions, but most members have the same right to receive the College journals.  Members on the Voluntary Register are entitled to receive the journals, but only pay an annual subscription of £50, whereas Fellows by Examination pay an annual subscription of £320.  Accordingly, the Commissioners say, there is no correlation between the open market value of the journals, if one exists, and the subscription fees.
18.	Membership of the College, the Commissioners say, is in itself a benefit to the members, with the more prestigious categories of membership having inherently greater benefits which are reflected in the higher subscription fees.  For example, the right to use the post nominals FRCA is a valuable benefit which enhances the professional life of the member and opens up greater career opportunities.  Further, the right to vote in elections and the opportunity to be involved in the life and activities of the College are also valuable benefits of membership.
19.	Witness Statements were lodged on behalf of the College by Dr Judith Ann Hulf MB, BS Lond, MRCS Eng, LRCT Lond, DObst, RCOG, FRCA and Mr Kevin Storey, the College Secretary, and they both also gave evidence before us.

Professional Background
20.	Dr Hulf obtained her primary medical qualification in 1969, passed her final FRCA in 1974, and was subsequently appointed to the Specialist Register of the General Medical Council.  She holds a consultant post at the Middlesex Hospital which is part of the University College London NHS Trust.  Her sub-specialty interest is in cardiac anaesthesia.  She was appointed to the post of College Regional Advisor in 1998 and was reappointed for a second term in 2001.  In 2002 she was elected to the College Council and is currently serving her first term of office.  She stood down from her Regional Advisor post in 2002 due to being elected to Council.  As a member of the Council her responsibilities, together with the other twenty-three elected members, include meeting the objectives of the College as laid down in the Charter and Ordinance, and setting the strategic direction of anaesthesia within the UK, in particular that of the training of anaesthetists.  She has recently been appointed by the President of the College to the position of Deputy Medical Secretary.  The Medical Secretary is the lead member of the Council on all training matters.

Functions of the Council
21.	Dr Hulf stated that the Council of the College nominates senior anaesthetists across the UK to:
Sit on Advisory Appointment Committees (AACs).  Under NHS regulations there must be a College nominated assessor on the appointment panel for every consultant anaesthetist post within the NHS.  She had been an assessor since July 1993, all elected members of Council are assessors ex officio.

Serve two 3 year terms as a College Tutor.  There is a Tutor in every NHS Trust in the UK that has trainees (approx 300).  Their role is to directly support the trainees in their hospitals.  Not all College Tutors are Fellows of the College, there are a small number who are Fellows of overseas Colleges.  She had served two terms as a College Tutor prior to becoming a Regional Advisor.

Be a Regional Advisor.  There are currently 25 Regional Advisors whose remit covers a larger geographical area than that of a College Tutor, the area normally covers one School of Anaesthesia which encompasses groups of hospitals.  It is normal that Regional Advisors are selected from experienced College Tutors.

Be a member of the Hospital Visiting panel.  The College visits all hospitals within the UK on a 5 year rolling programme as well as visiting the Schools of Anaesthesia.  The purpose of the visit is to ensure that the training of anaesthetists meets the standards set both by the College and by the Department of Health.  As a member of Council she participated in this programme of visits, particularly those were a visit is not expected to be straightforward, e.g. a re-visit to determine whether recommendations have been actioned.

In addition the College invites applications from Fellows to serve a ten year term as one of the 120 College examiners for the Primary and Final examinations.  Demand to be an examiner is high, the number of vacancies is always exceeded by the number of applications.

No remuneration is made to any College post holder including membership of Council.
22.	Training
Dr Hulf told us that doctors who decide to specialise in anaesthesia spend two years as a Senior House Officer (SHO) and then five years as a Specialist Registrar (SpR), during this time they will sit the Primary and Final Fellowship of the College (FRCA), those who are successful are admitted to the College as Fellows by Examination.  At the end of their 7 year training programme they will be recommended for inclusion on the Specialist Register of the GMC.

