Brockenhurst College provides education to its students in the form of teaching courses in catering and hospitality, as well as the performing arts.
As part of its teaching programme the College runs a restaurant called ‘MJ’s’, where the students perform the catering functions of the restaurant, under the supervision of their tutors. Members of the public attend the restaurant and are charged around 80% of the cost of a meal.
The performing arts course is run along similar lines. Students gain practical experience by performing concerts and performances for paying members of the public.
The College had historically paid VAT on the receipt of the income, but lodged a claim with HM Revenue & Customs (HMRC) for overpayment of VAT on the grounds that the services supplied were a necessary part of the students’ education, as they formed a practical element to complement the theory aspect of the subjects being studied and should, therefore, have been exempt from VAT. HMRC rejected this assertion and insisted the services were liable to VAT at the standard rate.
Item 4 of Group 6 of Schedule 9 of the VAT Act 1994 permits exemption for supplies that are ‘closely related’ to the provision of education or vocational training and this underpinned the arguments proposed by the College.
GROUP 6 – EDUCATION
1. The provision by an eligible body of –
b) vocational training.
4. The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply provided-
a) the goods or services are for the direct use of the pupil, student or trainee (as the case may be) receiving the principal supply; and
b) where the supply is to the eligible body making the principal supply, it is made by another eligible body.
The matter was the subject of a successful appeal by the College to the First Tier Tribunal, but HMRC took it to the next level and appealed the decision to the Upper Tier Tribunal. The Upper Tier Tribunal decision was published on 30 January 2014 http://abytx.co/1fhoDMN and the conclusion was that the First Tier Tribunal had reached the correct decision. HMRC’s appeal was dismissed.
HMRC’s arguments relied on the nature of, and consumption of, the supplies (i.e. the recipients) being key to determining the correct status of the transactions but the Tribunal disagreed. The Judges favoured the concept that the provision of catering and entertainment supplies by the students (as opposed to consumption by the students) were integral to the main supply of education and the students benefitted from those supplies, which acted as a means of them receiving a better education in their chosen subjects.
As such, the supplies in question were correctly considered to be closely related to the supply of education or vocational training and correctly exempt from VAT.
This case provides an interesting interpretation of the scope for exemption in the area of education that concentrates on the underlying purpose and ultimate beneficiaries of the supplies, rather than the more common approach of looking directly at the nature and recipient of a supply. VAT is after all generally accepted as a ‘consumption’ tax but who said ‘VAT is a simple tax’?
This decision may well offer opportunities for other educational establishments in similar circumstances to lodge claims for overpaid VAT and should be explored further where appropriate.
Author: Mark Burke, VAT Manager on the ReSource Tax and VAT Consultancy Team.