The First-tier Tribunal has established in a leading case that the exemption in VATA 1994, Grp. 6, Sch. 9 is, under the Marleasing principle, subject to Principal VAT Directive, art. 132 and 134. The tribunal then applied this to a number of activities performed by a further and higher education college to determine whether they qualified for exemption (Fareham College v HMRC [2023] UKFTT 214 (TC)).
The background
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 salons and a performing arts centre from which services were provided to members of the public by Fareham using the students attending related courses provided by the college. It was agreed that the provision of these supplies were essential to the provision by the college of the vocational training that it provided.
The college had accounted for output VAT on these supplies but had then claimed a refund on account of them being exempted by VATA 1994, Grp. 6, Sch. 9. However, HMRC had refused the refund because, as result of the Marleasing principle, Principal VAT Directive applied and art. 132 and 134 withdrew the exemption “where the basic purpose of the supply is to obtain additional income for the body in question through transactions which are in direct competition with those of commercial enterprises subject to VAT”.
The college appealed arguing that:
- VATA 1994, Grp. 6, Sch. 9 should not be construed in accordance with Principal VAT Directive, art. 132 and 134; and
- in any case Principal VAT Directive, art. 132 and 134 would not apply as the basic purpose of the activities was to provide experience for the students and not to obtain income.
The Marleasing principle
This states that:
“… in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article 189 of the Treaty.”
The tribunal noted “It is now well established that this Tribunal is required to interpret UK domestic legislation in such a way, in so far as possible. Later case law has emphasised the limitations on this principle, and that the exercise is one of interpretation and not law-making.”
Following detailed consideration the tribunal judge concluded:
“In short, there is nothing in these submissions which causes me to consider that implying the words of Article 134(b) into Item 4 is inconsistent with the words used by Parliament in Item 4. The provision in Article 134(b) clearly goes with the grain of the legislation, which must in any event be construed to be consistent with fiscal neutrality. It is compatible with the underlying thrust of the legislation. There is no distortion and it is not necessary to identify any textual anchor. … I do not consider that HMRC’s interpretation is contra legem … It is clear from Vodafone 2 that the Marleasing principle is broad and far-reaching, and that it permits the implication of words necessary to comply with the UK’s obligation to implement Articles 132 and 134. … I am satisfied that Item 4 should be interpreted as including the exclusion from exemption.”
Application to the college’s activities
Having established that the exemption from VAT was subject to Principal VAT Directive, art. 132 and 134, the tribunal found that the burden of proof in respect of whether the basic purpose of the supplies was to obtain additional income through transactions which are in direct competition with those of commercial enterprises subject to VAT lay with the college. After considering the evidence provided the tribunal concluded:
- With regards to the training restaurant the college had provided sufficient evidence in relation to its costs, pricing and operation to establish that obtaining additional income from its supplies was not the appellant’s basic purpose. Its basic purpose was to provide a realistic working environment for students to pursue their courses and qualifications. It therefore qualified for the exemption.
- However, as the college had provided insufficient detail for the salons and no detail for the performing arts centre, the tribunal judged that the college had not proved that its purpose was not to raise income and as such the exemption did not apply.
Outstanding matter
The tribunal noted that in addition to consideration of the Marleasing principle and the application to the college:
“There is a third issue which arises on the appeal. HMRC say that supplies of education to fully grant funded students are not supplies for consideration and therefore a non-business activity. That issue was determined against HMRC by the Upper Tribunal in Colchester Institute Corporation v HM Revenue & Customs [2020] UKUT 368 (TCC). HMRC intend to take that issue to the Court of Appeal in another appeal by a different appellant. I am not concerned with that issue. …The determination of the third issue may arise in due course in relation to the quantum of any recovery of output tax to which the appellant might be entitled.”
https://www.bailii.org/uk/cases/UKFTT/TC/2023/TC08740.html
Related content from Claritax Books
Value Added Tax, written by Ciaran McGee MA (Oxon), FCA, CTA, is an extensive volume (over 1,000 pages), written primarily for non-VAT specialist accountants and tax advisers.