Within the NHS the training of junior doctors (SHOs and SpRs) is one of the responsibilities of consultant staff.  At the Middlesex Hospital departmental meetings are held weekly at 08h00 on a Friday morning.  FRCA teaching follows the departmental meeting.  Audit meetings are currently held approximately once a quarter.  Internal teaching for the Primary FRCA is currently held on a Monday morning and for the Final FRCA on Friday afternoon.  There are currently 9 SHOs and 25 SpRs at the University College hospitals.
23.	Dr Hulf said that she felt that by being a member of the Council she could give something back.  She considered that the College is the representative of the profession.  Its task is to review the standards of care and does this by training and regulation.  The College represents the members in regard to what the profession does.  It is not a trade union like the BMA.  The RCA does not deal with contractual matters.  The job, she regards as being to set the standards of the profession.  The main activities are in critical care and pain management.
24.	Being a specialist requires rigorous training.  Maintaining standards is something you can return.  Being an examiner is a splendid way of keeping this knowledge up to date.
25.	The College sets standards but does not provide the training which is provided by the NHS and paid for by the NHS.
26.	Asked what principal role of the College is, Dr Hulf said it has the responsibility for standards.  But no information produced by the College is restricted to the College.  It is freely available to the public, whether medical or not.
27.	In reply to a question by Mr Maxwell-Scott Dr Hulf stated that membership of the College is optional but once a member is an FRCA, that is not dependent on being a member of the College; membership is dependent on payment of the prescribed subscription.  Once an individual has passed the exam they can use the post nominals.  The fact that you have passed the exam and can use the FRCA post nominals is irremovable.  Membership of the College is optional but 96% of doctors who pass the exams are members.
28.	The journals, Dr Hulf stated, are available as of right to members.  They are also available in hospital libraries and, now, on line.
29.	In her view, the only benefit of membership is the Journal.  The majority of doctors would wish to feed back into their profession the benefit of their knowledge.  That is the opportunity presented by membership of the Royal College of Anaesthetists.  It is beneficial to the profession and to the public rather than a personal benefit.  Doctors wish to feed back into the profession the benefits which they themselves have obtained and by remaining members of the College they are favouring their stock.  It is an evolving profession.  The College itself has no access to funding.  The Fellows can speak with authority from the facts as known from the training programmes – not from practising anaesthetics.  They seek to maintain the highest standard of anaesthesia care.  How it is delivered is not a matter for the College.
30.	Dr Hulf said she was passionate about maintaining the highest level of training and being able to deliver the highest level of service.  It was a matter of self-interest because all of us are potential patients.  It is teamwork, which means that all work is done to the highest standards.  The College has standards of quality at its heart.
31.	In reply to Mr Maxwell-Scott, Dr Hulf said that all medical people are required to have continuing medical education.  The College is involved in this and in setting the standards.  Education continues all through the years of practice.
32.	Training and standards are historically part of the function of the Royal Colleges.  Historically, their role has evolved.
33.	96% of all qualified anaesthetists are members of the Royal College.
34.	The following paragraphs summarise Mr Storey’s evidence.  Mr Storey is the College Secretary, a position he has held for two years.  Before being appointed Secretary he was Finance Director of the College, a post he had held since March 1999.
35.	Together with the other Directors he manages the staff of the College.  He has overall responsibility for all matters but specifically for finance, membership services and estate management.

He is a qualified accountant with The Chartered Institute of Public Finance and Accountancy (CIPFA) and also an examiner for his Institute’s final examinations.
36.	History of the Royal College
Mr Storey stated that the College was created as a Royal College in 1992; prior to that it was a Faculty and then a College within the Royal College of Surgeons.  It is located in London.
37.	To commence training in anaesthesia one must already be a qualified doctor and be on the General Medical Council’s (GMC) Medical Register.  Training lasts 7 years and those that successfully complete this period of training as well as passing the College’s Primary and Final examinations will be recommended by the College to the Specialist Training Authority (STA) for inclusion on the Specialist Register of the GMC.  By law a doctor can only hold a consultant post when on this register, once on this register there is no legal requirement for an anaesthetist to retain a link with this College.
38.	The College has a membership of some 12,000 anaesthetists consisting of approximately 4,200 trainees and 7,800 consultants, other career grades and retired Fellows.  Those on the Voluntary Register are doctors with an involvement in anaesthetics but do not meet the entry criteria for any category of membership, e.g. a GP on a remote Scottish island who may occasionally have to administer anaesthesia.
39.	There is no time bar on the length of time a trainee can take, some have to retake a year.  In practice those that are unlikely to succeed are advised of this and subsequently end training and take a non-consultant career grade post.
40.	The College has a statutory duty to provide standards and monitoring of training in anaesthesia, critical care and pain management within the UK.  It is also a provider of education to anaesthetists both pre and post training.  Trainees have to retain a formal link with the College in order to complete their training but post training there is no requirement to maintain that link.  The only statutory requirement is to remain on the GMC register.  Despite their being no compulsion the College represents 96% of all practising anaesthetists in the UK.
41.	Policy of the College is determined by an elected Council of 24 anaesthetists and is carried out by the 40 members of staff in conjunction with approximately 400 College nominated consultant anaesthetists throughout the UK known as Regional Advisors, College Tutors and Advisory Appointment Committee Assessors.
42.	The College is very largely self funded.  96% of all income originates from anaesthetists.  Only 4% is government funded.  It is a policy of the College to set fees and charges relative to the earnings of the person paying, e.g. newly qualified Fellows pay a reduced subscription rate for 4 years as this is normally the time it takes from obtaining the Fellowship to ending their training and securing a Consultant post.  Overseas members pay a reduced rate as they are likely to be paying a subscription to a similar body in that country and their opportunity to participate in College affairs is less than UK residents.
43.	Mr Storey stated that the Charitable Objectives of the College are:

To advance promote and carry on study and research into anaesthesia and related subjects and to disseminate the useful results of any such research; to educate medical practitioners to maintain the highest possible standards of professional competence in the practice of anaesthesia for the protection and benefit of the public; to further instruction and training in anaesthesia both in the United Kingdom and overseas; and to educate the general public in all matters relating to anaesthesia.
44.	Mr Storey stated that the activities undertaken by the College are:
(a)	Examinations
The College conducts the sole examination process for anaesthetists in the UK.  There is a Primary examination and a Final examination.  The Primary examination consists initially of a written multiple choice question paper, candidates successful in this proceed to an Observed Structured Clinical Examination (OSCE) and Vivas.  Approximately 900 candidates attempt the 3 sittings of this examination each year, of whom approximately 50% are successful and proceed to the Final examination which initially comprises another written multiple choice question paper and a short answer question paper, successful candidates at this element are invited for Vivas.  Approximately 850 candidates attempt the two final examinations each year of whom approximately 50% are successful.

