Kingston Maurward College
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 April 2021 |
| Neutral Citation | [2021] UKFTT 127 (TC) |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 127 (TC)
Judge Harriet Morgan
Elizabeth Kelsey, counsel, instructed by VATangles Consultancy, appeared for the appellant (“KMC”)
Peter Mantle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents (“HMRC”)
Value added tax – Claim for credit for input tax – Whether the provision of free education/vocational training to students where funding was provided by government agencies was a supply of services for consideration made by the appellant as a taxable person (any person who, independently carries out in any place any economic activity) acting as such – Yes – Whether KMC is entitled to credit for VAT incurred by it as residual input tax as a matter of law and under an agreed special method – No – Appeal dismissed.
The FTT dismissed a claim for additional input tax recovery. The College had previously recovered input tax on the basis that it had a mixture of non:business, taxable and exempt income. Following litigation involving other colleges the non:business income was reclassified as being VAT exempt business income. The College attempted to argue that input tax previously treated as non:business input tax was, in fact, residual input tax attributable to both taxable and exempt supplies.
Kingston Maurward College (“KMC”) is a further education college providing education and vocational training. Its sources of income were divided into three broad categories:
- Government funded courses, i.e. courses where the student was fully funded by either the Education Funding Agency or the Skills Funding Agency, referred to as supplies without charge;
- Courses where the agencies partially funded or did not fund the student's fees, referred to as supplies for fees; and
- Commercial activities, such as shop sales, admission to its park and gardens etc. (KMC runs agricultural and rural studies courses and, inter alia, operates a farm).
It was accepted that the income from commercial activities was taxable and income from “supplies for fees” was exempt from VAT.
Historically, KMC had treated the income from its “supplies without charge” as non-business income. However, following Wakefield College v R & C Commrs [2018] BVC 22, it concluded that this income was business income which was exempt from VAT. Subsequent to Wakefield, in Colchester Institute Corporation [2018] TC 06657 (“CIC”) the FTT had concluded that courses funded by the Education Funding Agency and Skills Funding Agency were not a business activity. However, this decision was overturned by the UT [2021] BVC 501. The UT decision in CIC was released before the hearing and the FTT accepted that, following this, KMC's income from “supplies without charge” was business income which was exempt from VAT (para. 70).
KMC is partially exempt and, in 1998, agreed a partial exemption special method (“PESM”) with HMRC. In summary, the PESM apportions residual input tax based upon the ratio of taxable input tax to taxable input tax plus exempt input tax (taxable input tax being input tax wholly attributable to taxable supplies and exempt input tax being input tax wholly attributable to exempt supplies). Therefore, if there was no input tax wholly attributable to exempt supplies, KMC could recover all of its residual input tax.
VAT incurred on non-business activities is not “input tax” for the purposes of VATA s. 24 and it cannot be recovered. Because KMC considered “supplies without charge” to be non-business income, VAT incurred on this activity had to be separately identified and not recovered.
Having determined that its supplies without charge were in fact a business activity, KMC sought to argue that i) the VAT previously treated as irrecoverable because it was incurred on non-business activities was residual and ii) because it was residual it was recoverable in full under the terms of the 1998 PESM.
The FTT dismissed KMC's appeal. It found that the evidence presented by KMC did not demonstrate that the input tax under appeal was residual rather than being exempt input tax.
KMC's argument that the input tax was residual was based upon the premise that its activities comprised a “single integrated whole” and, as a consequence, all of the input tax under dispute was used to make both taxable supplies (i.e. the commercial activity) and exempt supplies (i.e. the courses supplied for fees or without charge) (para. 20). The “lynchpin” of KMC's argument that it operated a single integrated business as a rural studies college was that students on most courses engaged in the commercial activities (para. 118). For example, KMC provided courses on agriculture and butchery and its commercial activities included running a farm and selling produce.
The FTT found KMC's evidence in support of this premise insufficient. Its detailed findings are contained in para. 119. They included noting that, by KMC's own admission, there were some students who did not engage in commercial activities and that the income generated by the course fees exceeded commercial income by a substantial margin.
