In SAE Education Ltd v HMRC, the Supreme Court has set out the correct approach to determining whether a provider of education was a ‘college of such a university’ within the meaning of note 1(b), item 1, Group 6, Schedule 9, Value Added Tax Act 1994 (note 1(b)). To be such a college, the provider did not have to form a constituent part of the university. Its objects and the nature of its educational services had to be examined in order to determine whether there was such a level of integration that the provider was imbued with the objects of the university.
SAE Education Ltd (SEL) provides education in audio and digital media technologies. Middlesex University (MU) was a university within the meaning of note 1(b). Although it had never had any financial interest in SEL and no MU employee had ever been a director of SEL, the relationship between MU and SEL was very close. In 1998, SEL and MU agreed a memorandum of cooperation which provided for the teaching by SEL of Bachelor of Arts degree courses in Recording and Multimedia Arts at specified MU campuses. These courses were described as ‘validated collaborative programmes’ of MU. Overall responsibility for the courses was retained by MU but their day-to-day direction was undertaken by employees of SEL. The students were taught by SEL subject to MU’s quality safeguards, were assessed in accordance with MU’s regulations and were considered members of MU.
SEL appealed against HMRC’s assessments to VAT on the basis that supplies of education which it made were exempt from VAT under note 1(b), as they were supplies of education made by ‘a university, or any college of such a university’.
The FTT found for SEL and held that the ‘integration’ test expounded in School of Finance and Management (London) Ltd v Customs and Excise Commissioners, meant that it was a ‘college of’ the university within the meaning of note 1(b) and that its supplies of education were therefore exempt from VAT.
The UT disagreed and the Court of Appeal upheld the UT’s decision, holding that a body seeking to show that it was a college of a university within note 1(b) had to demonstrate the existence of some legal relationship which confirmed that it was a constituent part of the university in a constitutional or structural sense.
SEL appealed to the Supreme Court.
Supreme Court judgment
The appeal was allowed.
The Court noted that the starting point for a consideration of the proper interpretation of note 1(b) was articles 131 to 133 of PVD. These make clear that member states must exempt transactions involving the provision of, among other things, university education by bodies governed by public law having such education as their aim. Member states must also exempt transactions by other organisations which they have recognised as having similar objects to those governed by public law and which also have education as their aim. The general objective of the exemptions is to ensure that access to the higher educational services is not hindered by the increased costs that would result if those services were subject to VAT.
The Court said that Parliament had chosen to exercise the discretion conferred upon it by exempting from VAT the provision of education by a UK university and any college of such a university. The term ‘university’ is not defined in the Value Added Tax Act 1994. However, the conditions under which a body in the UK is entitled to use the word university in its title are regulated by statute.
The Court made the following observations:
First, for its activities to fall within the scope of note 1(b), any college of a university, as an eligible body, must provide education. Secondly, the supply of educational services is exempt only if it is provided by bodies governed by public law, or by other bodies recognised by the member state as having similar objects. Thirdly, there is nothing in note 1(b) which would justify limiting the scope of the phrase ‘college of such a university’ to colleges which are a constituent part of a university in a constitutional or structural sense. On the contrary, the Court noted that if satisfaction of such a constituent part test were required, it would effectively exclude commercial providers from the exemption as it is a test they will rarely, if ever, be able to satisfy. Fourthly, it is necessary to examine the characteristics of those educational services and the context in which they are delivered rather than the precise nature of the legal and constitutional relationship between the body that provides them and the university.
In assessing whether a body is a “college of such a university” the following five questions are relevant:
- whether there is a common understanding that the body is a college of the university;
- whether the body can enrol or matriculate students as students of the university;
- whether those students are generally treated as students of the university during the course of their period of study;
- whether the body provides courses of study which are approved by the university; and
- whether the body can in due course present its students for examination for a degree from the university.
In the view of the Court, the findings of fact of the FTT were sufficient to justify its conclusion that SEL’s activities were integrated into those of MU and that it shared the objects of MU. The FTT was entitled to find that SEL was a college of MU, within the meaning of note (1)(b).
This decision provides much needed clarity for those commercial higher education providers who must collaborate with UK universities because they do not have degree awarding powers.
If a body can establish the presence of each of the above five features, then it is likely to be considered a college of the university within the meaning of note 1(b). The Court made it clear that there may be 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 notwithstanding that not all of the above five features are present.
Private colleges providing university education as a college of a university who wish to claim VAT exemption should ensure that they are integrated with the university of which they are a college. While not needing representation on one another’s boards, they should ensure that they have and document an academic agreement. One of HMRC’s objections in this case was that the academic agreement with MU was not UK specific, but established a global relationship with the university via a Dutch subsidiary of an Australian company. This criticism was considered by the Court not to be fair, but a UK specific academic agreement may be advisable in documenting a common understanding of a college relationship.
A copy of the judgment can be viewed here.