In Imperial College of Science, Technology and Medicine v HMRC7, the FTT has concluded that an approved retrospective partial exemption special method (PESM) was intra vires. Although the FTT dismissed the claims for 1973-74 to 1980-81, HMRC will have to repay the residual input tax incurred between 1981-82 and 1993-94, subject to sufficient evidence being provided to it. 


Educational institutions make both taxable and exempt supplies of services. Consequently they are only able to make deductions of attributable input tax for part of their business which is taxable (ie non-exempt). Before the introduction of VAT in 1973, an agreement was reached between HMRC and the Committee of Vice-Chancellors and Principals of the United Kingdom in relation to the interpretation of the law concerning VAT within the university context (the CVCP Guidelines)8

The case of University of Edinburgh v C&E Commrs9 , concerned the university’s treatment of input tax deductions under the CVCP which had previously not incorporated residual input tax. It was held in that case that the university was entitled to its residual input tax. Following that decision, other universities followed suite, including the taxpayer in the instant case.

The taxpayer made a Fleming10 claim in March 2009, in the sum of £626,756.77 of residual input tax deductions for periods between April 1973 and July 1994 (the Claim). HMRC refused the Claim in February 2012 and the taxpayer appealed to the FTT. 

The taxpayer argued that a new PESM was in place which replaced the CVCP Guidelines. HMRC argued the contrary and maintained that the CVCP Guidelines were still in operation. Alternatively, HMRC submited that even if there was a new PESM in place, it had not been approved. 

Thus, the outcome of the Claim hinged on:

  • whether HMRC had given approval for the new PESM
  • whether the taxpayer would be able to support its Claim with sufficient evidence.

HMRC had already allowed repayment of earlier claims made by the taxpayer in 1993, 1994 and 1995 (the Earlier Claims). A further claim was successfully made in 1997 for the period from 1 August 1994 to 31 July 1997. As such, it was argued by the taxpayer that the repayments for this period were the result of HMRC having allowed, or approved, a new non-CVCP PESM. HMRC contended that the CVCP Guidelines were still in operation, and even if they were not, the new PESM could not be said to be approved simply by virtue of the repayments. 

The taxpayer sought to rely on a letter dated 4 January 1996 from HMRC, which stated:

“I therefore propose to accept the special method that has been used for calculations from Y/E 31/7/94 back to Y/E 31/7/74 … although the previous Officer did not reply in writing, the fact that

two repayments were made, gives, in effect, approval.”

HMRC argued that this did not amount to a formal approval letter. The taxpayer also relied on a later letter dated 27 November 1997 which read:

“… having perused previous correspondence between Andy Jamieson and Imperial College … formal approval of the method that had been used by the College was granted only for the Y/E74-Y/E94 claims …” 

HMRC maintained its argument that formal approval had not been given. 

A further issue in the appeal concerned something called the HEGCT grant (T-grant). Historically, educational institutions excluded the T-grant from the denominator, treating it as outside the scope of VAT, as follows:

Click here to view the formula.

HMRC had originally accepted the taxpayer’s analysis in relation to the T-grant, however, in 1999/2000, its policy changed. Consequently, HMRC argued that not including the T-grant as a denominator in any agreed PESM would be ultra vires its power as, following the decision in Kwik-Fit 11, any PESM which was not fair and reasonable was void. Accordingly, even if HMRC had given approval, the PESM would be invalid.

FTT’s decision

The FTT found in the taxpayer’s favour. HMRC had approved the new non-CVCP PESM. Although it was found that the evidential burden was not satisfied for the periods 1973 to 1981, for the remaining periods 1981 to 1994, HMRC’s approval of the Earlier Claims was not ultra vires and it was bound to repay in accordance with the Claim.

As to the T-grant, whilst it was acknowledged that HMRC had changed its policy, in the context of the Claim, the non-inclusion of the T-grant as a denominator did not breach the fair and reasonable principle and accordingly the PESM was found not to be ultra vires on this basis.

The FTT also concluded that there had been no requirement for the approval of PESM to be in writing for the purposes of Regulation 4 VAT (Amendment) Regulations12. The fact that previous repayments had been made had the effect of an approval.

The appeal has been adjourned for three months in order to permit the parties an opportunity to come to an arrangement. 


Although fact specific in many respects, this decision provides some helpful guidance on how the FTT will approach questions of PESM approval and retrospective application.

To read the decision click here.