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VAT and further education: HMRC’s view

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HMRC has confirmed its view that providers of further education can choose to treat supplies of that education as exempt from VAT (as opposed to being outside the scope of VAT as non-business activity).

Revenue & Customs Brief 8/2021 sets out HMRC’s response to part of the Upper Tribunal decision in Colchester Institute Corporation (CIC) v HMRC [2020] UKUT 368 (TCC) which concerned the VAT treatment of public grants received by further education institutions to fund the provision of education for 16–19 year old students.

The Upper Tribunal made a number of findings in reaching its decision, including that state-funding had a sufficiently direct link to the provision of education and training by the college to constitute a supply of services for consideration. In other words, the college had been making supplies of educations services which were exempt from VAT rather than being outside the scope of VAT as non-business activities.

The principal issue in the case was input tax the college had deducted on building costs under the Lennartz mechanism. Although input tax was recovered up front, the college would need to account for deemed output tax on future non-business use. The provision of grant-funded further education had previously been considered to be such non-business use and the college had accounted for deemed output tax. Following the Upper Tribunal decision, the college was able to claim overpayment of output tax.

Although HMRC is not appealing this part of the CIC decision (because it won on other grounds), it maintains its view that the supplies remain outside the scope of VAT and is seeking to challenge the decision through a separate appeal on this point.

In the meantime, the Brief notes that HMRC will not impose the CIC decision on any other education providers, but institutions can choose to apply it by submitting error correction notices. Such institutions should be aware that HMRC ‘will protect its position to secure tax revenues pending the outcome of the new appeal’.

Institutions considering making a claim for potential overpaid output tax should note that HMRC may be able to set off any input tax previously claimed under Lennartz, potentially reducing or eliminating the value of any repayment.