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This First Tier Tribunal case concerns the VAT liability of income generated from various outlets operated by Fareham College (the College.) The College believed that the income generated from these outlets was exempt. HMRC said it was taxable, arguing that the basic purpose was to obtain additional income in direct competition with commercial enterprises.
VATA 1994, Grp. 6, Sch. 9 exempts from VAT supplies of goods or services made by an eligible education or vocational training body that are closely related to its principal supply of education or training.
Fareham College operated a training restaurant, training beauty salon, training hairdressing salon and a performing arts centre from which services were provided to members of the public by Fareham College using the students attending related courses provided by the college. The College argued that supplies made were closely related to the supply of exempt education. The purpose of operating these outlets was to provide a realistic working environment for students to pursue their courses and qualifications, not to obtain additional income.
Link to Brockenhurst College VAT Exemption
The College referred to Brockenhurst principles in arguing its case for exemption. The Brockenhurst case concerned vocational training where the students learnt a particular trade through practice (catering, hospitality, performing arts) and generated ‘sales’ by doing so. HMRC took the view that income generated was taxable but lost this argument both at tribunal stage and the Court of Appeal.
Following the judgment in Brockenhurst, HMRC accept that further education colleges and other bodies can treat certain supplies to the public in the course of education or vocational training undertaken by students as exempt from VAT, provided they meet certain conditions.
One of the conditions is that the activity must not have the purpose of generating additional income for the body in direct competition with commercial enterprises. In Brockenhurst, the training restaurant only provided meals to those who were on a restricted list, and only recovered 80% of the cost of the food.
The First Tier Tribunal case judgement
The FTT agreed that the basic purpose of the training restaurant was not to obtain additional income, so the income is exempt. It was essential for FC to operate the training restaurant for the students to successfully complete their courses. The restaurant had limited opening hours, charges were low for the quality of the food and set with a view to covering the cost of ingredients.
However, as the burden of proof was on the appellant to show exemption applies, it was not convinced in respect of the Hair and Beauty Salons nor the Performing Arts Centre. In the case of the hair salon there was little evidence offered by the college as to how the relevant supplies were made and how they might differ from those in a commercial salon. The college provided no information about the Performing Arts Centre. The FTT therefore concluded that income from these three outlets is excluded from exemption, and is subject to VAT.
Implications
An FTT decision is only binding on the parties involved and it remains to be seen whether this decision will be appealed.
In HMRC’s online manual its states that education providers claiming exemption must “be prepared to demonstrate whether the restaurant (theatre, beauty salon or other activity) is run so as not to generate additional income, and to provide figures which demonstrate this.” It is therefore surprising that in this FTT case, the College provided no such evidence for three of the four outlets.
The case highlights the need for robust documentation to be held to support VAT-exempt treatment for this type of income. Financial records are important, but educational establishments should also be able to show why the activity is “closely related” to education provided to students. Is there a need for students to learn in a “live” environment in order to meet the course requirements?
How S3TAX can help
The case does raise a concern that HMRC is reviewing its approach to the VAT treatment of income generated from these types of outlets operated by education providers. We would advise education providers to consider whether they hold documentation which is robust enough to challenge an approach from HMRC where the VAT exemption is being applied.
If you are uncertain or have concerns in relation to the treatment applied at your establishment, then we are happy to undertake a review of your relevant income streams and any supporting documentation to give an opinion about whether the VAT liability could be open to a challenge by HMRC. This could be as a standalone piece of work or as a wider VAT review of income streams and VAT recovery.
Get in touch today, contact [email protected].
