On December 21, 2016 on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Kokott in Case C‑699/15, The Commissioners for Her Majesty’s Revenue & Customs versus Brockenhurst College (ECLI:EU:C:2016:991) was published.
In the present case, the Court is asked to rule on the tax exemption provision in Article 132(1)(i) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’). It is necessary to clarify the scope of the exemption, as it applies not only to precisely listed services, but also exempts the supply of ‘closely related’ services and goods (‘supplies’) from value added tax.
This technique for extending the exemption to closely related supplies is used by the EU legislature also in connection with other exemptions (for example, Article 132(1)(b) and (n) of the VAT Directive). However, here too there are difficulties in differentiating supplies that are still closely related from supplies that are no longer closely related. There is already some case-law of the Court on that question of differentiation. However, the Court has not yet concerned itself in detail with the question whether the exemption can also apply to supplies to external third parties (that is to say, not to the students to be taught (or patients to be treated) and also not to other training establishments that are exempt from tax). This concerns cases in which the taxable person (for example the school or the hospital) makes supplies to those third parties that are to some extent related to its exempt supplies (the education or the hospital care).
The question of the scope of the exemption of these ‘closely related’ supplies is raised in the present case on the basis of a ‘training restaurant’ or ‘training theatre’ at Brockenhurst College (‘the College’). The College provides through trainees, in the course of their practical training, restaurant services or theatre services to third parties in return for payment and would like to have that income treated as consideration for a supply that is exempt from tax under Article 132(1)(i) of the VAT Directive. The question can be raised, in all its variants, in connection with practical training. In Germany, for example, the owner of a hairdressing school attempted to treat the haircuts given by its trainees to customers — who had to pay a reduced price for them — as exempt from tax. According to the Advocate General there are almost no limits to the possible cases here. The same question would also arise if — as the Commission stated at the hearing — a baker training establishment allowed its trainees to sell bread and bread rolls in the course of their training or an industrial cleaning academy gave its trainees experience at the premises of paying customers in the course of their training.
The main proceedings
· The dispute in the main proceedings concerns the catering and entertainment services provided by the College (namely the services supplied by the College to members of the public dining in the restaurant or attending a performance).
· As the referring court has described, the College carries on the business of providing education to its students, including the teaching of courses in (i) catering and hospitality and (ii) the performing arts.
· For the purpose of enabling the students enrolled in the course related to catering and hospitality to learn skills in a practical context, the College runs a training restaurant. The catering functions of the restaurant are all undertaken by students of the College, under the supervision of their tutors. External third parties (members of the public) dine there and pay around 80% of the cost of their meals.
· Similarly, for the performing arts course, to give practical experience to the students enrolled on those courses, the College — again through those students — stages concerts and performances for paying members of the public.
· The training restaurant is required to meet the educational needs of the students taking catering and hospitality courses. The restaurant is tantamount to a classroom for such students.
· The training restaurant is not open to the public as such. The College operates a database of local groups and individuals who may wish to attend the restaurant. They are informed of events at the College through a newsletter created by the hospitality department.
· In relation to the training restaurant, the College requires there to be a full restaurant (serving between 30 and 40 people) for two sittings on the same day and two different groups of students to obtain maximum benefit for the students. If not, the meal is cancelled.
· The performance of concerts and plays within the performing arts courses has, for students on those courses, a similar function to that of the training restaurant.
· Likewise, for the performances, the audience is limited in the sense that they are usually friends and family of the students or from an established database of people registered with the College.
· The persons attending the training restaurant or a performance know that they are paying a reduced fee for a meal or performance which is to be prepared or offered as part of the training for the students.
· The practical training was designed as part of the courses and was in the contemplation of the students at the time they registered for the respective qualifications. If the practical training, including the serving of food and performances at concerts, were not offered then the students would not fully benefit from the courses. The making of the supplies is facilitated by the students in the course of their education. This is, according to the findings of the referring court, an essential part of their education.
