Many organisations across the not-for-profit sector have been following the progress of Colchester Institute Corporation VAT case with interest, given the potential implications for valuable VAT reliefs.
At the heart of the case are two key questions:
- Does the outcome of the case mean that grant funding is now payment for a supply of services, and thus potentially within the scope of VAT?
- Are the grant funded activities a form of business, meaning that the recipient loses VAT reliefs aimed at those undertaking non-business activities?
One of the fundaments of VAT is that where payment is received in return for providing goods or services to someone else, that is a payment for business purposes, and is potentially subject to VAT.
In the case of grant funding, it is important to establish the extent of the link between the funding received and the activities provided. This case was specifically about the provision of courses, free of charge to eligible students and the Court of Appeal found that in the case of public funding received by a Further Education institution, the link between the funding and the provision of approved courses was direct and represented third party consideration for a supply of services to the students. Colchester was thus found to be making business supplies of education.
A supply of education, other than by a private school, is generally exempt from VAT, meaning no output tax arises on the supply. The question arises as to whether it is a supply of private education, following the imposition of VAT on private schools. The definition of a private school includes an institution providing education suitable for persons over compulsory school age but under 19, in respect of which fees or other consideration are payable, though this is subject to a number of exceptions. Institutions which have followed the Colchester position after the earlier case and are treating the funding as business income should consider whether their income becomes standard rated for VAT.
The main consequence for most Further Education institutions, if this case is applied, is that they will no longer be able to claim VAT reliefs on building projects and utility supplies. VAT is payable on the construction of most buildings, with some valuable exceptions. The construction of new homes, for example is zero rated, as is the construction of a building for qualifying use by a charity. To claim this relief, charities need to be able to sign a certificate stating that they will not be using the building for the purposes of business. Following this case, FE colleges receiving government funding may not be able to access that relief. Similar considerations may also apply to reduced-rate utility supplies.
HMRC has issued a Brief, setting out its position following the case, which it is not intending to appeal further. It will consider whether any policy change is required and issue guidance in due course. In the meantime, institutions may choose whether to continue to treat education as non-business or follow the Colchester position as third party consideration for a supply. If they adopt the Colchester approach, they must check that they are not claiming reliefs which are only due for those with non-business activities.
The purpose of taking the case by Colchester was to escape VAT clawbacks when using the Lennartz mechanism to recover VAT on capital projects. This mechanism has been obsolete for some time, so is unlikely to provide an upside in most cases. A court of appeal finding is binding on any taxpayer with exactly the same fact pattern, so FE colleges receiving state funding to provide free courses for similar students should consider whether they need to plan for a potential VAT exposure in the future. HMRC are taking time to consult and consider how to take matters forward.
So what should you be doing now?
FE colleges in particular, should be assessing the potential impact of the loss of charitable VAT reliefs and how any potential liability to output tax on grant funded courses would be paid. The HMRC Brief could be interpreted such that any zero rating certificate signed now for construction services would still be valid following any potential future change to guidance. The potential savings and risk of loss of relief should be planned into future capital projects and VAT risk assessments undertaken.
Whilst this case was specifically about the provision of Further Education, it has raised questions for the wider not for profit sector. Bodies have always had to take care to correctly identify whether grant funding represents consideration for the supply of services and should plan for the consequences of any future change in HMRC Guidance on which they rely.
How Menzies can help?
Our Further Education team provides a wide range of services to support Colleges through sector changes.
If you believe you may be impacted by the above case, or would like some further information on VAT treatment within the FE sector, please get in touch with Sarah Barron.
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