The European Court has ruled that a further education college’s income from student run activities is exempt from VAT. However, this outcome will not be positive for every college, so each should consider its position on an individual basis.
The Brockenhurst College appeal
Brockenhurst College, a further education provider, received income from meals served in its student restaurant and ticket sales for student productions performed in its theatre.
Having initially accounted for VAT, the college later submitted a refund claim to HMRC arguing that both activities were exempt as supplies ‘closely related’ to the college’s principal supply of education. HMRC refused the claim, taking the view that the income was subject to VAT because the college was simply making supplies of catering and entertainment.
The European Court ruling
Following an appeal, the case was eventually referred to the Court of Justice of the European Union (CJEU), which has now ruled in the college’s favour, finding that the income was exempt. The CJEU agreed that the student run activities were ‘closely related’ to education, provided they were:
- Essential to the students’ education, and
- Not aimed at obtaining additional income for the college by carrying out activities in direct competition with commercial enterprises.
Implications for other colleges
As well as student restaurants and drama productions, the decision is also likely to apply the exemption to other student run activities that sell to the public, including hair salons and automotive workshops.
However, not all FE colleges will have a claim for overpaid VAT. Many are unlikely to qualify for exemption because they provide these services on a far more commercial footing than Brockenhurst. Also, HMRC may refuse to pay claims on unjust enrichment grounds where it feels that it is the customer who has ultimately borne the cost of the overcharged VAT.
Those colleges whose supplies are exempt under this new interpretation should review their VAT position carefully. Retrospective claims may not produce substantial returns and could be administratively complex to prepare. For example, claims may have to be adjusted in respect of non-fee paying students because their education is outside the scope of VAT rather than exempt.
Also, an increase in the college’s overall exempt income risks reducing the amount of VAT that can be recovered on costs under its partial exemption method. Colleges may also have reduced VAT recovery on directly related costs (eg equipment and consumables, including drinks) and the proportion of VAT recoverable on overheads could also fall.
Given these considerations, some colleges may find they are better off changing their arrangements so their student run activities do not fall within the exemption at all.
To discuss the impact on your college, get in touch with your usual BDO contact or one of our VAT specialists listed above.