4 April 2019
The Supreme Court has overturned decisions by the Court of Appeal and Upper Tribunal and ruled to apply VAT education exemption based on public policy basis and not on the narrow definition applied by HMRC.
What is the general position?
Exempting supplies from VAT is restricted to activities in the public interest. The exemptions are applied narrowly and are frequently conditional on the status of the provider.
HMRC are increasingly taking a literal view of the legislation and rarely seek to apply the rules on a considered basis. This is frequently contrary to wider public policy.
And the Court's view?
In SAE Education v Commissioners for Her Majesty’s Revenue & Customs, the Court ruled unanimously that SAE Ltd was entitled to claim exemption from VAT as a College of Middlesex University. SAE is a commercial education provider acting in all material means as a College of Middlesex University. The fact it was a commercial profit-making entity did not mean it could not benefit from VAT exemption and to do otherwise would have resulted in a breach of fiscal neutrality.
The intention of EU law is to ensure that VAT is not charged on supplies of education and HMRC’s application of the exemption was too narrow.
What does this mean?
Firstly, it confirms that HMRC does not always apply the law in an appropriate manner. They have lost other cases where they have applied a very narrow interpretation. It is rare that officers will look to apply VAT regulations with any regard to the purpose of the rules or reliefs. This can be frustrating and expensive to challenge.
Secondly, organisations might want to reflect on their arrangements to ensure they are not adversely affected by this judgement. Whilst on balance it is more consistent with the intention of EU law that the purpose of the transaction should determine the VAT treatment, rather than the narrow status of the provider or other ‘qualifying’ factor; there is a risk that trading companies could be seen to be an extension of a charitable provider (eligible body) and their supplies exempt rather than subject to VAT. This could result in a very different tax model.
If you would like to discuss this or any aspect of your charity, please contact me or your nearest UHY charity sector expert here.
Alternatively, you can read more about the services we provide to charities here.