Candidates pay a fee for each examination that they enter.  It is a College policy that the income from examinations should be set to equal its total expenditure.  The reason for this is that the College does not wish to be seen to be making a profit from Trainees.
(b)	Courses and Conferences
The College arranges courses for trainee anaesthetists to prepare them for the College examinations as well as organising conferences on topical matters for those post training.  In total 2,650 people attended 34 events in 2002/2003.  These ranged from Paramedic courses attended by employees of Ambulance Trusts to annual 2 day scientific meetings attended by Consultants to listen to eminent lecturers from around the world.  Attendees pay a fee to attend.  The College recognises that not all attendees can afford the same fees and sets fees accordingly, e.g. no charge is made for the Christmas lecture as this is aimed at teenagers, and the Paramedic course fee is set only to recover direct costs; it makes no contribution to any overheads, this recognises the financial constraints of NHS Ambulance Trusts.  Attendance at courses or conferences is open to anyone.
(c)	Professional Standards
The Professional Standards directorate is responsible for setting guidelines for anaesthetic procedures and participating with other health organisations: NICE, CHI, etc.

Another responsibility is to ensure that a College nominated assessor sits on every interview panel for a consultant post in anaesthesia, critical care and pain management in the UK.

The College sets standards for Continuing Education and Professional Development (CEPD) and maintains a register for all participating anaesthetists, whether a member of the College or not.  Verification of CEPD is not undertaken by the College as the GMC has made this part of the revalidation process of doctors.

A recent project undertaken was the production of Patient Information documents informing patients of anaesthetic procedures that may be administered to them.  The College makes no charge for this information and actually encourages downloading from the web or local copying to ensure information is disseminated to patients.

The government requires information on the number and type of anaesthetists practising in the UK in order to determine how many consultants will be available in future years.  The College undertakes an annual census (100% return rate in 2002) to allow it to inform government on this matter.  The College also advises on the current trend towards earlier retirement.
(d)	Training
Hospital Visits
The College arranges for College nominees to visit every hospital in the UK that has trainees (approximately 300) to ensure that training standards and facilities are maintained.  When a serious matter is determined the College works with the Trust Chief Executive and Medical Director to ensure that remedial action is taken, e.g. following an accidental death of a patient the College issued a mandate that all anaesthetic machines used by Trainees must be fitted with an interlock to prevent similar accidents; this decision was sent directly to all Trusts with an implementation date some 12 months in the future to allow Trusts to be able to replace out of date equipment, at the same time all regional Advisors and College Tutors implemented local action to ensure that Consultants supervision of Trainees in this area was strengthened. 
(e)	Training Directorate
This directorate maintains the training records of all Trainees in the UK and liaises with the 300 College Tutors on the performance of Trainees.  It submits recommendations to the Specialist Training Authority that Trainees who have completed the 7 years of post-graduate training and examinations be included on the Specialist Register of the GMC (gateway to a Consultant post).  It also oversees the criteria for eligibility to UK training, and acts as the sponsoring body for those that meet the criteria.

(f)	The British Journal of Anaesthesia (BJA)
The BJA is a separate registered charity that publishes the monthly journal “The British Journal of Anaesthesia” and the bi-monthly journal “CEPD Review”.  The College pays the BJA for a block subscription for its members (£218,418 in 2001/2002).  The BJA also receives subscriptions from individual and organisational subscribers in the UK.  It also sells publishing rights to overseas organisations.  The subscription prices of the BJA and the CEPD Review are £275 and £45 respectively.  In the BJA 2002 published accounts income from subscriptions (excluding the College) was £731,338; this equates to some 2,285 non-College subscribers.
45.	Mr Storey stated that the Charitable Objectives of the BJA are the advancement and improvement of education of the public in anaesthesia and diffusion of knowledge of new and improved methods of teaching and practising anaesthesia.
46.	How membership of the RCA fits into the profession
Mr Storey stated that the College could not exist without the enormous contribution of time and effort from its members.  By continuing to be a member of the College after training anaesthetists exercise their option to put something back into the profession and the specialty.  In return they are provided with up to date relevant professional guidance and information by receiving the BJA and being informed of courses, meetings and seminars to which they may attend by paying the required fee.
47.	Other matters
The RCA negotiates a contract price with the BJA each year for the supply of the journals to RCA members.  It does not have any involvement in the setting of prices to other subscribers.  The block subscription rate to the BJA for 2003 has increased due to increased numbers of subscribers as well as paper and distribution cost increases.  Mr Storey produced as an appendix the accounts of the BJA for the year ended 31 December 2002, but we do not propose to reproduce them in this Decision.
48.	Mr Sherry asked Mr Storey about CEPD training, in particular how it is paid for.  Mr Storey said that every doctor has a budget from his NHS Trust for study leave, but may pay himself.  Asked what the College does for members other than supply the publications, Mr Storey said, effectively nothing. There is no direct contact.  Likewise if they use the post-nominals but do no pay their subscriptions the College can do nothing about it except ask again for payment of the subscription.
49.	Referring to the College Regulations Mr Maxwell-Scott pointed out that Paragraph 2(1) of Part III states that the enjoyment of the rights and privileges of all College members “will be dependent” upon the payment of the prescribed subscription unless it has been waived.  Mr Storey said that in practice members cannot be prevented from enjoyment of the rights and privileges.

Para 2(3)(b) gives the right to take part in approved training.  Mr Storey suggested that this is a right and not a benefit.