· It is common ground between the parties that obtaining additional income for the College through transactions in direct competition with commercial enterprises was not the basic purpose of the supplies of restaurant and entertainment services.
· By a decision dated 5 November 2012, the First-tier Tribunal determined that the supplies of restaurant services and entertainment services by the College to members of the public are exempt from VAT under Article 132(1)(i) of the VAT Directive as supplies of services closely related to education.
· On appeal by the Commissioners, the Upper Tribunal (Tax and Chancery Chamber) by a decision dated 30 January 2014 upheld the decision of the First-tier Tribunal. On appeal by the Commissioners to the Court of Appeal (England and Wales) (Civil Division) (United Kingdom), the Court of Appeal decided to stay the proceedings and refer questions to the Court of Justice for a preliminary ruling.
Procedure before the Court
· The Court of Appeal (England & Wales) (Civil Division) therefore referred the following questions to the Court on 24 December 2015 pursuant to Article 267 TFEU:
1. With regard to Article 132(1)(i) of the VAT Directive, are supplies of restaurant services and entertainment services made by an educational establishment to paying members of the public (who are not recipients of the principal supply of education) ‘closely related’ to the provision of education in circumstances where the making of those supplies is facilitated by the students (who are the recipients of the principal supply of education) in the course of their education and as an essential part of their education?
2. In determining whether the supplies of restaurant services and entertainment services are within the exemption in Article 132(1)(i) as services ‘closely related’ to the provision of education:
a) is it relevant that the students benefit from being involved in the making of the supplies in question rather than from the subject matter of those supplies;
b) is it relevant that those supplies are not received or consumed either directly or indirectly by the students but are received and consumed by those members of the public who pay for them and who are not recipients of the principal supply of education;
c) is it relevant that, from the point of view of the typical recipients of the services in question (that is to say the members of the public who pay for them), the supplies do not represent a means of better enjoying any other supply but are an end in themselves;
d) is it relevant that, from the point of view of the students, the supplies in question are not an end in themselves but participating in the making of the supplies represents a means of better enjoying the principal supply of education services;
e) to what extent should the principle of fiscal neutrality be taken into account?
· Written observations on those questions have been submitted by the College, the United Kingdom and the Commission. The College, the United Kingdom and the Commission took part in the hearing on 10 November 2016.
Conclusion
The Advocate General proposes the following answers to the questions referred for a preliminary ruling by the Court of Appeal (England & Wales) (Civil Division) (United Kingdom):
(1) Closely related transactions within the meaning of Article 132(1) of the VAT Directive are independent supplies, the taxation of which also increases the cost of access to supplies that as such are exempt from tax. They do not include the supply of restaurant and entertainment services by an educational establishment to paying members of the public who are not recipients of the educational services that are exempt from tax.
(2) For the differentiation it is relevant (and militates against the existence of the exemption) that the persons benefiting from the exemption contribute to what is provided to other consumers. It is also relevant that the third parties pay for their own consumption, that is to say, not for the provision of education to the students. Finally, it is also relevant that the supplies to the third parties — both from the perspective of the third parties and the students — pursue an independent objective (providing for third parties) that is pursued alongside the educational objective that continues to be exempt from tax.
From the assessment as made by the Advocate General
A – Question 1
· By its first question, the referring court ultimately wishes to ascertain how the criterion of ‘closely related’ supplies in Article 132(1)(i) of the VAT Directive is to be interpreted. In particular, it asks whether supplies to third parties through an establishment named in Article 132(1)(i) of the VAT Directive can also fall under it. The referring court raises that question, in particular, because those third parties receive supplies that the trainees provide during and as part of their training.
· As the Court has already held in relation to Article 13A(1)(i) of the Sixth Directive, the VAT Directive (now Article 132(1)(i)) does not define the concept of supplies ‘closely related’ to education. Nevertheless, it is clear from the actual wording of the provision that it does not cover the supply of goods or services which are unrelated to ‘children’s or young people’s education, school or university education, vocational training or retraining’.
