Meaning of ‘supplies closely connected to education’

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The Court of Appeal has decided to refer the case of HMRC v Brockenhurst College [for a preliminary ruling by the European Court (CJEU). The case relates to the VAT exemption applying to supplies ‘closely related’ to education. The college taught courses in catering, hospitality and performing arts. To enable students to learn practical skills, the college ran a restaurant in which the students provided the catering and the restaurant charged for the meals at 80% of the cost. The college’s performing arts students also staged concerts and performances for paying members of the public. The issue was whether the supplies of restaurant and entertainment services were exempt because they were ‘closely related’ to the provision of education.
The Court found that the interpretation and application of the exemption to the facts of the case were not clear. Furthermore, the facts were not unusual, so that this decision has a potentially wide impact. The Court of Appeal therefore decided to refer the issue to the CJEU for a preliminary ruling.
Why it matters
The UT had found for the college, on the basis that the exemption should not be applied narrowly and that there was no requirement that the ‘closely related’ ‘supply had to be made to the same recipient as the principal supply of education. However, HMRC pointed out that it is a long-established principle that exemptions from VAT must be interpreted narrowly. They take the view that a supply to someone other than those who are being trained/educated cannot be one of ‘education’ or one that is ancillary to education. Given the potentially very wide impact of the case to many bodies which provide exempt education (not just colleges but also arts organisations), the ultimate decision of the CJEU will be important.

Sveda and free admission

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In recent years HMRC have developed a policy of restricting input tax recovery using a ‘cost component’ approach. Under this policy they have argued that VAT is recoverable on goods and services only if they can be shown to be ‘cost components’ of a taxable supply made, and in addition that for VAT to be fully recovered the cost of the goods and services bought must be shown to be funded by that taxable supply.
Recently the European Court rejected this approach.  Sveda (Case C-126/14),  a corporate business, not a charity, incurred VAT on the cost of capital assets as part of a government grant-funded Lithuanian heritage trail, where the public were allowed in free, but in which Sveda operated a souvenir shop and tearoom.  HMRC attended the hearing and in it’s view Sveda’s VAT recovery on the costs of building the park should have be restricted because the costs would not be recovered from the sales income in the shops. The AG had rejected this and considered that the question of VAT recovery in this case was not determined by reference to whether the taxpayer intended to factor the costs into the price of its output transactions.

The Court followed the AG and ruled that EU law permits a taxpayer to reclaim input VAT on the acquisition of capital investment goods (the trails, etc.) which are directly destined for free use by the public, but where they can be used for a secondary purpose as a means to attract visitors to a place where the taxpayer intends to supply goods and/or services.
The AG had said that the right to deduct input tax depends upon the objective use or purpose of the purchase. In this case, the facts were that the objective purpose of the trail was to attract visitors to the café and shop. The fact that the assets were primarily used for free access by the public did not break the link with Sveda’s taxable supplies. In fact, the AG said this link could only be broken if the recreational path was used primarily to make an exempt supply or if the use of the recreational path was used primarily by Sveda for the purpose of a non-economic activity. Here the referring Lithuanian national court had specifically ruled that the activities of Sveda were economic activities, and thus there was no question of non-economic use of the recreational paths by Sveda.
Why it matters
This is a significant case for organisations offering free admission to attractions or buildings, as HMRC had recently begun to argue that even where taxable outputs were being made the VAT on costs could have no “direct link“ to a taxable supply unless it could be demonstrated that the costs had been incorporated into the price of a taxable output. Where grant funding was received this made full VAT recovery impossible, and that argument was in our view wrong, and is now clearly unsustainable. Similarly, some HMRC officers have recently insisted that grant funding is automatically indicative of a non-business activity and requires input tax to be restricted– this is also unsustainable.