Para k) gives the right to use the facilities of the College buildings.

What are the facilities of the College buildings?  Mr Storey stated that there is a Fellows Room, which is used regularly for exam sittings.  There are five exam sittings each year, each preceded by a 3-week course.
50.	We were provided with a list of subscription rates for 2003/2004 effective from 1 October 2003.  There are 12 categories, ranging from £325 (Fellow by examination and Fellow an ennden) down to £50 (Affiliate and Voluntary Register).  It is a discount system because the cost is the same throughout.
51.	There are eight categories of membership.  In each case the enjoyment of rights and privileges is dependent upon the payment of the prescribed subscription.  The most extensive rights and privileges are those of Fellows by Examination, Fellows by Election and Fellows ad eundem.  There are 12 such rights and privileges as follows:
(a)	to use the description Fellow of the Royal College of Anaesthetists and the designatory letters FRCA;
(b)	to take part in approved training and to benefit from the facilities provided through the medium of the College in connection with such training;
(c)	to vote in relevant College elections provided that, where appropriate, he has any necessary residential qualification;
(d)	to attend General Meetings, and to speak and to vote thereat;
(e)	to be nominated for election to Membership of the Council;
(f)	to be nominated by the College for appointment to any Advisory Appointment Committee, constituted in accordance with Regulations made from time to time by the Secretary of State for Health in respect of the Appointment of Consultants, to represent the College;
(g)	to be appointed to a Board of Examiners;
(h)	to be appointed a Regional or a Deputy Regional Adviser;
(i)	to be appointed a College Tutor;
(j)	to receive copies of the British Journal of Anaesthesia, the College Bulletin and other publications the College may issue from time to time;
(k)	to use the facilities of the College buildings;
(l)	to benefit from the arrangements organised by the College for participating in continuing education and recording such participation

Associate Fellows enjoy items c) j) i) and k) above and so on.
52.	Mr Storey produced a schedule of 13 types of membership and, against each the amount of the annual subscription.  The figures are different for UK and overseas members.  In each case the BJA is provided for an extra £30 p.a.  The cost to the College of journals is about the same, i.e. about £30.  Mr Storey confirmed that the cost of the journals is the same whether or not the rights to the Journal differ.  In other words, there is a discount system and, for example, as a matter of policy the full cost is not paid by trainees.  96% of the income comes from practising anaesthetists, including those practising outside the UK.
53.	Mr Storey agreed with Mr Maxwell-Scott that the benefit to members would be the face value of the journals.
54.	The Regulations of the Royal College contain in Part III a section headed “Rights, Privileges, Obligations and Fees” and the second section of this Part contains the “rights and privileges of College members”.  
55.	In all cases, the enjoyment of the rights and privileges of all College members is dependent upon the payment of the prescribed subscription unless it has been waived.  There are seven categories of members, each of which enjoy different rights and privileges.  For example, the rights and privileges of Honorary Fellows have three benefits, namely to use the description Fellow of the Royal College of Anaesthetists and the designatory letters FRCA, to receive copies of the College Bulletin, and to use the facilities of the College buildings.
56.	The rights and privileges of Fellows by Examination, Fellows by Election and Fellows ad eundem include the following: use of the description Fellow of the Royal College of Anaesthetists and the designatory letters FRCA, and 11 other benefits, ranging from taking part in approved training and voting in relevant College elections, to attend General Meetings and to speak and vote at such meetings, and, as with the previous category, to receive copies of the BJA, the College Bulletin, and other publications the College may issue from time to time, and to use the facilities of the College buildings.  There are five other categories, but all of them include the right to receive copies of the BJA, the College Bulletin and other publications the College may issue from time to time.
57.	All College members have the duty to observe the traditions of the College’s Charter, Ordinances and Regulations, and any Direction the Council may from time to time issue.  All College members also have the duty to pay, within a specified time, any fees, subscriptions or other sums prescribed under the Charter or Ordinances.
58.	Mr Sherry submitted that the training activities of the College relate to the training leading to admission to Fellowship and cannot, therefore, be a membership benefit for the Fellows.

As to the maintenance of professional standards the College performs this function as part of its charitable objective.  It is not a benefit to Fellows only, but for the general public good.  It is not a business activity, Mr Sherry said, relying on London Red Cross Blood Transfusion Service v the Commissioners [1983] VATR 241, the Commissioners v Apple and Pear Development Council [1986] SCT 192 and ICAEW v The Commissioners [1999] STC 398.

Further, Mr Sherry submitted, this activity is not “a benefit of membership”, i.e. not a supply of services to the members in return for their subscription and he referred to “the Dutch Potato” case Staatsecretaris Van Financie v Co-operatieve Aardappelenbewaar plaats GA (ECJ Case 154 (80)0.
59.	a)  Mr Sherry, referring to the Commissioners’ contention that the right to vote and the right to be involved in College life is a valuable benefit to Fellows and that, therefore, the subscription price should be apportioned to take account of the receipt of this benefit, submitted that, if these rights are considered to be part of a supply in return for the subscription, they are merely ancillary to the principal supply of the BJA and the CEPD Review and he referred to Cord Protection Plan (“CPP”) v C&E Commissioners [1999] STC 230 at paras 30 and 31 of the Judgment and C&E Commissioners v Madgett & Baldwin [1998] STC 1208 at para 24 of the Judgment.

