Was the appellant due to pay output VAT under the Lennartz mechanism?
Jan Garioch CA discusses a recent case, Colchester Institute Corporation v HMRC, where the Upper Tribunal has to consider the fate of VAT incurred on a significant construction project for a college in receipt of finance from funding agencies.
The background to the case
Colchester Institute Corporation (CIC) is incorporated as a general further education college offering educational and vocational courses to over 11,000 students of differing ages from 16 upwards. Most of these students receive free training with the finance coming from further education funding agencies, although some students, for instance international ones who are not entitled to free education, pay fees. The agreements with the funding agencies do not stipulate which qualification a student should take but they only fund qualifications approved on a Government maintained website.
CIC started a major building project in 2008. At that time CIC and HMRC both believed that the provision of education, when funded by a relevant funding body, was not a business activity and hence outside the scope of VAT. Consequently, under the Lennartz mechanism CIC applied for, and was granted, permission to deduct input VAT incurred on the building project and subsequently account for deemed output VAT on the provision of education services in due course. Since those services were thought to amount to non-business supplies, the tax charge arose under para 5(4) Sch4 VATA1994 and Part15A SI1995/2518. In total, £2.25M of input VAT was repaid to CIC, but it continued to account for output VAT on deemed supplies.
The origin of the VAT dispute
In 2014, CIC changed its view and claimed its supplies were after all business supplies and hence it had never needed to account for deemed output VAT on non-business supplies. It claimed repayment of the deemed output VAT subject to the 4-year cap. HMRC refused and that decision was appealed to the First Tier Tribunal (FTT).
What the FTT thought
CIC failed to convince the FTT, which decided that funding received was merely a block grant subject to conditions and did not constitute consideration for any supplies made by CIC. The FTT did not find any direct link between the cost of education provided to any specific student and the funding provided. However, CIC appealed this decision to the Upper Tribunal (UT).
Arguments put to the UT
CIC argued that the FTT had erred in law when it did not see sufficient link between the grant funding and the supply of services to students. The grant funding was paid on an ongoing basis based on a formula targeted at certain categories of students. CIC asserted that Le Rayon d’Or SARL v Ministre de l’Économie et des Finances [2014] established that lump sum payments calculated by reference to a formula could be consideration for VAT purposes. HMRC put forward the counter argument that the FTT was correct to consider whether CIC made any supply in respect of a particular course to an individual student. They asserted this was required, although they acknowledged that the identity of the particular student did not need to be known. HMRC tried to distinguish Rayon d’Or as being on different facts since it concerned the permanent availability of healthcare services to care home residents at the appropriate time. HMRC cited South African Tourist Board v Customs Commissioners [2014] UKUT 280 in support of their arguments. The South African government funded a body promoting tourism in South Africa where it was held there was no supply because there was not a mutual exchange of supply for a consideration.
The UT decision
The UT defined their task to be drawing on two previous cases with “diametrically opposite analysis” and deciding which side of the line CIC falls against that backdrop. The UT was most strongly influenced by Rayon d’Or case and found a direct link between grants coming into CIC and the courses provided to CIC students for free. They saw the experience of students who were required to pay for their tuition to be identical to that of students who were fully funded by grants. They concluded that the FTT was wrong to look for a link that was so direct that it matched supplies and/or cost of supplies to individual students because nothing in case law requires the link to be so specific.
Since CIC’s supplies were always exempt supplies, it had erred in overpaying output VAT under the Lennartz mechanism. Similarly, HMRC had erred in not assessing in time to recover the input VAT wrongly repaid to CIC on their building project.
Ongoing consequence
This case is of consequence to other educational providers who had embarked on construction projects and have similar VAT disputes in progress. Any further appeal on this case will be closely watched.