Colchester Institute Corporation
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 August 2018 |
| Neutral Citation | [2018] UKFTT 479 (TC) |
| Date | 15 August 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0479 (TC)
Judge Aleksander, Ruth Watts Davies
Eamon McNicholas, counsel, (24 July) and Noel Tyler, chartered tax advisor, (25 and 26 July), instructed by VATangles Consultancy, appeared for the appellant
Peter Mantle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Provision of grant-funded education and training – Meaning of economic activity and of business – Lennartz treatment – Lead case – Principal VAT Directive (2006/112), art. 26(1).
The First-tier tribunal (FTT) dismissed an appeal against a decision of HMRC refusing to repay overpaid Value added tax (VAT) in respect of deductions under the Lennartz mechanism. The provision of grant-funded education and vocational training was not an economic activity and the College was required to account for output tax under the Lennartz mechanism.
The appellant Colchester Institute Corporation (CIC) fell into dispute with HMRC over the application of the Lennartz mechanism (Lennartz), see Lennartz v Finanzamt München III (Case C-97/90) [1993] BVC 202. Under Lennartz taxpayers can reclaim input tax on goods, that are later used for a non-business purpose, requiring output tax to be paid each time the goods are so used, Directive 2006/112, art. 26(1)(a)) and 11(A)(1)(c). The UK transposed these regulations as VATA 1994, Sch. 4, para. 5(4) and Value Added Tax Regulations 1995 (SI 1995/2518), Pt. 15A, reg. 116E. Output tax is calculated on a formula set out in reg. 116E based on non-business use as a percentage of total use.
In Vereniging Noordelijke Land- en Tuinbouw Organisatie v Staatssecretaris van Financiën (Case C-515/07) [2009] ECR I-00839 (“VNLTO”) the ECJ had clarified what the terms economic activity and business meant in the context of Lennartz and art. 26(1)(a). Lennartz had been incorrectly applied and a taxpayer could no longer use Lennartz where its non-business activities formed part of its economic undertaking. HMRC gave taxpayers a choice to unravel existing Lennartz agreements or continue until they ended, F(No. 3)A 2010, Sch. 8, para. 4 and HMRC Brief 02/10.
In April 2014 CIC submitted a claim under VATA, 1994, s. 80, for overpaid output tax less input tax previously included under Lennartz. CIC claimed all its activities were exempt business and fell outside of Lennartz. As most of the input tax previously claimed in January 2010 was now out of time it fell outside the adjustment. The claim was rejected by HMRC and CIC now appealed. CIC was a lead case for a number of FE colleges.
The FTT considered whether publicly funded education and vocational training, as provided by FE colleges was an economic activity and therefore outside the scope of VAT within the meaning of EU law. Furthermore within the meaning of EU law and VATA 1994, s. 4 whether such activities were not supplies for consideration and were not made in the course or furtherance of a business. This was in the context that students were not charged a fee, funding came from government grants and students were educated or trained alongside others who do pay fees. CIC contended that its activities were an economic activity undertaken for consideration paid by the funding agencies. HMRC's said that such activities were not an economic activity and there was no direct link between the grant funding and education/vocational training provided to individual students. The FTT referred to this as Issue 1.
The second item concerned the Lennartz treatment, this was referred to as Issue 2. CIC submitted that it had no liability under Lennartz, whereas HMRC claimed that legislation in place required an output tax calculation.
With regard to Issue 1 the FTT agreed with HMRC that the activities undertaken by CIC in the context of Lennartz were business and the use of the term business in VATA 1994, Sch. 4, para. 5(4) applying Lennartz was different to that in VATA, 1994, s. 4 where business referred to the concept of economic activity, see para. 117 of the decision. The FTT found there was not a sufficiently direct link between payments from funders and students for it to be deemed third-party consideration, see para. 131.
For Issue 2 the key point concerned the effect of para. 4, which the FTT said CIC had not considered in its submission. Following VNLTO, where a taxpayer had received the benefits of Lennartz albeit incorrectly, para. 4 required it to continue to account for output tax. HMRC gave Taxpayers a choice to repay input tax previously claimed otherwise para. 4 applied. The FTT agreed that para. 4 was deemed to always have had effect, see para. 172. It dismissed CIC's argument that its activities were a single business activity agreeing with HMRC that there was a distinction between fee-paying and grant-funded student activities, see para. 173. The FTT agreed with HMRC, as opposed to the view of CIC, that the term provision in EU and UK law was intended to mean something that was not a supply, see para. 178. Finally CIC had claimed that in public guidance HMRC had referred to vocational training as exempt and therefore a business activity something that the FTT considered had no influence on its decision, see para. 180.