b)  The ECJ said in CPP that a service must be regarded as ancillary to a principal service if it does not constitute for the customers an aim in itself but is a means of better enjoying the principal service supplied.  That dictum is taken from a passage in the decision of the ECJ in Madgett & Baldwin and is better understood by reference to that passage, which followed the Advocate General’s opinion in Madgett & Baldwin (para 36).  The passage observes that if a service makes up only a small proportion of the package price it is a means of better enjoying the principal service provided and is therefore ancillary to it.
60.	To the extent that any other benefits that the Fellows receive are considered to be supplies by the College, Mr Sherry submitted that the nature of the supplies is such that they are ancillary to the principal supply of the journals as the costs associated with providing these membership benefits are minimal.  On that basis, Mr Sherry submitted, these ancillary supplies take their tax treatment from the principal supply and so fall to be zero-rated.  In this regard it should be noted that there are no direct costs associated with the Fellows’ rights to use designatory letters.  Moreover, once members have been admitted to Fellowship by reason of completing their training and examinations, the College has no power to prevent them using their designatory letters even if they cease to be members of the College.
61.	If, contrary to Mr Sherry’s submission above, an apportionment is required then he submitted that in order to arrive at the correct apportionment in this case the market value method should be used.  It was observed by Lindsay J in Public and Commercial Services Union v Commissioners of Customs and Excise [2003] EWHC 2845 at para 30 that the market value method was shown to have advantages in Madgett & Baldwin and that it was not uncommon to use it.  Nevertheless that does not mean that the cost method is invariably wrong.  However, Lindsay J went on to observe that where it is not apparent which method is better the simpler method should be chosen, following CPP at para 31.
62.	Mr Sherry submitted that the simpler method in this case is the market value method as the journals provided to the Fellows are also provided at large to other organisations and members of the public for an annual subscription fee.  That subscription fee of £320 is charged by the BJA which is an independent charity and it is the best evidence of the true market value of the journals.  As the subscription fee for membership of the College is also £320 then the whole membership subscription fee ought to be treated as zero-rated, as being the market value consideration for the publications.  Moreover the “other benefits” to which the Commissioners pointed have no market value.  Their monetary value is insignificant.  Further, the Commissioners have not pointed to any reason why the market value method is not appropriate in this case.
63.	Finally, Mr Sherry submitted that the cost method used by the Commissioners in their Statement of Case did not make use of the appropriate figures.  The Commissioners had divided the figure incurred in providing the journals to its Fellows by the cost of running the College.  However, the figure of £907,000 which they had used as that representing the cost of running the College included the direct expenses incurred by the College for training and setting professional standards.  These activities were exempt training for non-Fellows and non-business charitable activities respectively.  It was not appropriate to include them in a costs calculation designed to apportion the membership subscription between publications and member benefits which consist of no more than the right to attend meetings, vote and use initials.  If the Tribunal should decide that the appropriate method to apportion the subscription fee is the cost method then the appropriate denominator was the direct cost of the publications to the College (£227,000 for the year ended 30 June 2000) plus the direct cost of the meetings etc (£19,000 for the year ended 30 June 2000).  On the numbers for the year for 2001 (those used by the Commissioners) this would leave a figure of approximately £323,000 attributable to the publications.  This would mean that the apportionment percentage of subscriptions attributable to taxable income would be 83.6% as opposed to the 30% proposed by the Commissioners.  However, on the basis that the figures will vary from year to year Mr Sherry submitted that the market value method is the simpler method to use to ascertain the appropriate proportion and gives a more appropriate result and is therefore to be preferred.
64.	For the reasons set out above Mr Sherry submitted that the College’s appeal should be allowed and that, for the purpose of applying the standard method of ascertaining the partial exemption rate of recovery of input tax on non-attributable overhead expenditure the full subscriptions received should be treated as zero-rated; or the percentage for apportioning the subscription on a costs method be ascertained by using the figures suggested by the College.
65.	In his closing submissions Mr Maxwell-Scott said that the following issues arise for determination in this case:

