If you are an independent provider of higher education, the recent SEL judgement is certainly required reading.
SEL and other similar independent providers of higher education that do not operate on a “not for profit” basis can only claim VAT exemption if they are either a UK university or a ‘college of a university’. If their students are self-funding, it would clearly be better not to charge them VAT.
The Court of Appeal judgment is particularly focused on SEL’s ability to qualify as a college of a university, Middlesex University in this case.
However, despite the efforts of the Court of Appeal to provide a simpler more ‘hard edged’ approach, the judgment recognises that self-governance and financial independence do not undermine your ability to be a college of a university. I would also advise a strong note of caution in relation to the latter part of the judgement, which deals with SEL’s own facts and circumstances. These are not relevant to anyone other than SEL and they also contain statements about the limited number of courses offered by the company in comparison to Middlesex University that do not stand up to too much scrutiny in my view.
Court of appeal
On 28 July 2017, the Court of Appeal released its judgment in the case of SAE Education Ltd v HMRC (2017 EWCA Civ 1116). The case concerns the VAT liability of educational services provided by SAE Education Ltd (SEL) to its students.
Putting aside the VAT registration threshold, VAT is chargeable on all supplies of goods and services in the UK made in the course or furtherance of a business, unless there is a specific provision in UK law that relieves the supply from VAT. A business which is or is required to register for VAT is referred to as a ‘taxable person’. A taxable person is required to file VAT returns on a periodic basis and is required to pay VAT to HMRC after deduction of VAT on its operating costs. Until at least March 2019, UK VAT law must also have a compliant construction with overriding EU VAT law, which can be found in the Principal VAT Directive (Council Directive 2006/112/EC).
VAT exemptions in a nutshell
In EU law certain supplies of goods and services are relieved from VAT, and this includes the provision of education, as follows.
Article 132 1(i) of the Principal VAT Directive provides an exemption for:
‘the provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects’.
As far as it’s relevant to this issue, the above provision has been enacted into UK law as follows:
Item 1(a), Group 6, Schedule 9, VAT Act 1994:
‘The provision by an eligible body of education.’
Note 1(b), Group 6, Schedule 9, VAT Act 1994:
‘For the purposes of this Group an ‘eligible body’ is a United Kingdom university, and any college, institution, school or hall of such a university.’
Note 1(e) of Group 6 includes charities and similar not for profit entities within the definition of ‘eligible body’. Although not relevant to the facts in this case, it does demonstrate why the not for profit sector can continue to provide educational services without the need to charge VAT, irrespective of the judgment of the Court of Appeal.
Prior to the judgment in this case, the generally accepted basis to determine VAT exemption for a college of a university had been contained in the High Court decision of Customs and Excise Commissioners v School of Finance and Management (London) Ltd  STC 1690 (SFM). SFM like SEL provided degree courses to its students which led to the award of a university validated degree. In short summary, the SFM decision detailed 15 separate tests to be used in effect as a checklist to determine whether a particular body qualified as a college of a university. It wasn’t necessary to satisfy all 15 tests and the High Court in SFM referred to it as an exercise in weighing up the factors in each particular case.
The Court of Appeal in SEL rejected the SFM ‘multi-factorial’ doctrine in favour of a more ‘hard edged’ approach. The following extract from paragraph 35 of the SEL judgment offers the most succinct explanation of the judge’s thinking.
‘In order to succeed, [SEL] must establish [that it is] part of the university…with all the rights and privileges for its students and other members which that entails. Inherent in that concept is the need to demonstrate some legal relationship between the university and college which establishes and confirms the status of the latter. Whether this is a formal foundation or constitutional document as opposed to some other binding arrangement seems to me to be a matter of form rather than substance’.
The Court was also attracted by the similarities between Item 1(b), Group 6, Schedule 9, VAT Act 1994 and Section 216 (2)(b) Education Reform Act 1988. The latter refers to a ‘constituent college of a university’, as a recognised body for the purposes of awarding degrees. In Paragraph 18 of the judgment, the Court quite rightly points out that the provisions of the Education Reform Act cannot govern a liability to account for VAT. There are plenty of instances in which other legislative provisions are enacted into UK VAT law, but this does not include the Education Reform Act 1988.
The judgment of the Court of Appeal runs to 75 paragraphs and there is a great deal of relevant detail to absorb. However, in my view at its heart, the judge wishes to condense the 15 tests laid out in SFM and condense them into one benchmark. Is the college ‘part of the university’? Interestingly, this is effectively identical to the first of the 15 tests in SFM, ‘the presence of a foundation or constitutional document establishing the college as part of the university.’
In terms of the immediate action required, I would advise all businesses in this sector to take stock and not to merely assume that SEL spells the end of VAT exemption as we know it. So, in answer to the question posed at the beginning of this article, the answer in my view is maybe, but certainly not yet. There will probably be further litigation in the future by another institution that believes it satisfies the test that it is ‘part of the university’, which will undoubtedly be dependent on a detailed examination of the legal relationship with its partner university.