1. Principal supply, ancillary supply and closely related supply
· Furthermore, the Court has held that the supply of goods or services can be regarded as ‘closely related’ only where they are also considered to be supplies that are ancillary to the principal supply. However, a supply may be regarded as ancillary to a principal supply only if it does not constitute an end in itself, but a means of better enjoying the principal supply. This in turn suggests that the recipients of the principal supply and the ancillary supply must be identical, otherwise there would actually be two independent (principal) supplies.
· However, that conclusion is not mandatory. The very wording of Article 132(1)(i) and Article 134 of the VAT Directive militates against the idea that closely related supplies must constitute ancillary supplies in that sense. A non-independent ancillary supply shares, by definition, the fate of the principal supply (in this case the tax treatment of the ‘educational services’ for VAT purposes) and is therefore exempt from tax per se. The separate exemption, in a few exemption provisions, of supplies closely related to exempt supplies makes sense only if the EU legislature considered that these supplies are in fact subject to tax according to the general principles but nevertheless should also be treated as exempt from tax.
· Furthermore, in the Horizon College case the Court also extended the exemption in Article 132(1)(i) of the VAT Directive to supplies of one educational establishment to another (and therefore not directly to the students). Likewise, in the Canterbury Hockey Club and Canterbury Ladies Hockey Club case, the Court ultimately extended the exemption in Article 132(1)(m) of the VAT Directive — which is however worded slightly differently — to supplies to third parties (namely persons not taking part in sport).
· Article 132(1)(i) of the VAT Directive therefore implies that the ‘closely related’ supply is not merely a dependent ancillary supply, but an independent (principal) supply. However, as that supply remains closely linked to the exempt (principal) supply, it is (exceptionally) also covered by the exemption applicable to that supply. This also explains why it is only for those cases that Article 134 of the VAT Directive explicitly and additionally requires that this in itself, independent principal supply must be essential to the exempt (principal) supply.
· On this understanding of a ‘closely related’ supply, supplies to external third parties may also more easily fall within the scope of the exemption provision than if they were understood to be a dependent ancillary supply. Nevertheless, such supplies that are still ‘closely related’ must also be distinguished from supplies that are no longer ‘closely related’. In that respect, it depends upon the purpose and objectives of the tax exemption.
2. The purpose and objectives of the tax exemption of transactions that are closely related to the provision of ‘education’
· The purpose and objective of the exemption in Article 132(1)(i) of the VAT Directive is that access to the provision of education — for the benefit of pupils, students and trainees — does not become more expensive due to VAT. As the Commission and the United Kingdom stressed at the hearing, this may well relate to the fact that the training of individuals serves not only them but also the public interest (see the title of Chapter 2 of Title IX of the VAT Directive).
· The exemptions in Article 132 of the VAT Directive preclude the deduction of input tax. Therefore, they only bring about a partial exemption of the recipient of the supply. Their amount depends on the (non-deductible) VAT burden of the provider of the supply. If the supplies of the College were to be subject to tax in the present case, it would be entitled to deduct input tax with regard to the goods purchased, so that the prices to third parties would have to be increased ‘only’ in respect of the difference between the tax liability and the input tax deduction, in order for the College to obtain the same economic outcome.
· This shows that the purpose of the exemption in Article 132(1)(i) of the VAT Directive is not the favourable treatment of the taxable person concerned (in this case the ‘educational establishments’). Economically, the exemption works only in the favour of the recipient of the supply, who now incurs lower VAT.
· This is in accordance with the character of VAT as a tax on consumption that must be borne by the final consumer and should burden him alone. In this context, an exemption of supplies that are consumed directly by third parties and are ‘produced’ only on the occasion of training is difficult to justify.