1.  The nature of the benefits provided by the College to its members.
2.  Whether the benefits/supplies provided by the College to its members should be valued by the Market Value Method or by the Cost Method.
66.	Response to the College’s first submission
Mr Maxwell-Scott submitted that receipt of the journals is not the only benefit provided by the College to its members.  The best description of the benefits of membership is that set out in Part III of the College’s Regulations.
67.	Submissions on the law
The Dutch Potato Case [1981] ECR 445.  This case, correctly interpreted, does not assist the College’s case but rather assists the Respondent’s case.
(i)	The issue for determination in the case was the correct interpretation of the term “consideration” in Article 8(a) of the Second Directive (judgment para 8).
(ii)	The facts were that during the relevant period a cold-storage potato depot permitted growers to store 1000 kg of potatoes without charge (report page 447).
(iii)	The Advocate General was right to describe this as a very simple case.  There was no payment for the service and thus no consideration.  The case is authority for the proposition that consideration for the provision of a service must be capable of being expressed in money (judgment para 13).
(iv)	In this case there clearly was consideration expressed in money in that members paid the College a membership subscription.
(v)	The Dutch Potato case is not authority for the proposition that rights and privileges of membership do not constitute consideration because they allegedly have no objective value.
(vi)	The Dutch Potato case in fact acknowledges that consideration is a subjective value and not a value assessed according to objective criteria (judgment para 13).
(vii)	Thus the task in this case is to assess what subjective value the parties have given to (a) the rights and privileges of membership and (b) the journals.
68.	Lex Services[2003] UKHL 67
This case, correctly interpreted, does not assist the College’s case but rather assists the Respondent’s case.
(i)	Lex Services is authority for the proposition that the ‘subjective value’ of non-monetary consideration is the value overtly agreed and adopted by the parties to the transaction in question (judgment paras 18 and 19).
(ii)	Thus the task in this case is to assess what subjective value the parties have given to (a) the rights and privileges of membership and (b) the journals.
69.	The Blood Transfusion Service Case [1983] VATTR 241
This case does not assist the College’s case.
(i)	The issue for determination in the case was whether the Service was making supplies ‘in the course of a business’.
(ii)	What the Service did was to enable hospitals more easily to contact volunteers who were prepared to travel to hospital in order to give blood (report page 255).
(iii)	On the facts, this activity clearly did not amount to a business.  It was a purely voluntary service (report page 255).
(iv)	No similar issue arises in this case because s.94(2) VATA 1994 expressly states that “the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members” is deemed to be the carrying on of a business.
70.	The Apple and Pear Development Council [1988] STC 221
This case, correctly interpreted, does not assist the College’s case but rather assists the Respondent’s case.
(i)	Under the Apple and Pear Development Council Order 1980 the Council imposed on growers a mandatory annual charge in order to finance its activities.  These related essentially to advertising and the promotion and improvement of the quality of apples and pears in England and Wales.
(ii)	The Council also operated a concurrent voluntary scheme (the Kingdom Scheme) designed to promote the sale of standard top-quality apples (report pages 223 and 230h-j).
(iii)	Advocate General Slynn described the arguments in relation to whether the statutory charge under the mandatory scheme was to be treated as a payment for the exercise of the Council’s functions as “almost evenly balanced” (report page 234a-b).
(iv)	The Advocate General considered that, on balance, the charge was not to be treated as such a payment.  He relied on the obligatory nature of the payment, the obligatory discharge of statutory functions and the lack of control by individual growers over what the Council did for them (report pages 234g and 235e-f).
(v)	The Advocate General stated that: “the position seems to me to be very different in relation to the Kingdom Scheme where growers voluntarily pay for services directed to their specific products” (report pages 234g and 235e-f).  The Court of Appeal placed particular emphasis on this passage in the British Field Sports Society case [1998] 1 WLR 962.

The ECJ also relied on the mandatory nature of the charge and the fact that it was statutory rather than contractual (judgment paras 15 and 16).
71.	The ICAEW case [1999] STC 398
This case does not assist the College’s case.
(i)	The issue for determination in the case was whether the Institute was making supplies ‘in the course of a business’.
(ii)	It is clear from the case that the Apple and Pear Development Council clearly had been carrying on a business (report page 403j-404a).
(iii)	It is clear from the case that the mere fact that an institution is carrying out functions pursuant to statutory powers does not mean that it cannot be carrying on a business (report page 401f).
(iv)	No similar issue arises in this case because s.94(2) VATA 1994 expressly states that “the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members” is deemed to be the carrying on of a business.
72.	The British Field Sports Society case [1998] 1 WLR 962
The Respondent relies on this decision of the Court of Appeal.
(i)	The Society was formed to protect the rights of its members to carry on field sports.
(ii)	Members were entitled to attend and vote at general meetings (report page 964F).
(iii)	The Tribunal found that “members of this society pay their subscriptions for a package of benefits of which the most important is to have the society carry on its campaigning activities, which activities it carries on for them and on their behalf” (report page 965F-G).
(iv)	The Tribunal held that, on the evidence, the necessary link existed between the campaigning services provided by the society for its members and the subscriptions paid by the members (report page 966A-B).
(v)	The Court of Appeal upheld the Tribunal’s decision.  It stated that:
”Where, as in the present case, the members of the society have paid voluntary subscription for the society to provide benefits to the members and to each of them in accordance with the rules of the society, there is a direct link as the Tribunal found.  The benefits are perceived by the members as accruing to them equally, for they are provided in pursuit of a common purpose for which they subscribe”.  (report page 971G-H).
(vi)	In reliance on this case, the Respondent submits that the fact that, in practice, some members may receive greater benefits than others is not significant.  The nature of membership organisations is that members theoretically have the same rights and privileges although, in practice, they do not take equal advantage of them.
(vii)	In reliance on this case, the Respondent submits that the fact that non-members with similar views also benefit from the organisation’s activities does not mean that those activities do not constitute benefits to members.
73.	Submissions on the facts
The Respondent relied on the following facts and matters:

(1)  If the only benefit of being a member of the College were the right to receive its journals, one would expect those with an identical right to receive the journals to be charged the same subscription fee.  This is not the case.  In fact, there is no correlation between the cost to the College of providing the journals and the subscription rates it charges its members.  Furthermore, there is no correlation between most of the subscription rates set by the College and the market value of the journals relied upon by the College.

(2)  Dr Hulf’s evidence was that members do not remain members of the College merely in order to receive its journals.  Department libraries will have a complete archive of BJAs and most/many will pay an additional subscription for online access.  Department libraries will also have search facilities for both paper copies and the online version.

(3)  Part III of the College’s Regulations contains a clear description of the benefits of membership.  Part III sets out the “rights and privileges” of different categories of membership and states that “the enjoyment of the rights and privileges of all College members will be dependent upon the payment of the prescribed subscription”.

