HMRC have released a recorded webinar about VAT on private school fees — what you need to do, and when and how to register.
It covers:
The subject of education often gives rise to complex VAT issues – as the number of Tribunal cases illustrates.
Background
A number of schools provide early or pre-school education (before compulsory education). All children aged four should be able to access an early education place and some early education and childcare services offer free part-time early or pre-school education to three year olds. This is paid for at the discretion of Local Authorities. Places for children under three in voluntary or private pre-school settings are paid for mainly by parents.
Update
In light of, inter alia, the Yarburgh Children’s Trust, Wakefield College , Longbridge and St Paul’s Community Project, HMRC has updated to reflect changes to it’s policy in respect of charities supplying; crèche, pre-school education, nursery, after-school clubs and playgroup facilities.
Business test
HMRC’s past position was that if a charity supplied nursery and crèche facilities for a consideration that was fixed at a level designed to only cover its costs, this was not a business activity for VAT purposes. Now the two-part test derived from the Wakefield College Court of Appeal case will be applied:
The activity results in a supply of goods or services for consideration. This requires a legal relationship between the supplier and the recipient. The initial question is whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration is not a business activity.
The supply is made for the purpose of obtaining income therefrom (remuneration)
General
The provision of pre-school education (without charge) is non-business; breakfast clubs and after-school child-minding/homework clubs remain non-business in the Local Authority sector even when a charge is made. This is on condition that the school offers the service strictly to its own pupils and that the fee charged is designed to no more than cover overhead costs.
Law
VAT Act 1994, Schedule 9, Group 6 – Education
VAT Act 1994, Schedule 9, Group 7, Item 9 – Health and Welfare
Latest from the courts
In the Julie Lalou t/a Dogs Delight First Tier Tribunal (FTT) case the issue was whether the teaching of dog grooming qualified as private tuition and was therefore exempt.
Background
The Appellant operated a business providing dog grooming and dog grooming courses. The appeal was concerned only with the supplies of dog grooming tuition as it was accepted that dog grooming in itself is taxable.
Technical
The sole issue in dispute in this appeal was whether the supplies fall within the private tuition exemption as for provided by The Value Added Tax Act 1994, Schedule 9, Group 6, item 2 “The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer”.
HMRC’s view was that “to be eligible for exemption dog grooming would need to be a course that is ‘ordinarily’ taught in schools and universities which it is not…”
The appellant wrote to HMRC giving a list of seven “local Colleges and Universities where the Level 3 Dog Grooming Diploma is ordinarily taught”. The appellant went on to state “There are many more within the UK” which were said to represent around 30% of English colleges. Further it was stated that the business was a City & Guilds approved centre and that the courses were not recreational.
Decision
It was accepted that the courses that the appellant taught involved her making supplies of tuition in that she transferred to her students skills and knowledge.
But, unsurprisingly, the appeal was dismissed. The appellant had failed to demonstrate that dog grooming is taught at a wide number of schools and universities
The court also determined that the appellant needed to provide some evidence of whether dog grooming was taught at schools and universities in the EU (again, something she had failed to do).
Commentary
The exemption for private tuition is fraught with complexities and the amount of case law on the subject is significant, which indicates the difficulties in analysing the VAT position. An example here. It is important to establish what is being provided and that research is carried out to consider the degree of ubiquity of the subject in education. A general guide to education here. The phrase “ordinarily taught” is rather nebulous and it would be prudent to obtain as much evidence as possible that a subject is s commonly or ordinarily taught in schools and universities if a supply is treated as exempt.