· Furthermore, the principle of fiscal neutrality must also be taken into account in the interpretation of the exemptions in the VAT Directive. That principle precludes, in particular, economic operators who effect the same transactions from being treated differently in respect of the levying of VAT. From the perspective of the end consumer (in this case the third party), a distinction as to whether the food is consumed in a normal restaurant or in a training restaurant is irrelevant to his VAT burden. In both cases, the consumer is served and fed and in both cases he pays money for that consumption. The fact that in a training restaurant there is potentially a higher error rate is — as the United Kingdom also stressed at the hearing — taken into account solely in the amount of consideration (in the present case the charging of only 80% of the meal cost). The quality of the restaurant service does not call into question the existence of such a service.
· With regard to the principle of neutrality, it cannot be correct that consumers are relieved of VAT only because exempt training of other people is also taking place at the same time. This also applies if the training restaurant or training theatre were in fact available only to a restricted group of people within the public. If there is an economic activity for the purposes of VAT law, a restriction of the consumer base is — as the Commission and the United Kingdom submit — therefore irrelevant to the correct taxation of the consumers. Even catering in so-called ‘Members’ Clubs’ through a restaurateur constitutes an economic activity that falls under the principle of neutrality. The same applies to a restaurant that only serves customers whose name begins with the letter ‘A’. It nevertheless competes with every other restaurant that attaches no importance to the initial letter of a name. The same applies in the present case, in which a customer must be registered beforehand in order to be eligible as a guest.
B – Question 2(a)-(d)
· The main aim of the referring court’s question, subdivided into subparagraphs (a) to (d), is to clarify the differentiation criteria according to which a supply that is still closely related can be distinguished from a supply that is no longer closely related.
· For that differentiation it must be borne in mind that the exemptions are, in the view of the Court, to be interpreted strictly, and, according to more recent case-law, the interpretation is to orient itself above all by reference to the purpose and objectives of the provision. As the Court explicitly states: ‘nevertheless, the interpretation of those terms must be consistent with the objectives pursued by those exemptions and comply with the requirements of fiscal neutrality. Thus, the requirement of strict interpretation does not mean that the terms used to specify the exemptions referred to in Article 132 should be construed in such a way as to deprive the exemptions of their intended effect.’
· In this regard, it is not sufficient that, through the supplies to the third parties, the educational purpose alone is optimised. On the contrary, the supplies must, in accordance with Article 134 of the VAT Directive, be essential to the transactions exempted. Accordingly, the Court held in the judgment in Commission v Germany that the performance of projects for external third parties in return for payment is not exempt from tax; even though they can be seen as very useful for university education, they are not, however, essential for the purpose of achieving its intended objective.
· The crucial point is whether taxation of those supplies makes access to exempt supplies more expensive. One example is the cooperation of two enterprises directly for the benefit of the end consumer who is to be exempt from VAT, as in the Horizon College judgment. That concerned the collaboration of two educational establishments concerning supplies on the input side. The Court has held supplies between two exempt educational establishments to be exempt from tax in order to prevent the students for whom it produces a benefit from being burdened with VAT only because the educational service was provided not directly to them but only indirectly through another educational establishment. That is not the situation in this case. Here, education is provided on the output side to the students in return for payment at the same time as restaurant or theatre services are provided to third parties in return for payment.
· For the assumption of a ‘closely related’ service, it is simply not sufficient that supplies arise ‘only’ sometimes as a kind of product in the course of the exempt supply and are provided to third parties. That is because, in this case, the taxation of the products does not increase the cost to the recipients of the supply who are to benefit from it (here, the cost to the students for access to education). Instead, the taxation of the supplies in the present case ‘merely’ makes access to the restaurant and theatre services more expensive for the restaurant and theatregoers. It follows that there is no service closely related to the exempt provision of education.
· Finally, that conclusion is in line with the nature of VAT as a tax on consumption. If the consumer is to be burdened with VAT on the basis of the assets he expends on the consumption, then it must primarily be asked for what has he expended his assets. In this case, however, the third party pays the amount primarily and directly (that is to say with a direct link) for the food in the restaurant (or the performance in the theatre) and not so that the pupils or students are trained.
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