VAT on education material and services

Thu 21 Dec 2017

In a case concerning supplies of education books and services by Metropolitan International Schools Limited, the Upper Tribunal (UT) has reversed a First tier Tribunal (FTT) decision, holding that the supplies were not predominantly of zero rated books.  The case reinforces the view that where HMRC have given an incorrect ruling, the only legitimate expectation the taxpayer can have is that there will be no retrospection.  It is not possible to rely on that incorrect ruling with respect to interest on withheld amounts, nor with respect to any on-going contracts (run-off contracts) entered into during the period of the incorrect ruling.

Background

In 2000 HMRC entered into an agreement with the school which treated its supplies as 75% zero rated (education books) and 25% standard rated.  Following the 2009 House of Lords decision in College of Estate Management, HMRC withdrew from that agreement, contending all the school’s supplies were standard rated. It originally sought to recover unpaid tax in relation to open periods prior to 2009, but withdrew from this when an application for judicial review was made.

The school contended it should have been allowed to rely on the old (incorrect) agreement in relation to on-going contracts in existence under the old agreement. It also contended it should have received repayment supplement on input tax repayments withheld in respect of periods prior to HMRC’s withdrawal from the agreement.

The FTT decided that the school made a single zero rated supply of books.  It did not need to deal with the other questions, but considered that while it did not have jurisdiction to consider the judicial review point on the run off of existing contracts, if it did it would have permitted the old VAT agreement to continue to apply to those contracts. If it needed to answer the last point it would have held the school was not entitled to repayment supplement, because if the returns had been correctly dealt with, there would have been no excess input VAT on which repayment supplement could be calculated.

HMRC’s view before the UT was that the school’s supply was of standard rated education services.  The UT considered that the FTT had identified the correct tests to apply, as set out in the CJEU case of Mesto (case C-12/12). This was to identify whether there was:

• a single supply where two or more elements are so closely linked that they form an indivisible single economic supply from the customer’s perspective, or
• is a single supply here one or more elements represent the principal supply and the other elements are ancillary, but take their characteristic for VAT purposes from the principal supply.

However the UT considered the FTT misapplied the test and failed to give adequate weight to certain matters, particularly the way the service was marketed and the provision of software to use certain of education manuals and the value attached to tutor marked assessments. Making its own assessment of the facts, the UT considered that the predominant supply was not one of zero rated books.

The UT also considered that while there was a legitimate expectation that HMRC’s change of view would not be retrospectively applied, there was no legitimate expectation that that view could deem the old agreement to apply to the ‘run-off’ contracts. Neither did the UT consider that the school was entitled to repayment supplement.

Implications

Determining whether there is a single predominant supply that determines the characteristic of anything else supplied with it is not always straight forward. The situation can become complex where HMRC has given a ruling which later turns out to be incorrect.  Please get in touch with a member of the Mazars indirect tax team for a review of the VAT treatment of your business transactions and how you can protect your business from changes in HMRC’s interpretation of how VAT applies to those transactions.