The VAT world of partial exemption can be complex with some arcane language used in guidance. Here is your “cut out and keep” guide:
A general guide to partial exemption here.
| VAT Glossary
Partial Exemption |
|
| Term | Explanation |
| Allocation | Some special methods have different sectors where the recoverable element of residual input tax is different. Allocation is the means by which residual input tax is distributed to specific sectors within a method. |
| Annual adjustment | At the end of the tax year the partial exemption calculation is recalculated using annual figures. |
| Apportionment | Residual input tax must be apportioned to reflect the extent to which the purchases on which it is incurred are used in making onward taxable supplies. The partial exemption method carries out this function. |
| De minimis tests | Tests designed to allow recovery of minimal amounts of exempt input tax. |
| Direct attribution | The identification of input tax on supplies that are wholly used, or to be wholly used in making taxable supplies or are wholly used or to be wholly used in making exempt supplies. |
| Exempt input tax | Input tax incurred on purchases which are used or to be used in making exempt supplies. It comprises input tax directly attributable to exempt supplies and, after the partial exemption method has been applied, the exempt element of residual input tax identified by the partial exemption method. |
| Exempt supplies | Supplies made by a business, which are listed in Schedule 9 of the VAT Act 1994. VAT incurred in making exempt supplies is non-recoverable, unless they are ‘specified’ supplies, subject to the de minimis test. |
| Input tax | VAT incurred by a VAT registered person on goods and services purchased for the purposes of a business. |
| Longer period | This is usually the tax year for annual adjustment purposes but may in certain circumstances be shorter than a tax year. It may also be longer in the case of a mid-year stagger change. |
| Foreign supplies | Supplies made by a business which are made outside the UK but which would be taxable if they were made in the UK. |
| Residual input tax | Input tax which is used, or to be used, to make both taxable and exempt supplies. It is apportioned between taxable and exempt supplies by the partial exemption method. Residual input tax is commonly referred to as ‘non-attributable input tax’ or ‘the pot’. |
| Special method | Any partial exemption method, other than the standard method, used to identify the taxable element of input tax incurred. Special methods require prior approval from HMRC. |
| Specified supplies | Supplies specified by Treasury Order which are not taxable supplies, but which carry the right to recover input tax incurred in making them. |
| Standard method | This is the default partial exemption method. It is specified in law and is suitable for most smaller businesses. |
| Taxable input tax | Input tax incurred on purchases of goods and services which are used or to be used in making taxable supplies and other supplies which carry the ‘right to deduct’. |
| Taxable supplies | Supplies made by a business, which are either standard, reduced or zero-rated. Input tax incurred in making taxable supplies is deductible. |
| Tax year | Every VAT registered business has a tax year. This usually ends at the end of March, April or May each year, depending on the business’s VAT return periods. |
| VAT Groups | Two or more corporate bodies accounting for VAT under a single VAT registration number. One acts as representative member and any supplies between the members of the group are disregarded for VAT purposes. |
Any business which receives income from the following sources may be affected by partial exemption:
This list is not exhaustive.
If your, or your client’s business is partially exempt I always recommend a review.
Latest from the courts
In the Upper Tribunal (UT) case of Loughborough Students’ Union (LSU) the issue was whether sales of certain goods from Student Union shops were exempt as being closely related to education. This case is a practical issue considering the exemption I set out recently here
The two issues before the UT were:
Background
The appeal by LSU was against a decision of the First-Tier Tribunal (FTT) dismissing its appeal against HMRC’s decision to deny its claim for repayment of output tax in respect of sales of; stationery, art materials and other items from the shops which LSU operates on campus.
Legislation
The legislation (where relevant to this case) is:
VAT Act 1994, Group 6, Item No 1, item 4
1 The provision by an eligible body of (a) education; …
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…
Decision
Not surprisingly, the appeal was dismissed. because even if LSU was an eligible body (which the judge was doubtful about) the exemption only applied to an eligible body which itself provided education, which clearly LSU did not. Consequently, the supplies for which exemption was sought were not closely related to any principal supply. Further, the judge was not persuaded that even if the supplies were closely connected to education, that they were essential (as required) to education. Food, newspapers and household goods for eg, are “ends in themselves” and not ancillary to education; the education provided by the University would be just as good if the students did not buy these items from the LSU shops.
Commentary
The appeal seems to have been a long-shot and predictably, it failed. Care must always be taken with the VAT treatment of goods and services closely connected to education. This is an area I am often asked for an opinion on by schools, academies, colleges and universities and there is not one single one-size fits all answer.
Our offering to education bodies here