The Court of Appeal recently decided that SAE Education Limited (SAE) is not a college of Middlesex University. That does not seem remarkable. SAE is a privately owned company which runs some courses for the students of Middlesex University but this does not immediately conjure up the image of a ‘college’ of the university.
The consequence of the decision is that SAE cannot provide VAT exempt courses. VAT exemption is only available for education provided by specified bodies, including a university and ‘any college, institution, school or hall of such a university’. In deciding that SAE is not a college of Middlesex University, the Court of Appeal has added VAT to the cost of its courses.
The problem is that many private companies have historically treated themselves as colleges of universities, often with the agreement of HMRC, and they now find themselves unsure as to their VAT position. Prior to the SAE case, the law was thought to be as stated by the High Court in 2001 in Customs and Excise Commissioners v School of Finance and Management (London) Ltd. In that case it was decided that there were 15 factors in determining whether a body was a college of a university, and HMRC has often been prepared to agree that enough of those factors are present to make a private company a college.
The Court of Appeal has basically said the 2001 case is wrong and that the primary factor is whether the core legal relationship between the body and the university is one of college and university. Most private companies will presumably fail this test (though the decision of the court was not itself a model of clarity and will lead to uncertainty in some cases).
So where does this leave companies which have an agreement with HMRC that they are colleges of a university but think they are in the same position as SAE? First, they should review the agreement reached with HMRC. Is it clear that HMRC intended to be bound by the agreement? Was the agreement reached after giving HMRC full information regarding the circumstances? Did the agreement indicate that HMRC may have misunderstood the facts? Have the facts on which the agreement was reached subsequently changed? If the answer to either of the first two questions is no, or the answer to either of the last two is yes, then the company will not be able to rely on the agreement and is at risk of having to pay VAT for prior periods.
Assuming the company can give the correct answers to the previous questions, HMRC will not be able to reopen closed periods. However, it says that, when a court or tribunal judgment changes the established understanding of the law on which an agreement was based, it can insist that a taxpayer pays tax on the basis of the new judgment for any period that has not been finalised – for example, where a return has yet to be submitted or can still be amended. It also says that it will not necessarily insist on this and that it will ‘consider whether or not the original understanding should be taken into account’.
HMRC has yet to say how it intends to deal with agreements with companies that they are colleges. It cannot do nothing. Its primary duty is to collect tax according to the law and so it must cease to be bound by agreements which contravene the law established by the SAE case. We can therefore expect an announcement on this.
In the meantime, companies which may be affected have to consider whether they can continue to take advantage of their agreement with HMRC. Taxpayers have a duty to file honest tax returns, so once a company thinks it may be caught by the SAE decision, it probably either has to begin charging VAT on its courses, or at least has to contact HMRC to ascertain its view on the issue. Again, doing nothing is probably not an option.
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