Customs & Excise v Pilgrims Language Courses Ltd

For VAT purposes, a transaction supplied for one price must be analysed by reference to its essential features. Separate supplies remain distinct, but a principal supply may absorb ancillary elements which are not an aim in themselves and merely enable customers to enjoy the principal service more effectively. A single price is relevant but not decisive.

In education cases, services closely related to exempt education cannot be excluded merely because they are not themselves strictly educational. The statutory exemption must be construed consistently with Article 13A of the Sixth Council Directive (77/388/EC). The court must examine each course separately, identify the principal supplies, and allocate ancillary supplies to them.

Pilgrims operated residential courses teaching English as a foreign language. A single fee commonly covered tuition, activities, meals and accommodation. The Commissioners ruled that only the strictly educational elements were exempt from VAT.

The VAT Tribunal treated several elements, including accommodation and catering on children’s and young adults’ courses, as integral to the exempt educational supply, while treating sporting activities, excursions and related transport as taxable. Richards J allowed the Commissioners’ cross-appeal and dismissed Pilgrims’ appeal: [1998] STC 784.

After the judge’s decision, the European Court of Justice delivered its judgment in the CPP litigation. The central issues were whether the courses constituted single composite supplies or multiple supplies, and whether the relevant elements fell within Group 6 of Schedule 9 to the Value Added Tax Act 1994.

1. Appeal allowed. The Court of Appeal restored the Tribunal’s conclusions that meals on fully residential courses, and accommodation on children’s, young adults’ and teachers’ courses, were exempt. It also held that excursions, airport transport, course photographs and certificates supplied on children’s and young adults’ courses were exempt. The Tribunal’s decision was restored to that extent.

2. Applying the approach in the CPP judgment, each course had to be considered separately. The court had to identify the various supplies, determine whether there was one or more principal supply, and, where there was more than one principal supply, identify to which principal supply each ancillary supply related.

3. A service was ancillary where it was not an aim in itself for the customer but a means of better enjoying the principal service. A single price could suggest a single supply, but was not decisive. The inquiry concerned the essential features and economic reality of the transaction.

4. The statutory note restricting the exemption for bodies whose eligibility arose from teaching English as a foreign language could not be construed to exclude supplies closely related to that teaching. Such a construction would place domestic law in breach of Article 13A of the Sixth Council Directive (77/388/EC). The note could instead be construed sensibly, for example to exclude the supply of teaching other languages by language schools.

5. The Court rejected the Commissioners’ submission that the United Kingdom could use the definition of eligible organisations to deny exemption for closely related supplies made by eligible bodies while granting it to public-law bodies. The conditions in Article 13A(2)(b) were cumulative, and the present case did not satisfy the competition condition.

6. On the facts, meals and accommodation in the specified courses were not aims in themselves. They were means of better enjoying the principal educational service. The remaining courses were outside the appeal because Pilgrims had not challenged the Tribunal’s adverse conclusions concerning them.

Mantell LJ and Butler-Sloss LJ agreed. The appeal was allowed with costs in the Court of Appeal and High Court, and the Tribunal costs order was varied so that the Commissioners paid 90 per cent of Pilgrims’ costs.

• Court of Appeal (Civil Division): allowed Pilgrims’ appeal and restored the Tribunal’s decision in the specified respects.
• High Court, Queen’s Bench Division: Richards J dismissed Pilgrims’ appeal and allowed the Commissioners’ cross-appeal: [1998] STC 784.
• VAT Tribunal: treated specified accommodation, catering and related elements as exempt, but held sporting activities, excursions and certain transport and incidental items taxable.