The FTT was not presented with evidence regarding specific costs. The FTT noted that KMC had argued its case only by reference to its outputs, it had not provided examples of inputs and explained how they were used. As a result it was, in the FTT's words, “guesswork” whether the inputs on which the input tax was incurred had a direct and immediate link to both taxable and exempt supplies (para. 146).
The FTT concluded with a review of the parties arguments regarding how the 1998 PESM should operate in practice. However, as the appeal had been dismissed on other grounds, its findings were not relevant to the outcome of the appeal.
The College made its case largely on theoretical grounds and it did not directly address why, having realised that its non-business activity was an exempt business activity, it now considered that the input tax was partially attributable to taxable activities. Any input tax attributable to taxable activities should have been recoverable at the time under the business:non-business apportionment method used.
Had the College provided examples showing the practical application of its theoretical argument it might have been more persuasive.
[1] KMC appealed against a number of decisions notified by HMRC to KMC in letters dated 1 and 3 September 2015, 20 July 2016, and 2 September 2016 in which HMRC refused its claims for “credit” for “input tax” (as those terms are defined and used in ss 24, 25 and 26 of the Value Added Taxes Act 1994 (“ATA”)) in respect of its accounting periods for VAT purposes from 1 August 2010 to 30 April 2016 (“the relevant periods”). The appeals are made under s 83(1)(c) VATA and for the period 04/15 also under s 83(1)(p)(i) VATA. KMC notified the tribunal of the appeals in notices dated 11 December 2015 and 17 November 2016.
[2] In short, KMC's stance is that it is entitled to “credit” for VAT incurred by it in respect of the relevant periods for which it had not previously claimed “credit” when it submitted its VAT returns for those periods (“the claimed tax”). KMC makes its claim on the basis that the claimed tax constitutes “residual input tax” (as that term is used for VAT purposes) and that KMC is entitled to full “credit” for all of it under the “partial exemption special method” it has agreed with HMRC in a letter dated 6 May 1998 (“the 1998 PESM” and “the 1998 letter”).
[3] Unless stated to the contrary, references in this decision in the present tense to law, facts and circumstances are to law, facts and circumstances as in place or as they existed during the relevant period.
[4] KMC is a Further Education College, incorporated under the Further and Higher Education Act 1992 with charitable status for the purposes of the Charities Act 2011. It occupies a rural site, including a Grade 1 listed Georgian Manor House, near Dorchester in Dorset. KMC provides education and/or vocational training to students of a range of ages in a variety of full time and part time courses including agriculture, equine studies and other “rural” or “land based” studies, business studies, “military preparation” and sport and leisure (as described in full at [50] and [51] below). I refer to all such services as “training services” and to all activities constituting or relating to such services as “training activities”.
[5] Only a minority of students who enrol on KMC's courses are subject to fees for the training services KMC provides to them. For the majority of students, KMC receives funding grants from the Education Funding Agency (“EFA”) and the Skills Funding Agency (“SFA”). EFA and SFA are executive agencies of the government, sponsored by the Department for Education. I refer to these bodies as “the agencies” and to KMC's supplies for VAT purposes of training services which (a) are fully funded by the agencies as “supplies without charge” and (b) which are not funded by the agencies or are partially funded by the agencies, as “supplies for fees”.
[6] KMC also makes various other supplies of goods and services for VAT purposes, such as sales of produce from KMC's farm and dairy and products from its blacksmith, the provision of a number of services related to its equestrian activities, the hire of its buildings for weddings and conferences, the admission of the public to its visitor park and gardens and the operation of a camping and caravan site (as described in full at [52] below). I refer to all such supplies as “commercial supplies” and the activities constituting or relating to such supplies as “commercial activities”. Some of KMC's students are involved, as part of the courses they undertake, in work which forms part of the commercial activities undertaken by KMC in the course of which it makes commercial supplies.
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