The court ruling that ‘cast a long shadow’ over college VAT

Multiple colleges lodge HMRC tax assessments after landmark decision

Multiple colleges lodge HMRC tax assessments after landmark decision

29 Mar 2024, 10:00

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A court ruling that upended a long-held understanding over the VAT status of FE colleges continues to “cast a long shadow” over whether they can claim discounts on large building projects, some four years after it was issued.

The ruling by judges in the Upper Tribunal of the Tax and Chancery Chamber in late 2020 undermined an established government policy that required further education colleges to pay VAT on most of their spending.

Their decision was the conclusion of a complex dispute between Colchester Institute and HMRC over whether the college could reclaim VAT on a £100 million building project dating back to 2008.

The wide-ranging impact of the ruling – which set a precedent for similar cases – appeared to be an unintended outcome of the college’s attempt to reduce its tax bill on building expenses between 2010 and 2014.

It found that Colchester Institute’s education of 16- to 19-year-olds is an “exempt business activity”, meaning it would no longer have the right to discounts on some VAT costs that colleges and other charitable institutions have access to.

But shortly after the ruling was published, HMRC told colleges in a similar position to the Colchester Institute they should effectively ignore it. The tax authority appeared to suggest that it would overcome the ruling through a “new appeal” with another college.

However, four years later a new HMRC appeal is yet to emerge.

FE Week understands there are several other colleges that have lodged appeals against HMRC tax assessments due to similar disputes over how much VAT they owe on large capital projects, although the tax authority has claimed it is unable to confirm how many.

What did the ruling mean?

FE colleges have long called for more favourable rules on VAT, which costs them an estimated £200 million each year.

Before the 2020 ruling, colleges had a “non-business” status under VAT law, meaning they were unable to recover most of the tax they paid but could claim certain “reliefs”, or discounts.

The ruling meant colleges lost the right to reliefs, the most significant being full discounts on VAT for some building projects and five per cent on fuel and power costs.

It also called into question a special rule allowing academies and schools to recover VAT, giving them a bonus over FE colleges.

What happened this year?

Earlier this month a new ruling from the First Tier Tax Tribunal concluded an almost identical VAT dispute between the Colchester Institute and HMRC.

This time, HMRC took the college to court over a disagreement related to tax bill of £123,000 for a slightly later period to the 2020 ruling. According to the ruling, HMRC admitted it had “no basis” for mounting the claim and the judge cut Colchester Institute’s tax bill by about £99,000.

Is this year’s case the ‘new appeal’ HMRC promised?

Whether the new court ruling will result in an appeal to the Upper Tribunal remains unclear.

When asked whether it plans to appeal, an HMRC spokesperson would only say it is “carefully considering” the tribunal’s recent decision.

The college told FE Week: “Colchester Institute does not comment on matters where there is an ongoing legal implication”.

In a briefing on the latest ruling, accountancy giant Deloitte said HMRC chose to challenge Colchester Institute despite appearing to recognise that the outcome was a “foregone conclusion”.

The briefing added: “However, the fact that HMRC pursued the appeal anyway means that it is likely that they will apply for permission to appeal to the Upper Tribunal.

“If so, any decision ultimately in favour of the college may adversely affect the further education sector’s ability to access VAT reliefs, such as the zero rate on the construction of relevant charitable buildings and the reduced rate on supplies of fuel and power.”

The ruling cast a ‘long shadow’ over colleges’ VAT claims

Audrey Fearing, a partner at tax advisory consultancy RSM UK, said the 2020 ruling on Colchester Institute’s tax claim “continues to cast a long shadow” over HMRC’s stance on colleges’ VAT exemptions.

She added that colleges are faced with a “weighing up exercise” between claiming charitable relief in line with HMRC’s policy or following the Colchester Institute in claiming its spending falls “within the scope of the VAT system.”

She said: “What [the recent ruling] means is as of today, FE colleges have a choice; they can either make claims to HMRC and avail themselves of the charitable reliefs that are available, such as construction and building work … or they can treat their income as wholly within the scope of the VAT.

“Colleges have really got to weigh up what the benefit is, if they’ve not got big capital projects coming up then why would you [challenge HMRC]?

Linda Skilbeck, a director at accountancy firm Buzzacott, said the 2020 ruling “called into question” VAT refunds given to colleges and potentially academy schools.

She added: “The consequence has been that a long-held policy of HMRC, that central government funding is outside the scope of VAT, has been undermined.”

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