(4)  Mr Maxwell-Scott submitted that this amounts to a contractual arrangement whereby the College offers its members the rights and privileges set out in Part III in consideration for the members paying their subscriptions.  Mr Storey’s evidence about “how things work in practice” cannot alter the nature of this contractual arrangement.  This is a straightforward case (see Lex Services) in which the parties have agreed the subjective value of the package of benefits provided to its members.

(5)  Dr Hulf’s evidence was that members primarily remain members in order to promote and maintain professional standards.  This is an activity that the Royal Colleges have historically been involved in, although more recently such functions have been performed within a statutory framework.

(6)  The maintenance of professional standards in this case is analogous to the Society’s activities in the British Field Sports Society case - see also the Northamptonshire Football Association case (unreported) (Decision 12936).  Maintaining professional standards is an activity that the members wish the College to perform.  It is a benefit to them (i) by reason of the fact that they want it (ii) because it is in their interests for there to be a sufficient number of well trained and well qualified colleagues for them to work with and (iii) because it is in their interests for the profession of anaesthesia to be well regarded.  Furthermore, Dr Hulf was very clear that membership is not marketed as an opportunity to donate to the College’s charitable objectives; it is marketed as an opportunity to join.  The College has not suggested to its members that their subscriptions are used to fund activities which are not for their benefit.
74.	Response to the College’s second submission
Mr Maxwell-Scott submitted that the right to receive the journals is merely one of the rights and privileges of membership set out in Part III of the College’s Regulations.  The receipt of the other rights and privileges of membership cannot be characterised as ancillary to the supply of the journals.

(1)  In Madgett & Baldwin [1998] STC 1208 it was held that the supply of bought-in coach services was ancillary to the in-house supply of hotel accommodation.

(2)  This principle only applies where (i) the secondary service contributes to the proper performance of the principal service and (ii) the secondary service does not constitute a service sought for its own sake, but a means of better enjoying the principal service (Advocate General para 36; judgment para 24).

(3)  In this case the provision of the rights and privileges of membership do not contribute to the proper performance of the supply of the journals.  Nor are the other rights and privileges a means of better enjoying the supply of the journals.

(4)  Furthermore, the in-house supply of the rights and privileges of membership cannot be characterised as ancillary to the bought-in supply of the journals.

(5)  The approach contended for by the College is unreal.  The College exists inter alia to provide education and promote professional standards.  It is not merely (or even) a publisher of journals.  The College of Estate Management v Customs & Excise [2003] EWHC 2712 (Ch).
75.	Response to the College’s third submission
The Cost Method was the only proper method for valuing the supplies provided by the College to its members.  The Market Value Method would have been improper because it would, on the facts of this case, have been arbitrary.

(1)  In Public & Commercial Services Union v Customs & Excise [2003] EWHC 2845 (“PCSU”), Lindsay J held that the ECJ decision in Customs & Excise v Madgett & Baldwin [1998] STC 1189 was not authority for the proposition that the Market Value Method should invariably be used; nor was it authority for the proposition that the Cost Method was invariably wrong.  Madgett & Baldwin merely established a list of factors to be considered in determining which method should be chosen.  In PCSU Lindsay J held that the Tribunal had not erred in law in adopting the Cost Method.

(2)  The facts of this case are very different to those in Madgett & Baldwin.  In that case both the in-house services and the bought-in services had a clear market value.  The ECJ’s ruling was that:

”A trader may not be required to calculate the part of the package corresponding to the in-house services by the actual cost method where it is possible to identify that part of the package on the basis of the market value of services similar to those which form part of the package”.

This ruling does not apply to the facts of this case because the in-house benefits/services provided by the College do not have a clear market value and it is therefore not possible “to identify that part of the package on the basis of the market value of services similar to those which form part of the package”.

(3)  But the fact that they do not have a clear market value does not mean that they are not benefits of membership.  Nor does it mean that they have no value and thus that, by default, the value of the journals must be equal to the cost of membership.  Any such argument is logically flawed.

(4)  In fact, the College and its members have agreed the value to be given to the different parts of the package of benefits provided by the College to its members.  Part III of the College Regulations makes it clear that all categories of membership have the identical right to receive the journals but receive different rights and privileges.  An objective analysis of the College’s subscription rates suggests that the parties have given the journals a subjective value of £30 which broadly equates to the actual cost to the College of supplying them.

(5)  The application of the Market Value Method contended for by the College would be arbitrary because it would ignore the subjective value placed by the parties on the different parts of the package of benefits provided by the College to its members.  There is no reason why the subjective value agreed by the parties should be disregarded in favour of the alleged market price of the journals which, Mr Maxwell-Scott submitted, is somewhat artificial given that the majority of sales of the journals are not at the alleged market rate.

(6)  Furthermore, the application of the Market Value Method contended for by the College would be arbitrary because of (i) the lack of correlation between the subscription rates set by the College and the market value of the journals relied upon by the College and (ii) the lack of correlation between the subscription rates set by the College and the cost to the College of providing the journals.

(7)  If the College’s submission as to the market value of the journals were correct, the College would, in effect, be permitted to take advantage of the substantial mark-up placed by it on the journals.  Mr Maxwell-Scott submitted that the College should not be permitted to take advantage of the mark-up in this way.  The Tribunal in the PSCU case stated that:

”I am not persuaded that it is appropriate to apply a mark-up when the entity in question is a Union or some other body that finances its year by year operations out of subscriptions...  I know of no reason why, in the case of a mutual organisation such as the Union, for the purposes of calculating the taxable supplies any mark-up should properly be factored in in valuing any particular supply”.  (report para 39).

