St Patrick's – Opportunity or false dawn for alternative education providers?

HMRC has now issued Revenue & Customs Brief 09/26 following the Court of Appeal decision in St Patrick’s International College and Others Ltd v HMRC. The decision will be of particular interest to independent higher education colleges and alternative further education providers that currently charge VAT on their courses.

The Court of Appeal found in favour of St Patrick’s and concluded that certain education providers which are not “eligible bodies” may nonetheless have grounds to argue that their supplies should receive the same VAT treatment as comparable courses provided by exempt universities and FE colleges. HMRC has, however, obtained permission to appeal to the Supreme Court and continues to maintain its long-standing policy that education supplied by providers that are not eligible bodies is subject to VAT.

As a result, whilst the decision creates opportunities for some providers, it would be premature to view this as a wholesale change in the VAT treatment of privately operated education providers.

Who may be affected?

The decision is most likely to be relevant to:

• Independent higher education colleges.
• Alternative further education providers.
• Providers delivering HNCs, HNDs and degree pathway programmes.
• Organisations offering courses that closely mirror those delivered by universities, FE colleges or other exempt providers.

Not every training provider will benefit from the decision. The strongest cases are likely to be those where the courses offered are comparable to exempt higher or further education from the student’s perspective and effectively compete with provision offered by exempt institutions.

HMRC’s position

The most important point is that HMRC has not changed its policy.

Providers should continue to follow HMRC’s published guidance and account for VAT in the normal way on current supplies where they are not an eligible body. HMRC’s view remains that the exemption in Group 6, Schedule 9 VATA 1994 only applies to supplies made by eligible bodies.

Should providers submit protective claims?

Potentially, yes.

HMRC has acknowledged that businesses may wish to protect their position pending the Supreme Court appeal and has confirmed that claims can be submitted by providers who consider themselves to be in a similar position to St Patrick’s. Any claims will be considered on a case-by-case basis.

However, a repayment claim is unlikely to be as straightforward as simply recovering previously declared output VAT.

Providers should also consider:

• The impact on input tax recovery under the partial exemption rules.
• Any Capital Goods Scheme adjustments.
• Potential unjust enrichment issues.
• The overall net benefit once all VAT adjustments have been calculated.
• The possibility that HMRC may ultimately succeed in the Supreme Court.

In some cases, the repayment of output VAT could be substantially reduced once these factors are taken into account.

What should providers do now?

For most providers, the sensible approach is likely to be:

1. Continue to follow HMRC’s current policy for ongoing transactions.
2. Review whether their courses are genuinely comparable to exempt higher or further education offered by universities or FE colleges.
3. Consider whether a protective claim should be submitted before any repayment opportunities become time barred.
4. Quantify the impact of any associated partial exemption and Capital Goods Scheme adjustments.
5. Await the outcome of the Supreme Court appeal before making significant changes to VAT treatment.

Final thoughts

The Court of Appeal decision is undoubtedly significant and may ultimately lead to a wider VAT exemption for some alternative education providers. However, there remains considerable uncertainty whilst the matter is awaiting determination by the Supreme Court.  As the dispute relates to supplies made prior to Brexit (1 December 2012 to 6 August 2017), the Court of Appeal’s decision was heavily influenced by EU law principles, including fiscal neutrality and direct effect. The applicability of the same reasoning to post-Brexit periods remains uncertain and may ultimately depend on the Supreme Court’s approach to the continuing relevance of retained EU VAT jurisprudence.

Whilst affected providers may wish to consider protective claims to preserve their position, this is not necessarily the VAT windfall that some headlines suggest. Any potential repayment needs to be assessed alongside the consequential impact on input tax recovery and the possibility that HMRC ultimately succeeds in its appeal.

For now, caution rather than celebration is probably the most appropriate response.