An opportunity for commercial providers?

1. © 2016 Grant Thornton UK LLP. All rights reserved.
Briefing Paper – VAT & Education.
An opportunity for commercial
providers?
At best, the UK's application of EU law relating to the exemption for supplies of education is
questionable. At worst, it is simply wrong and needs to be completely overhauled. There have been a
number of cases over recent years that have 'chipped away' but the recent cases of Finance &
Business Training Ltd and the Open University have brought the matter into sharp focus. Questions
still remain unanswered but, it seems, we are getting much closer to a final conclusion. The outcome
may well provide commercial providers with an opportunity.
What's the issue
European VAT law (the VAT Directive), exempts supplies of
'children's or young peoples education, school or university
education, vocational training or retraining (including the
supply of services and of goods closely related thereto) by
bodies goverened by public law having such as their aim'.
The Directive also exempts supplies of such education when it
is provided by other organisations recognised by Member States
as having similar objects.
In simple terms then, there are six types of education that can
qualify for exemption from VAT but this is conditional on the
person providing the education being either a public body
having such delivery as its aim or some other organisation
which is recognised as having a similar aim.
Under UK VAT law, the exemption for education applies to all
provision of education or vocational training if the person
providing it is an 'eligible body'. The UK VAT Act lists certain
bodies that are regarded as 'eligible bodies' for the purposes of
the exemption and includes the likes of schools, universities FE
colleges and certain other 'not-for-proft' bodies. The problem
with the UK's interpretation and implementation of the
Directive is that UK law takes no account of the aims of the
body nor does it provide a public body comparator. The
Directive clearly states that if the provider of education is not a
public body, the Member State can still recognise an
organisation for the purposes of applying the exemption if it
has similar aims. UK law simply lists various institutions by
reference to their status rather than by reference to their aims.
As such, it is considered, by some, that the UK law fails to
implement the Directive correctly and that, as a result, UK law
is in breach of the EU principles of fiscal neutrality and legal
certainty.
Finance & Business Training Ltd (FBT)
FBT, as its name suggests, is a commercial provider of
professional finance and business training. As a commercial
provider, it is not an 'eligible' body under UK VAT law and, as
a result, it charges and accounts for VAT at the standard rate of
20% on its supplies.
However, as part of its curriculum, FBT was accredited by the
University of Wales and agreed to provide degree level
education which ultimately led to the awarding of a degree by
the University. FBT argued that, as far as this education was
concerned, it was providing university education as a college of
the University of Wales and, as such colleges are specifically
listed in the list of 'eligible' bodies under UK VAT law, FBT
contended that its provision of such 'university' education
qualified for exemption from VAT.
Unfortunately for FBT it failed to convince both the First-tier
Tax Tribunal and the Upper Tribunal. Both Tribunals
considered that FBT was not an eligible body under UK law.
MDDP – The Court of Justice
In a separate strand of litigation, the Court of Justice of the
European Union (CJEU) found itself grappling with a similar
issue in the MDDP case (Case C-319/12). MDDP was a
commercial provider of education. Under Polish law, all
supplies of education were exempted from VAT irrespective of
the status of the provider. MDDP did not want to benefit from
the VAT exemption as it wished to recover input tax and so
challenged the Polish law at the CJEU. In its judgment, the
CJEU confirmed that the VAT exemption for education

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provided for in the Directive has to be interpreted strictly. As
such, the blanket exemption was not permitted. Poland was
required to limit the exemption to bodies governed by public
law having as their aim the provision of the six types of
education set out in the Directive or to other organisations
which it recognised as having similar aims. Moreover, the CJEU
states in its judgment that Poland had to set out conditions or
procedures to establish whether such other organisations had
“similar objects”. In failing to do so, the CJEU found that
Poland was in breach of the principle of fiscal neutrality.
Essentially, looked at objectively, a supply of university
education by a profit making organisation having such as its aim
should not be treated any differently to a Public body's
provision of such education.
Poland's exemption for all supplies of education was found to
be ultra vires.
FBT – Court of Appeal
Armed with the benefit of the CJEU's judgment in MDDP,
FBT then headed off to the UK Court of Appeal. It contended
that, following MDDP, the UK's failure to recognise
organisations by reference to their aims was, similarly, in breach
of the principle of legal certainty. As far as the principle of
fiscal neutrality was concerned, it argued that the difference of
treatment of its supplies compared to an eligible body's supplies
breached the principle of fiscal neutrality. Unfortunately, in a
unanimous judgment, the Court of Appeal did not agree and it
refused to make a referral to the CJEU on these points.
The Open University – Court of Appeal
In a further separate strand, only a few weeks after the Court of
Appeal's judgment in FBT, the same court issued its judgment
in the long-running Open University case. In essence, the Open
University (OU) argued that the United Kingdom had failed to
correctly implement the provisions of the VAT Directive. It
argued that the BBC was a body governed by public law and
that its charter had clear aims of an educational nature such that
its provision of production and broadcasting services were
services that were closely linked to education and should have
been exempt from VAT. In such circumstances, the OU
contended that, historically, VAT should not have been charged
to it by the BBC and that it was entitled to seek a refund of the
VAT paid in error.
Alternatively, the OU contended that if the BBC was not a
body governed by public law, it was, nevertheless a body with
similar objects. Although UK VAT law does not expressly
define the BBC as such a body, the OU contended that the UK
had, in fact, defined it but, even if that was not the case, it
argued that it could rely on the direct effect of the VAT
Directive and take the benefit of the VAT exemption.
The Court of Appeal held that the BBC was not a body
governed by public law. It was not an organ of the state.
However, it was a body with similar educational objects as a
public body and, as a result, its supplies of production and
broadcasting services to the OU were services that were closely
related to the OU's supply of education. Whilst the UK had not
expressly defined the BBC as a body with similar objects,
through the BBC charter and license and the funding from
Parliament the UK had de-facto recognised the BBC. On the
direct effect point, the Court made it clear that the OU and the
BBC could rely on direct effect as the UK had clearly failed to
correctly implement the VAT Directive in UK law.
Where does this leave FBT
That declaration by the Court of Appeal in the Open University
case is music to the ears of FBT. We understand that it has
petitioned the Supreme Court to appeal the judgment of the
Court of Appeal. At the time of writing it is not known whether
such permission will be granted.
What's the opportunity
Following the Open University judgment of the Court of
Appeal, it seems clear that the court now recognises the flaws in
the UK law (despite only weeks earlier the same court coming
to a different conclusion in the FBT case).
We await developments in this arena, but it may take several
years to resolve particularly if the Supreme Court decides to
refer the FBT case to the CJEU.
There is still, therefore, an element of doubt as to the correct
VAT liability of education provided in the UK. Any business
that is not regarded as an 'eligible body' under UK VAT law
needs to keep a watchful eye on these developments and, where
necessary, protect their position by submitting claims for any
overpaid output tax on historic supplies. Clearly, there may also
be a requirement to disallow a proportion of input tax claimed
if, ultimately, the supplies of education are found to be properly
exempt from VAT.
Grant Thornton can help
At Grant Thornton, we have a team of VAT specialists with
many years of experience of dealing with all aspects of VAT
and, in particular, in relation to the education sector.
Please feel free to get in contact if you would like further
information.
Karen Robb
Partner
T +44 (0) 20 7728 2556
E Karen.robb@uk.gt.com
Stuart Brodie
Partner
T +44 (0) 141 223 0683
E stuart.brodie@uk.gt.com