A recent Upper Tribunal has ruled that part-payment of fees paid by students has to be treated as VAT exempt ‘business income’. This will come as a blow to further education establishments - especially to the dozens of colleges that have already submitted VAT reclaims totalling in excess of £121m for VAT zero-rated construction works.
In a somewhat disappointing VAT decision of particular relevance to the amount of VAT relief available on the construction of new college buildings throughout the further education sector, the Upper Tribunal has ruled that part-payment of fees paid by students has to be treated as VAT exempt ‘business income’ of the College.
Further education colleges providing education for predominately no charge can benefit from the VAT zero-rated construction of new buildings and campuses. Following the favourable decision of a lower tax tribunal that part-payment of fees was ‘non-business’ income, some 50 colleges submitted VAT reclaims totalling in excess of £121m for VAT zero-rated construction works.
Now the Upper Tribunal has set aside that decision and stated that part-payment of fees paid by students over the age of nineteen (and presumably over eighteen in Scotland) are to be treated as ‘business income’ of the college where such fees are partly remitted because of income support grants or are otherwise reduced because they are grant supported.
The tribunal considered that, albeit the part-payment of fees represented less than the cost of the supply of education (primarily because that cost was in part defrayed by grant funding) that didn’t mean the fees did not amount to consideration for the supply of education. In its view there was a direct link to, and reciprocity of obligation between, the part-payment of fees and a supply being made by the College.
Such part-payments must therefore, on the basis of this decision, be included within calculations of the level of business use, and will mean that many colleges may not, after all, fall within the five per cent ‘business’ test, and so can’t benefit from newly constructed buildings being VAT free.
One crumb of comfort is in a postscript to the decision where the Upper Tribunal has called on the Government to reconsider VAT legislation. In noting that public funding doesn’t cover all a college’s costs, then depending on from where other sources of income are received, it can either escape from, or suffer, the tax burden on the construction of a building intended for its charitable purpose. The tribunal therefore made the bold statement that ‘it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse’.
Perhaps the Chancellor will revisit this issue in the forthcoming Budget?