Supreme Court clarifies scope of education VAT exemption

Bodies who provide degree level education courses in collaboration or partnership with universities yesterday received some welcome VAT news.

The Supreme Court allowed an appeal by SAE Education Limited (SAE Education Ltd v Commissioners for Her Majesty’s Revenue and Customs [2019] UKSC 14, on appeal from [2017] EWCA Civ 1116) ruling that its supplies of education to students were exempt from VAT.

Supplies of education to students in the UK are exempt from VAT if they are made by certain bodies, including by a “college of a university”.  This phrase has no statutory definition and there had been a body of case law laying down a number of different tests over the years.  However, the Court of Appeal decision in this case appeared to restrict the meaning of this phrase to bodies which formed a constituent part of a university in a constitutional or structural sense.  This effectively excluded third party commercial providers such as SAE, who enter into collaboration or similar agreements with universities in order to extend the range of degree courses on offer, from the VAT exemption.

The Supreme Court based its ruling on a review of the relevant provisions of the European Directive, from which the UK VAT legislation derives. These make clear that member states must exempt transactions:

• involving the provision of university education by bodies governed by public law having such education as their aim; and
• by other organisations recognised as having similar objects to those governed by public law and which also have education as their aim.

The Supreme Court noted that the general objective of the exemptions is to ensure that access to higher educational services is not hindered by the increased costs that would result if those services were subject to VAT.

The Court ruled that in assessing whether a body is a college of a university, five questions are likely to be highly relevant:

(i) whether the body and the university have a common understanding that the body is a college of the university;

(ii) whether the body can enrol or matriculate students as students of the university;

(iii) whether those students are generally treated as students of the university during the course of their period of study;

(iv) whether the body provides courses of study which are approved by the university; and

(v) whether the body can in due course present its students for examination for a degree from the university.

It ruled that if a body can establish the presence of each of these five features, then it is highly likely to be a “college of the university” within the meaning of the relevant VAT legislation. The Court went on to say that there may also be other cases where the degree of integration of the activities of the body and the university is such that it may properly be described as a college of the university and that all will depend on the particular circumstances of the case.

This decision provides some welcome clarity for universities and other providers of education who work with universities to provide additional courses.  Collaborations or partnerships  between them had been at risk of increased VAT costs, making such arrangements much less attractive.  VAT exemption should now be available for education provided through these arrangements if the five features set out by the Supreme Court are present.

This is welcome news for the sector which will also be boosted by a change to the VAT rules from 1 August.  The effect of such change is that if a body has Approved (fee cap) status on the register maintained by the OfS it will be able to make VAT exempt supplies of education from that date, whether or not it is a UK University, a college of a university, and even if it is a profit making body.