Higher Education College ‘Running a Business’ for Tax Purposes

In an important decision for educational charities, the Court of Appeal has ruled that a college that charged students fixed, but publicly subsidised, fees was engaged in a business or economic

activity for tax purposes and was thus not entitled to a VAT rebate in respect of the construction costs of a new campus building.shop being refitted

The college’s lengthy dispute with HM Revenue and Customs was treated as a test case on the outcome of which some 50 other similar cases hinged, involving about £120 million in VAT. HM Revenue and Customs (HMRC) had refused the college’s rebate claim on the basis that the building was in part intended for use in the course or furtherance of a business, within the meaning of the VAT Act 1994. The Upper Tribunal (UT) had backed HMRC’s stance.

In challenging the latter decision, the college, which provided mainly vocational further education courses to teenagers, pointed out that more than 70 per cent of its students qualified for full fee remission and thus paid nothing for their courses. Fees received from subsidised students came to much less than the cost of teaching them and the funding gap was made up by the Learning and Skills Council. The college only managed to avoid making a loss by running courses for foreign students, who were taught elsewhere on campus.

In dismissing the college’s appeal, however, the Court noted that it was agreed that those students who paid subsidised fees provided consideration in respect of their courses. The relevant fees were fixed without any reference to students’ means and provided the college with a significant proportion of its income.

The Court noted that the college was in reality a typical participant in what was undeniably a market in the provision of further and higher education whose viability was underpinned by a combination of grant aid and fees. In those circumstances, the provision of courses to subsidised students amounted to an economic activity and the relevant construction costs were not zero-rated for VAT.

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