Rewriting the rulebook: VAT changes for higher education providers

Posted: 23/04/2019

There have been two developments in the world of VAT and higher education – a Supreme Court case and a change in legislation. Let’s start with the case (SAE Education Ltd v Revenue and Customs Commissioners).

On the face of it, the case involved a simple question. Universities and their colleges do not have to charge VAT on their course fees because they are exempt for VAT purposes. The question was whether an independent company run for profit, which is not connected legally or by ownership with a university, could claim VAT exemption on the grounds that it is a ‘college’ of the university.

The obvious answer to this is no. But this is the law, so nothing is obvious. Indeed, in a previous case, the High Court had decided that there were 15 factors involved in deciding whether a body could be properly called a ‘college’ of a university (see Customs and Excise Commissioners v School of Finance and Management (London) Ltd [2001]). In that case the court said that the independent company was indeed a college of the university and this led to many similar claims being accepted by HMRC.

However, the Court of Appeal in SAE Education said that there was an overriding test which trumped the other factors. It ruled that the primary factor was whether the core legal relationship between the company and the university was one of college and university – if not, the company was not a college no matter what other factors were involved. This caused a small amount of chaos because few of the arrangements agreed by HMRC would have passed this test, and many companies were left not knowing where the Court of Appeal’s decision left them.

The happy news for them is that the Supreme Court has reversed the decision. It has declared that the presence of a foundation or constitutional document or some other legal relationship establishing the college as a constituent part of the university in a constitutional or structural sense will normally be sufficient to prove that it is a college of the university – this is similar to the Court of Appeal’s core legal relationship test above. 

But it has gone on to say that, if that test is failed, the company can still be a college of the university depending on the following five factors: (i) whether there is a common understanding that the company is a college of the university; (ii) whether the company can enrol or matriculate students as students of the university; (iii) whether those students are generally treated as students of the university during the course of their period of study; (iv) whether the company provides courses of study which are approved by the university; and (v) whether the company can in due course present its students for examination for a degree from the university.

So most such companies can breathe a collective sigh of relief that their agreements with HMRC remain valid and that their courses are still VAT exempt. That is the pragmatic answer reached by the Supreme Court. But is an independent company really a college of a university?  Of course not!

Now onto the legislative change. The VAT exemption described above currently applies to UK universities and their colleges, institutions conducted by higher education corporations (HECs) and other institutions that are designated as eligible to receive support from central funding. There are changes to the way that higher education providers are funded by the Office for Students from the start of the 2019/20 academic year, meaning that the VAT exemption test has to change too.

In order to be bodies entitled to exempt their supplies, those higher education providers which are currently exempt by virtue of being HECs or designated institutions will in future need to be registered by the Office for Students in the Approved (fee cap) category. Providers which are registered only in the Approved category will not be eligible for the exemption. This change is effective from 1 August 2019.

Note that it is only English higher education providers which are affected by this change, not Welsh ones. Also, the change will not affect providers which fall within the VAT exemption by virtue of being a university or non-profit making body, etc. And there are no changes to the VAT treatment of bodies which provide only primary, secondary or further education, and tertiary colleges providing both secondary education and vocational training.

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