UT/2024/00063 - [2024] UKUT 00397 (TCC)

Article 2(1) of the Principal VAT Directive (2006/112/EC) (“PVD”) includes the requirement that for a supply of services to be subject to VAT it must be “for consideration”. As explained by reference to authority in CIC UT 2020 that requires “a direct link between the service provided and the consideration received” ([45]), and can include third party consideration i.e. paid by a person who is not the recipient of the supply ([46]). The third party consideration can be in the form of public subsidy so long as the subsidy bears a direct link with the services at issue ([47]).

The FTT Decision set out the facts as drawn from the parties’ Statement of Agreed Facts. These included the background to CIC, the nature of the courses it provided and the qualifications they led to, the details of the government agency funding received including, as of particular relevance to the appeal, from the Skills Funding Agency (“SFA”) and the Education Funding Agency (“EFA”). The facts go on to detail the agreements CIC had with those two bodies, the funding formulae contained there, and the content of receipt documents provided to students. (These facts appear in the annex to this decision.)

The reasoning in the FTT Decision allowing CIC’s appeal noted the consideration issue, (in view of the other common positions the parties had adopted) was determinative of the output tax assessment under appeal, and that the parties accepted the consideration issue had been determined against HMRC by CIC UT 2020. Because CIC UT 2020 was binding on the FTT it followed that CIC succeeded on the consideration issue and therefore in respect of the output tax appeal. (Footnote: ³)

To put HMRC’s grounds before the UT in context it is helpful first to summarise the essential elements of CIC UT 2020. That was an appeal by CIC against the FTT’s decision in Colchester Institute Corporation v HMRC [2018] UKFTT 479 (TC) (“CIC FTT 2018”) relating to over-declared output VAT in periods 04/10 to 01/14 and which decided the consideration issue in HMRC’s favour.

The UT summarised the facts surrounding the activities of CIC and their funding at [13] to [30] including details of the SFA and EFA funding agreements and formulae contained within them. (Although the facts of CIC UT 2020 and the current FTT Decisionunder appeal concern grant-funded supplies of education in different periods and different versions of the SFA and EFA funding agreements were in place, there is no suggestion these differences are material.)

The UT’s reasoning identified (at [66]) the issue at the heart of the appeal as being between whether the payments made were a form of funding on conditions as HMRC’s position entailed or payments made pursuant to a reciprocal arrangement of services.

CIC’s case relied on analogy with a CJEU case Le Rayon d'Or SARL v Ministre de l'Économie et des Finances (Case C-151/13), a case where a residential care home was paid a “healthcare lump sum” by the French sickness insurance fund which the CJEU held was consideration for the care provided by the home to its residents. HMRC sought to distinguish that case saying it was about a supply of access to service (a so-called Kennemer (Footnote: ⁴)supply). It was common ground here the supply in CIC’s case was not of that nature. The UT rejected that distinction analysing Rayon d’Or as a case where services were supplied to individual residents ([70]). The UT considered the case was analogous on its facts and that it had to follow the CJEU decision saying that was sufficient to dispose of the consideration issue ([74]). The UT disagreed with the analysis of the EFA and SFA agreements in CIC FTT 2018 holding instead that rather than being neutral they did indicate the direct link between the grants and the courses provided ([76] to [81]). The UT also went on to explain why it disagreed with the CIC FTT 2018’s error in looking for a link which was so direct that the payments could be matched to individual supplies or costs or to individual students ([86]).

Although HMRC failed on the consideration issue it ultimately won the appeal on an alternative argument (that even if the supplies were for consideration the UT agreed HMRC were entitled to set-off input tax so as to extinguish CIC’s repayment claim under s81(3) VATA). As the successful party in the appeal, HMRC could not appeal against the UT’s decision in respect of the consideration issue.

HMRC’s overall ground of appeal in the UT, further detailed by extensive particulars, is that the provision of education or training was not for consideration; the grants paid to CIC by EFA and SFA were not directly linked to the provision of education or training and that CIC UT 2020 had wrongly decided the consideration point. Rayon d’Or, contrary to the UT’s analysis, was distinguishable on its facts which included, HMRC say, that Rayon d’Or concerned Kennemer supplies.

In support HMRC rely on the narrow interpretation of scope of Rayon d’Or they say the CJEU later took in the case, Balgarska natsionalna televizia (Case C-21/20).In HMRC’s submission Balgarska clarified Rayon d’Or was focussed on the particular relationship between the sickness fund and its insured. Balgarska concerned the question of whether a public national TV provider supplying audiovisual media services to viewers, financed by State subsidy, and where no fees were payable by viewers, constituted consideration for Article 2 PVD purposes.

HMRC also say CIC UT 2020 erred, in a number of respects, in its analysis that the funding agreements supported a conclusion the supplies were for consideration, and that it wrongly identified the degree of specificity required by the requirement that there be a “direct link”.