Lindsay J said that, if he had had to decide this issue, he would have had difficulty in concluding that the Tribunal had erred in law in its approach to this issue (report paras 53-55).

(8)  The purpose of apportioning the subscription income between taxable income and exempt income is to derive a ratio to apply to the POT input tax.  The POT input tax figure is based on those overheads which cannot themselves be directly attributed to either taxable or exempt supplies.  The application of the Market Value Method will not be fair and reasonable where there is no correlation between the contended for value of the taxable supply and the overhead costs incurred in providing it.  This will be the case where the mark up in relation to that supply is wholly disproportionate to that in relation to the organisation’s other activities and/or is used to subsidise the organisation’s other activities.  The application of the Market Value Method in such circumstances will produce a result which is inconsistent with the normal VAT principle that input tax is only recoverable where it relates to taxable supplies; Apple and Pear Development Council [1986] STC 192, HL.
76.	Response to the College’s fourth submission
(1)  In the light of the evidence of Dr Hulf and Mr Storey, Mr Maxwell-Scott stated that the Respondent accepts that the direct expenses incurred by the College in training should not have been included in the costs calculation because the specific activities which are funded by the training budget do not constitute benefits of membership.

(2)  For the reasons set out in paragraph 73 above, the Respondent maintains that the direct expenses incurred by the College in promoting and maintaining professional standards were correctly included in the costs calculation.

(3)  It was submitted that all expenses involved in providing the other benefits of membership fall to be included in the costs calculation.  This includes the cost of the meetings, the cost of elections and the salaries of the three staff who work on membership related matters.
77.	In his closing submissions, Mr Sherry said that the sole question was how much of the College subscriptions is liable to VAT or, put another way, how much of the subscription is attributable to the journals?

Training is not part of the benefit of membership.  To say that the rights and privileges of all College members “will be dependent upon the payment of the prescribed subscription” is merely a condition precedent.  Paragraphs e) to i) are not benefits of membership – they are burdens.  Para (c), the right to vote in relevant College elections, is not aptly described as given in consideration of the subscription.  Furthermore paragraphs k) to l) are not really benefits.

The College does provide courses and conferences, for which charges are made – but these are not said to be benefits of membership in any event.

What is significant, Mr Sherry continued, is the absence of any mention of anything covered by the “professional standards label”.  Also absent is representation of members’ interests as such.  Are professional standards linked to the subscription?  Unlike training they are not of direct benefit to members at all.

The only contentious items are voting rights.  Are they benefits or not?

The decision in the Dutch Potato case was that there must be, for VAT purposes, a direct link between the supply and the consideration.  VAT is based on the price which the parties have themselves adopted for the item in question.  Dr Hulf said that the journal has a value (but how much?).  All we have to do is put a price on the journal.

Dr Hulf was asked whether the benefit of membership of the College was only to receive the Journal and she said the best “feedback” is to ascertain the standards to which one had been trained.
78.	Mr Sherry said that the only reason for pursuing the appeal was that the parties had not agreed the price (or value) of the Journals.  Any other benefit of membership, Mr Sherry said, is so small that it can be subsumed in the value of the Journals.

Where the Journals are bought separately, i.e. not through a member of the College, the subscription rates are those shown inside the front cover.  There is no subjective value.  The true value is the amount paid by direct subscription.  Members of the College get the Journals at a discounted rate because of the huge quantity of Journals distributed.

It had been said, Mr Sherry continued, that if 100% of the cost was attributed to the Journals there would be an over-recovery of input tax, but there was no evidence of this.  Mr Sherry’s submission was that there were no overheads attributable to distributing the magazine (none are shown separately in the College’s 2001/2 accounts).  Any attribution to cost centres is not shown.

There is no VAT on salaries, so that the figures in the accounts of the number of recipients of the Journals is not a sensible way of ascertaining the amount of unattributable input tax.

Mr Sherry asked us to find that the cost of the provision of members’ benefits does not come into the equation and that the only candidates for the cost of member benefits are the professional standards category (which should not be included) and the costs of meetings, e.g. the AGM and elections (which should not be treated as a membership benefit).

Mr Sherry reminded us that in the Madgett & Baldwin case (ECJ) [1998] STC 1189 it was stated (in effect) that the simplest method of allocation should be adopted.
79.	We come to our conclusions.

First, with no disrespect to Dr Hulf, we reject the proposition that the only benefit of membership of the Appellant College is the entitlement to free copies of the Journals.  

Secondly, in general we find Mr Maxwell-Scott’s submissions compelling.  Our task, therefore, is to assess what subjective value the parties have given to the rights and privileges of membership and to the journals.

s.94(2) of the VAT Act 1994 provides that the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members is deemed to be the carrying on of a business.

For the reasons given by Mr Maxwell-Scott in his closing submissions, we agree that the Cost Method is the only proper method of valuing the supplies provided by the College to its members.

We also agree that the direct expenses incurred by the College in promoting and maintaining professional standards were correctly included in the costs calculation and that all expenses involved in providing the other benefits of membership fall to be included in the costs calculation, including the costs of meetings and elections and the salaries of the three staff who work on membership related matters.

The appeal fails.  There will be no direction as to costs.

PETER H LAWSON
CHAIRMAN

RELEASED: 08/06/2004

LON/03/170