Recent VAT changes for private schools have introduced uncertainty for further education (“FE”) colleges, particularly around whether fee-based education, wholly or partly in return for a fee, remains exempt.

Whilst the risk of colleges needing to charge VAT on education may currently be low, the broader implications, especially around access to VAT reliefs, require careful consideration. The uncertainty resulting from the outcome of the Colchester Institute Corporation (“Colchester”) litigation and how this interacts with HMRC’s published guidance means potential disruption and alternative approaches to the VAT position for FE colleges.  

Grant-funded education  

Colchester continues to litigate with HMRC in relation to its argument that grant-funded education is within the scope of VAT. The case will next be heard by the Court of Appeal.   

Despite this, HMRC confirmed in Revenue and Customs Brief 8 (2021) it will not impose the ruling of the Upper-tier Tribunal (that what was typically regarded as grant-funded education should be regarded as fee-based education and therefore in the scope of VAT) on colleges, at least whilst it continues appealing this case.    

Unless making similar arguments to Colchester, in our experience FE colleges continue to treat grant-funded education as outside the scope, not least with a view to claiming charitable VAT reliefs (on construction of new buildings and fuel and power). 

Fee-based education  

The new rules for private schools have created some doubt regarding whether exemption still applies, by excluding such institutions from being ‘eligible bodies’ for the education exemption, and defining private schools extremely broadly.  

There are two definitions of private schools. The second is a catch-all, introduced seemingly to discourage private schools from restructuring to escape the requirement to charge VAT, but which could unhelpfully capture colleges. The catch-all definition is as follows:   

“A ‘private school’ is defined as an institution which is either -

(b) an institution -

(i) which is wholly or mainly concerned with providing education suitable to the requirements of persons over compulsory school age (or, in Scotland, school age) but under 19, 

(ii) at which full-time education is provided for such persons, 

(iii) where the provision of full-time education falling within sub-paragraph (ii) is wholly or mainly provision in respect of which fees or other consideration are payable, and 

(iv) which is not an independent training or learning provider. A connected person will be treated as a private school for this legislation.” 

As things stand, FE colleges may not satisfy item (iii) by following HMRC’s view that education funded by the Department for Education or devolved bodies is not provided in return for consideration because of Revenue and Customs Brief 8 (2021).   

In a scenario where Colchester wins and Brief 8 no longer exists, exemption may still apply because FE colleges may qualify as independent training providers.  

In summary, there should be a low risk of FE colleges being required to account for output tax on education for a fee, despite the complex rule changes affecting the sector. What remains at risk is access to charitable VAT reliefs for construction works, and fuel and power.  

Charitable VAT reliefs 

For the time being, grant-funded education may typically still be regarded a qualifying non-business activity.   

The threshold to receive all fuel and power at the reduced rate (5%) is that the energy must be used at least 60% for qualifying activity. For developing new buildings and annexes zero-rated, qualifying use must be 95%.  

Fee-based education should remain an exempt business activity that is not qualifying use. This may make it difficult to achieve zero-rating for new buildings or annexes where education for a fee is provided.   

If Colchester is successful and Revenue and Customs Brief 8 (2021) is removed, accessing VAT reliefs should be unfeasible under traditional analysis as no education should be non-business.  

There is an alternative analysis, which potentially renders all education supplied by FE colleges as being a non-business activity, irrespective of the source of funding. The genesis of this opportunity is the Office of National Statistics reclassifying colleges as public sector bodies. Accessing VAT relief for development and energy costs to remain in budget should be seen as higher risk, particularly if Colchester wins.   

Our team would be delighted to discuss this alternative analysis. If you believe you could be impacted by this, please get in touch with Glen Small, VAT Director.   

Disclaimer 

This note is intended as general guidance only and does not constitute legal, tax or professional advice. The information is based on our understanding of current legislation, HMRC guidance and relevant case law as at the date of publication. Readers should seek specific advice before taking any action based on the content of this article. No liability is accepted for any loss arising from reliance on this material.