The FTT concluding found for Issue 1 that the provision of publicly funded education and vocational training was not an economic activity, was outside the scope of VAT and was not a supply for consideration. For Issue 2 in the circumstances outlined above Lennartz treatment required CIC to continue with output tax declarations. The appeal was dismissed.
Given the FTT's clear direction on the importance of para. 4 it remains to be seen whether the Appellant will appeal. Since the changes to Lennartz post VNLTO use of Lennartz has fallen away and other approaches have been taken for those organisations involved with both taxable and non-taxable activities.
[1] This appeal by Colchester Institute Corporation (“CIC”) is against a decision of HMRC to reject an application by CIC pursuant to a voluntary disclosure to be repaid £1,528,499 in respect of overpaid VAT pursuant to s80 VAT Act 1994.
[2] On 18 October 2016, the Tribunal gave directions that this appeal be a “lead appeal” pursuant to rule 18, Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, and that seventeen other appeals as set out in those directions be stayed behind it. The Tribunal gave directions as to the common or related issues of act and law, and these are set out below.
[3] On the first day of the hearing, CIC was represented by Mr McNicholas, and on the subsequent two days by Mr Tyler. HMRC was represented throughout by Mr Mantle.
[4] A Statement of Agreed Facts was submitted by the parties. Witness statements were submitted on behalf of CIC from Jason Peters (Vice-principal – curriculum delivery and performance), Julie Cox (Director of Funding and Information), Gary Horne (Executive Vice-principal – Finance and Corporate Development) and James Hurst (an employee of VATangles, CIC's VAT advisor).
[5] The evidence given by Mr Horne and Mr Hurst was not controversial, and they did not give oral evidence. Mr Hurst's evidence was a solely a series of photographs taken at the College's Colchester campus in April 2017. Ms Cox and Mr Horne gave oral evidence and were cross-examined. We found them both to be credible and reliable witnesses.
[6] In addition, bundles of documentary evidence were also submitted.
[7] Section 14, Education Act 2002 gives the Secretary of State for Education (in relation to England) the power to give, or make arrangements for the giving of, financial assistance to any person in connection with (inter alia)
- (a) the provision, or proposed provision, in the United Kingdom or elsewhere, of education or of educational services:[…]
- (c) enabling any person to undertake any course of education, or any course of higher education provided by an institution within the further education sector
[8] For these purposes “education” includes vocational training.
[9] Section 16, Education Act 2002 gives the Secretary of State power to determine the terms on which financial assistance will be given, and requires persons receiving financial assistance to comply with such terms.
[10] The Secretary of State for Education delegates to the Education Funding Agency its responsibilities under s14 for the provision of financial assistance in the further education sector (which includes the College).
[11] The Skills Funding Agency is an agency of the Department of Business, Innovation and Skills. Its funding comes from a combination of the European Union's Social Fund and from the UK government. We were not referred to the statutory basis under which the Skills Funding Agency operates.
[12] Item 1, Group 6 (Education) of Schedule 9, VAT Act 1994 (“VAT Act”) provides that the following are exempt supplies for the purposes of VAT:
The provision by an eligible body of:–
- education;
- [omitted by art 2, SI 2013/1897]; or
- vocational training.
[13] This appeal is concerned with the application of “Lennartz treatment” to goods1 acquired by a taxable person which are intended to be used both for economic activity and for private (or “non-business”) use. There was something of a semantic debate before the Tribunal as to whether this treatment was rightly called “Lennartz treatment” or the “Lennartz mechanism”, or whether it was just an illustration of a requirement of VAT law. The decision of the ECJ in Lennartz v Finanzamt München III (Case C-97/90) [1993] BVC 202 was instrumental in establishing this approach to the treatment of credit for input VAT, and it is convenient to use the terms “Lennartz treatment” or “Lennartz mechanism” when discussing these issue – and these terms are in common use amongst VAT practitioners. In this decision, the use of these terms is to be taken as...
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