50 Years Of VAT – It’s Been An Education!
In this instalment of our reflection on the first half century of the “simple tax”, we look back at some of the policy decisions and case law that have shaped the current VAT landscape for education providers. As we look…
Blog15th May 2023
In this instalment of our reflection on the first half century of the “simple tax”, we look back at some of the policy decisions and case law that have shaped the current VAT landscape for education providers.
As we look back on the last 50 years of VAT, few sectors reflect the changing nature of the tax and the interaction between HMRC and taxpayers more fully than the education sector.
Within this sector, there is a wide range of bodies to consider, from Russell Group universities, further education colleges, academies, local authority schools, private schools, research institutions and private tutors; each with their own VAT complexities to navigate.
Most recently, the spotlight has been on VAT on private schools with Michael Gove arguing that the tax exemptions enjoyed by private schools as a result of their charitable status was “one of the burning injustices of our time”. What ever the right or wrongs of the exemption for private schools, this is a matter for another time. Instead, we will look back at some of the key developments over the last half century.
When first introduced, the Higher Education (HE) sector was concerned that they would struggle with the record keeping requirements for VAT. As a result, a simplified partial exemption methodology was agreed – the CVCP guidelines. These guidelines enabled universities to keep simplified records in return for flat rates of VAT recovery.
However, as Universities became increasingly more commercialised and sophisticated, it was clear that the CVCP’s one-size-fits-all approach was no longer appropriate, and the guidelines were withdrawn in 1997. This led to a period of dispute between some universities and HMRC as to how the value of the exempt education should be reflected in any calculation. This continued for 10 years before the 2007 Review of Partial Exemption in the Higher Education Sector led to the publishing of a framework for Higher Education Partial Exemption Special Methods.
Another sign of the increasing sophistication of the sector was the vat efficient arrangements put in place using subsidiary companies to allow increased VAT recovery on capital projects. However, legislative and case law changes put an end to many of these arrangements:
- The introduction of option to tax anti-avoidance rules from 1997 limited the scope for simple lease and leaseback arrangements such as that defended before the House of Lords by Robert Gordon’s College.
- The Tribunal decision in UU Bibliotech Ltd effectively put an end to the many library company arrangements that were common in the sector.
Whilst “lease and service back” arrangement may still be possible for areas such as CHP projects, these do not match the savings gained from a library scheme. Other setbacks for the HE sector included the withdrawal of the VAT exemption for supplies of research and the requirement to apply the reverse charge to overseas recruitment costs.
All of these changes means that, after 50 years, VAT is an even bigger challenge for the HE sector.
Catering for a younger age group and having significantly less commercial activities than Universities meant that different opportunities applied to the Further Education (FE) sector.
Historically, where FE bodies made supplies of education for no charge to students who were 19 years or under at the start of their courses (18 years or under in Scotland), these courses were treated as non-business. This status offered up specific opportunities for colleges:
- If a new building was used “solely” for non-business purposes, it could qualify for zero-rating; or
- If not, the application of the Lennartz mechanism could provide significant cash flow benefits, via upfront recovery of the VAT on capital costs followed by an output tax charge on the non-business use of the building.
However, in 2021, the Upper Tribunal upheld the appeal by Colchester Institute Corporation (CIC) that the receipt of grant income by the college was third party consideration for the exempt business supply of education. As a result, no output tax charge was due on CIC’s use of the building for the delivery of these courses. Whilst HMRC is not currently imposing this decision on taxpayers, in a similar fashion to the UU Bibliotech decision, by challenging the status quo, the CIC decision has the potential to leave the HE sector worse off by removing the right to valuable charitable reliefs.
The question of whether a supply is a business or non-business activity was further considered with the issue on 1 June 2022 of Brief 10/2022. This HMRC brief replaced the six questions previously adopted as the business test with a simpler two stage test.
- Does the activity result in a supply of goods or services for consideration?
- Are the goods or services provided for the purpose of obtaining income therefrom?
Only if the answers to both questions are “yes” will the activity be treated as a business activity.
The new tests are more subjective and difficult to measure creating both uncertainties and potential opportunities for education providers. As the tests are new these are yet to be challenged but it appears that if the objective is not to obtain remuneration, then this could be viewed as a non-business activity having significant VAT implications for the education provider.
Historically, the majority of education provision for pupils up to sixth form was undertaken by local authority schools. As Section 33 bodies, full VAT recovery was available to the local authority and VAT was not a cost on the provision of primary and secondary education.
However, in England, the advent of academies meant that increasing number of schools left local authority control and, at the same time, lost their full VAT recovery position. To avoid this VAT leakage, a new VAT Refund Scheme under s.33B VAT Act 1994 was introduced for academies with effect from 1 April 2011. This scheme allows academies to recover the VAT incurred in the provision of non-business education.
Although relative newcomers to VAT, we are seeing a significant increase in VAT enquiries for Academies. Being notified of a VAT inspection can be a very stressful experience, however, with the right support, it doesn’t need to be. Taking proactive advice is the key to avoiding any unnecessary VAT costs.
WHAT’S NEXT FOR THE SECTOR
As we move into the next 50 years, one thing is very clear – VAT will continue to be a major consideration for the sector. Many of the issues that have impacted the sector in the last 50 years will continue and as legislation, policy and case law changes arise, new challenges for the sector will be added. We have highlighted some of the key areas universities, colleges and academies should consider:
- Do you have an approved partial exemption and/or non-business methodology in place?
- Has there been any changes since this was agreed?
- Could this be made more efficient?
Capital Goods Scheme
- Is a capital goods scheme register maintained?
- Is the change of use being monitored and the annual calculation carried out?
Land and Property
- Have the available charitable reliefs been applied?
- Is an option to tax required?
- Is a change to the partial exemption method required?
- Have the tax consequences of operating in another jurisdiction been considered?
- Is the reverse charge due on any imported services?
- Are charitable reliefs available on imported goods?
If you have any concerns about your VAT position, we recommend seeking advice now rather than risking HMRC applying penalties. Please don’t hesitate to contact Laura Moore, Alistair Duncan or your usual AAB contact.