Choose your fights carefully

The First-tier Tribunal recently released its decision on an appeal by Essex International College Ltd [2018] UKFTT 0085 (TC). The College provides university-level education. The College is able to distribute its profits to its members. This means that it is not an “eligible body” under UK VAT law – it fails to meet the criteria in the Value Added Tax Act 1994 Schedule 9 Group 6 Note 1; in particular, Note 1(e) to the Group which limits the exemption to organisations that are prevented by their constitution from distributing any profit they make. The other elements of Note 1 to the Group restrict the exemption mainly to bodies that are recognised by law as being a school, university, etc.

The College provides both education and books to students for a fee. The College is recognised for student finance purposes, e.g., student loans. The College separated its fee between the supply of education and books. It treated the education as a standard rated supply, and the books as zero-rated for VAT.

When HMRC visited the College it decided that the College was making a single supply of standard rated education. HMRC’s argument was that although the supply was made up of two elements, the main element was the education and the books were ancillary to that, it was a single supply that it would be artificial to split. This followed the CJEU ruling in the Card Protection Plan case. HMRC raised an assessment of more than £300,000, of which almost £275,000 related to the matter under appeal. The assessment covered thirteen VAT returns.

Given the size of the assessment, it is unsurprising that the College sought to have the decision reviewed by HMRC before appealing to the First-tier Tribunal. The review by HMRC upheld the original decision. Rather than go into the technicalities of the issue, which are rather complex for this article, I’ll cover the main reasons for the College losing its appeal. The College put forward three grounds of appeal:

  1. It made separate supplies of education and books.
  2. If the supply was a single supply, the College was an eligible body as it provided university-level education and was officially recognised for student finance, or it could rely on the direct effect of EU law (Principal VAT Directive (2006/112/EC) Article 132(l)(i)).
  3. The UK had failed to meet its obligations under two international treaties.

On the first ground of appeal, the First-tier Tribunal found that the College had failed to produce evidence to support its case, and dismissed it.

The second ground was dealt with in two parts. First, the eligible body point was lost because the College was found not to be recognised in UK law as a body that met the criteria in the Value Added Tax Act 1994 Schedule 9 Group 6 Note 1. Second, the direct effect of EU law in this area was dismissed because the Court of Appeal had ruled on it in the case of Finance and Business Training Limited, finding that UK law in this area was compliant with EU law. The First-tier Tribunal was bound to follow the decision of the higher Court.

The third ground was dismissed as the UK’s obligations under the international treaties related to the provision of basic education rather than tertiary-level education that was the subject of this appeal.

Bearing in mind that the only information available in the public domain about this case is that provided by the First-tier Tribunal in its decision, you might be wondering why the matter got as far as an appeal to the First-tier Tribunal. The way the First-tier Tribunal decision presents the case, one might conclude that the College’s case was poorly prepared.

What lessons can be drawn from this case? There are a number of things to do before appealing a decision to HMRC:

  • Make sure that the matter has not been dealt with by a Court above the First-tier Tribunal,
  • Play devil’s advocate and look for weaknesses in your case, and
  • Look for arguments HMRC might use to counter your position.

Each case will be different so there are likely to be other things to take into consideration.

There is a point at which you will need to make a decision about whether to proceed. Are the costs, taking into account the amount of VAT involved, too high? Has HMRC, in fact, reached the right decision?

If you think HMRC is wrong, you may feel strongly enough that a principle is at stake and accept that you may be involved in an expensive exercise. In which case, carry on.

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