College of Estate Management v Customs & Excise

For VAT, a transaction involving education and course materials must be characterised objectively by reference to all the circumstances and the essential economic features of what the customer receives. Separate supplies should not be artificially combined, but physical or economic separability is not conclusive. A supply is ancillary only where it facilitates the principal supply, takes a marginal share of the price, and is not an aim in itself. Written materials supplied by a distance-learning college were substantial, independently sought and distinct from the education service. They were therefore a separate zero-rated supply of goods, while education remained exempt under the Value Added Tax Act 1994.

The College, a charitable higher-education provider specialising in distance learning, supplied students with education, examinations and extensive printed course materials for one fee. Customs decided that the College made a single exempt supply. The VAT and Duties Tribunal dismissed the College’s appeal on 27 February 2003, and Lightman J dismissed a further appeal on 13 November 2003. The Court of Appeal granted permission for a further appeal. The central issue was whether the printed materials were a separate supply of books, zero-rated under Schedule 8, or were subsumed within exempt education and examination services under Schedule 9.

Disposition. Ward LJ delivered the leading judgment, with Jacob LJ and Sir Charles Mantell agreeing. The appeal was allowed and the matter was remitted to the Tribunal to apportion the price between the separate supplies.

1. Characterisation. VAT characterisation is a question of law. The court must identify the essential features and economic purpose of the transaction by looking objectively at all the circumstances and at what a typical customer receives, rather than at subjective reasons for contracting. Each service is normally distinct and independent, but a single economic supply must not be artificially split. A transaction may also comprise a bundle of integral supplies without one dominant element. These principles were drawn from Card Protection Plan Ltd v Customs & Excise Commissioners [1999] 2 A.C. 601, Faaborg-Gelting Linien A/S v Finanzamt Flemsburg [1996] STC 744, and related authorities.
2. Ancillary supplies. Physical and economic dissociability is relevant but is not a conclusive test. If separate elements are identified, the court must decide whether they are distinct and independent or whether one is ancillary to the other. An ancillary supply contributes to the proper performance of the principal supply, takes only a marginal proportion of the package price, and is not an object sought for its own sake but a means of better enjoying the principal supply. The court must stand back and review the transaction overall, taking account of commercial reality, price, value and VAT neutrality. The approach in Customs & Excise Commissioners v FDR Ltd. [2000] STC 672 was applied.
3. Application. The printed materials were physically separate, substantial in production, staffing and expenditure, and capable of separate price apportionment. Objectively, distance-learning students enrolled to obtain the necessary material for working and studying without attending full-time lectures or sourcing the material elsewhere. The material was therefore an object sought for its own sake, not merely a means of better enjoying education. The Tribunal and Lightman J had erred by treating the matter as a single either-or question and by asking whether the books were ancillary before first deciding whether there was a single supply.
4. VAT treatment. The College made two supplies: exempt educational and examination services, and a separate zero-rated supply of goods. The price was to be apportioned between them.

• Court of Appeal (Civil Division) — [2004] EWCA Civ 1086: allowed the appeal and remitted the matter to the Tribunal to apportion the price between the separate supplies.
• Chancery Division (Revenue) — Lightman J, 13 November 2003: dismissed the College’s appeal from the Tribunal.
• VAT and Duties Tribunal — 27 February 2003: dismissed the College’s appeal against Customs’ decision that the College made a single exempt supply of education, with the printed materials ancillary to it.