CIC had not filed a formal response under Rule 24 of the UT Rules, nevertheless its skeleton argument indicated it sought to, if it became necessary, uphold the FTT decision for additional reasons that were not in the FTT Decision (Rule 24B(1)(a) requires the Respondent to file a response in such circumstances). I should record that I agreed, further to a proposal HMRC helpfully made in advance of the hearing, to paragraphs [8] - [11] in CIC’s skeleton argument being treated as CIC’s Rule 24 Response in the appeal before the UT. In those paragraphs CIC explained that in the FTT, it reserved its position on the so-called “single business” issue (an argument to the effect that in the alternative scenario, where some supplies of education were for consideration and others were not, the overall activity was nevertheless an economic activity). That issue did not arise for decision in the FTT. It also does not arise in these proceedings (given HMRC’s acceptance that their appeal should be dismissed on the consideration issue). However, CIC reserves its right to argue these points on the single business issue further on appeal should it become necessary.

As already mentioned, HMRC seek to reserve their arguments on the consideration issue to raise on any further appeal. That means they do not seek to convince or satisfy this UT that CIC UT 2020 was wrong on the consideration issue. HMRC accept CIC UT 2020 determines the consideration issue and that the consideration issue determines their appeal. They accept the position they take means their appeal before this UT should be dismissed.

At the hearing I raised with the parties whether there was any difficulty of, on the one hand HMRC having an appeal on foot that rested on the sole question of consideration but then maintaining on the other that it was not pursuing that question before the UT. What was the subject matter of the appeal if the only question upon which permission had been granted was not advanced before the UT? Neither party was able to refer me to an example where all of the matters in the appeal were subject to reservation but I accepted there were certainly instances where a party had accepted a UT decision stood against them on a certain issue which then disposed of that issue but still left other issues to be argued in full before UT and determined in the normal way. Mr Mantle, who appeared for HMRC, emphasised however the rationale for the practice of reserving an argument on appeal was of conserving court and judicial resource. From that point of view, I agree with his submission, it should not make a difference, as a matter of principle if the reservation is in respect of the entirety of the parties’ ground of appeal as opposed to part of it (Footnote: ⁵). Mr Firth KC, who appeared for CIC, confirmed CIC did not take issue with HMRC reserving its arguments. As he pointed out, in view of the reservation there still remained a point of law for the purposes of enabling the UT’s appellate jurisdiction under s11 Tribunal Courts and Enforcement Act 2007.

Reserving matters in this way is not of course without risk for the party concerned and also has wider implications. If the UT refuses any permission to appeal application and the Court of Appeal does too there will be no onward appeal and HMRC will have lost the opportunity to try to persuade the UT with the benefit of full argument on the issues to depart from the earlier UT decision. It should also be noted the procedural framework does not provide a leapfrog procedure from the FTT to the Court of Appeal. The normal course is for appeals to proceed from the FTT to the UT and if allowed onwards after a full hearing in the UT. The stance taken here means that if the matter proceeded to the Court of Appeal that court would not have the benefit of the UT’s analysis in response to the detailed arguments that would otherwise have been rehearsed before it on whether the earlier UT decision was wrong. Against that is the risk of two conflicting UT decisions and the uncertainty that creates if the UT were to agree with HMRC and no appeal was made against the later decision and also the saving of judicial, administrative and party resource.

In the particular circumstances of this case, noting CIC raise no objection to HMRC’s reservation, (and that HMRC if pursuing an appeal would still need to persuade the UT, amongst other matters, that they have a real prospect of success in arguing CIC UT 2020 was wrong, and that the UT will therefore inevitably need to express its view to some degree on the underlying merits of any onward appeal), I am content to recognise HMRC’s position before the UT and their reservation.

HMRC’s position means they do not rely, before the UT at least, on points regarding the Balgarska decision that was issued after CIC UT 2020. Although some of the hearing before me was taken up, at my direction, with argument on the relevance of that case (for the purpose of putting me in a better position to deal with any analysis of the case on any subsequent permission to appeal application), I will not, given HMRC do not press that case in their UT appeal, express my views on the case’s relevance. I simply note that the parties take opposing views on the light it sheds on the scope of the CJEU’s reasoning in Rayon D’Or, that CIC considers the case helpful to their defence of the appeal, and that both parties accept it is not (as a post IP Completion Day case) binding on the UK courts.

Consistent with the conservation of judicial resource rationale underlying HMRC’s position and reservation, and having already explained the necessary background above, my reasoning for dismissing this appeal before the UT can be expressed briefly. CIC UT 2020 dealt with the same consideration issue in respect of the same material facts. The reasoning in that decision, which held in CIC’s favour on the consideration issue, applies equally to the materially similar facts of this appeal. The FTT was accordingly correct to find CIC succeeded on the consideration issue and to allow CIC’s appeal.

HMRC’s appeal against the FTT Decision is dismissed.