Colchester Institute Corporation (“CIC”) Upper Tribunal Case

Please find below a detailed summary of the Colchester Institute Corporation Upper Tribunal Case. The case is concerning because the UT has ruled that payment of what we would regard as a state grant is consideration for a supply.  

BUFDG OUTLINE OF THE UPPER TRIBUNAL  CASE

COLCHESTER INSTITUTE CORPORATION

Appeal number: UT/2019/0006

The full text of the case can be found here.

Background

Colchester Institute Corporation (“CIC”) is an FE college providing education and vocational training programmes to over 11,000 students. CIC is an "eligible body" for the purposes of Item 1, Group 6 (Education) of Schedule 9, VAT Act and the courses provided by the college are "education" or "vocational training" within the meaning of Item 1 of Group 6, Schedule 9 VATA.

Students either paid for their courses or their education was [partially or fully] funded by two government funding agencies: the Skills Funding Agency (SFA) and the Education Funding Agency (EFA). Detailed information on the progress of each student was provided to the SFA and EFA in the form of an ‘Individualised Learner Record Data’ (“ILR”).

When students enrolled on a course or courses, they were given a document headed ‘Receipt’.  Where the course costs were met in full by a funding agency, the Receipt set out a "fee" for the course and any associated examinations, stated that the student was entitled to a "waiver", and that the outstanding balance was nil. For students whose costs were not met in full by one of the funding agencies, the Receipt set out the fees payable for the courses, the amount paid on enrolment by the student, and any outstanding amount.

The amount of funding provided by EFA was determined by a national funding formula:

(student numbers) x (national funding rate per student) x (retention factor)x (Programme cost weighting) + (Disadvantage funding) + (Large programme funding) x area cost allowance

The SFA funding was provided on the basis of a funding allocation calculated at the beginning of the year, subject to a claw-back for under-delivery against the allocation. There were no additional payments for over-delivery.

The amounts of funding shown on the Receipts did not necessarily reconcile to the funding received from EFA and SFA.

In November 2009, CIC had submitted a “Lennartz” claim for over £2m of input tax incurred during 2009 on the construction of a building.  It had then subsequently accounted for output tax on deemed supplies – supplies of educations.  It submitted a claim in 2014 for overdeclared output tax of £1.5m on the deemed supplies that were still within the 4 year time limit, on the basis that the supplies were a business activity and there had never been a need to account for VAT on these supplies.

Questions considered in the UT appeal

The UT appeal was essentially on two points:

1. Whether the provision of free education and /or vocational training by CIC to students and funded by the SFA and EFA was a “supply of services for consideration”.  

(The FTT had agreed with HMRC that the funding was not “negotiated consideration paid for services, but rather a block grant provided subject to conditions”.)

2. Whether s 81(3A) and the principles established in the Birmingham Hippodrome Court of Appeal Case applied – i.e. could HMRC offset the input tax reclaimed against the overpaid output tax claim, even though the input tax claim had been made over 4 years before the claim for overpaid output tax was submitted.

The main cases considered by the UT in deciding the Colchester Case

The UT considered 3 main cases

1. Case C-151/13 Le Rayon d’Or SARL v Ministre de l’Économie et des Finances [2014] STC 1165

In Rayon d’Or, the taxpayer ran a residential care home for the elderly in France. It was paid a “healthcare lump sum” by the French sickness insurance fund which it argued fell outside the scope of VAT because the payments did not amount to consideration for VAT purposes. The French authorities argued that the payments were consideration for the healthcare services provided to the elderly care home residents. The French court referred a question to the CJEU. The CJEU held that the healthcare lump sum was consideration for the care provided by the RCHE to its residents. “Accordingly, the fact, in the main proceedings, that the healthcare provided to residents is neither defined in advance nor personalised and that the payment is made in the form of a lump sum is also not such as to affect the direct link between the supply of services made and the consideration received, the amount of which is determined in advance on the basis of well-established criteria”

2. South African Tourist Board v Customs Commissioners [2014] UKUT 280 (TCC) [2014] STC 2650.

In South African Tourist Board (the Board), the UT considered the position of the Board, a statutory body funded by the South African government with the objective of promoting tourism in South Africa. Each year, it entered into a performance agreement with the South African government to achieve its targets on increasing tourism and funding was subject to the Board achieving those targets.

The UT held that the performance agreement fell far short of demonstrating the degree and nature of reciprocity required to constitute the payments to the Board as consideration; there was a link but it was not one of mutual exchange of supply and consideration for that supply. The economic and commercial context supported the analysis that there was no supply, because this was a funding arrangement under the statute which lacked the required mutuality. There was no supply in so far as activities were funded in this way.

3. Kennemer Golf & Country Club v Staatssecretaris van Financiën (Case C-174/00). [2002] BVC 395

In Kennemer, the taxpayer was a golf club in Holland, and the questions was raised as to whether the annual subscription fees paid by members, who also paid admission fees for the use of the course, were consideration for services. The ECJ answered yes - there was a direct link between the subscription fees and services provided.

UT analysis in the CIC case

The UT analysis was:

• it did not consider that Rayon d’Or could be distinguished; the facts are comparable with the CIC case and the UT analysis must follow that of the CJEU (para 74)
• it agreed with the FTT that the statutory background is relevant but in this case could be ignored…..Rayon d’Or demonstrates that a supply analysis remains possible even where the payments are made pursuant to statute. Thus, we conclude that in this case the statutory background is a neutral factor, consistent with both parties’ cases (para 75)
• in considering the Rayon d’Or case it decided that:
  • “First, although the agreements did not state in terms which courses CIC was to provide, they did restrict the funding to courses within a list on the Government’s website. The essence was that the funding was for those courses; CIC was not at liberty to do anything else with the money. (para 77)
  • “Secondly, the amount paid was by way of formula and not negotiated….The formula was therefore highly specific to CIC’s outputs – to the number of students, the type of students, the number of courses and the type of courses.” (para 78)
  • “Thirdly, one way or another, CIC would have to pay back any part of the grant funding which was not used for supplying the courses as anticipated at the beginning of the year.” (para 79)
  • “Fourth, in order to give the funding agencies full sight of its activities, and to permit accurate application of the relevant funding formulae, CIC submitted an ILR for each student on a monthly basis, comprising over 200 fields of data for each student….With that information, the funding agencies were able to see how their grant funding had been spent.”(para 80)

The UT decision on the first question – whether supplies of education and training funded by the EFA and SFA was a “supply of services for consideration”   

The UT decision (see para 81-89) was that CIC was making supplies of education services, which were exempt from VAT, because:

• there was a direct link between the grants coming into CIC and the free courses;
• that the FT had made an error in distinguishing the Rayon d’Or from the CIC case;
• that the FT had made an error in looking for a link which was so direct that the payments could be matched to individual supplies; and
• that the FT had made an error focusing on the cost of supplies - the cost of supplies is irrelevant to the question of whether a transaction is to be regarded as for consideration

The UT decision on the second question – whether HMRC could offset input tax against overpaid output tax

The UT concluded that s 81(3A) did apply and HMRC were entitled to offset input tax claimed against overpaid output tax.