Universities: partnering and collaboration arrangements may not qualify for VAT exemption

In a recent case the Court of Appeal decided that the exemption from VAT for education is not available to a college which was not a constituent part of a university.

The provision by an "eligible body" of education is exempt from VAT in accordance with Item 1 of Group 6, Schedule 9 of the Value Added Tax Act 1994.  “Eligible body” is defined in Note (1) and includes “a United Kingdom university, and any college, institution, school or hall of such a university.”

SAE Education Limited (SAE) claimed that it was a 'college of' Middlesex University (the University) and therefore an eligible body so that its supplies of education were exempt from VAT. It won in the First-tier Tribunal but lost in the Upper Tribunal. The case was then appealed to the Court of Appeal for it to consider the meaning of 'college of a university' for the purposes of the VAT exemption.

The Court of Appeal said that 'college, school or hall of a university' has an obvious meaning in relation to collegiate universities such as Oxford, Cambridge and Durham where colleges and private halls, although legally independent and self-governing, provide the undergraduate and graduate students of the university and assume the primary responsibility for their tuition. In this case the colleges and private halls are an integral part of the structure of the university and their members make up the university's teaching staff and students. No student member of a college or hall is not a member of the university or takes a course of study which does not, if successful, lead to the conferment of a university degree.

In the 2011 case of Customs and Excise Commissioners v School of Finance and Management (London) Ltd, Burton J endorsed a multi-factorial approach to the determination of whether a college was a 'college of a university' for VAT purposes, with no single factor being treated as decisive. The factors were:

• the presence of a foundation or constitutional document establishing the college as part of the university;
• an absence of independence on the part of the college;
• financial dependence or interdependence on the university;
• the absence of distributable profit;
• entitlement to public funding;
• permanent links between the college and the university;
• physical proximity between the two;
• an obligation to offer a minimum number of university places;
• having a similar purpose to that of the university;
• providing courses leading to a degree from the university;
• having the courses supervised by the university and quality standards regulated by the university;
• admitting students as members of the university with university identity cards;
• submitting those students to disciplinary regulations and requirements of the university;
• entitling successful students to receive a degree from the university at a university degree ceremony; and
• being described as an associate/affiliated college of the university.

In the SAE case, Lord Justice Patten rejected the approach taken in the School of Finance and Management case. He said that in order to succeed a college must establish that it is a constituent part of the university with all the rights and privileges for its students and other members which that entails.

He said it was necessary to demonstrate some legal relationship between the university and college which establishes and confirms the status of the college. This could be a formal foundation or constitutional document or some other binding arrangement. He said the word 'college' was not confined to a body or institution within a university run on a collegiate basis. It would apply even if there was only one institution (apart from the university itself) which provided some of the university education services. However, he said the arrangement had to be one which "in a real sense makes the college a part of the university and not simply a suitable educational provider to whom the university has outsourced the courses which it has been unable for whatever reason to provide itself".

The judge said that the starting point in every case should be to look at the core legal relationship between the college as an institution and the university and this factor will ordinarily be decisive. He rejected the Upper Tribunal's view that recognition by the university of the college's status should be treated as conclusive of the status which the college in fact enjoys.

In the SAE case, the institution was part of a commercial group and was treated as an 'associate college' of the University, delivering a limited range of degree courses which led to a University degree.

Lord Justice Patten said that SAE was not part of the University in the constitutional or structural sense. The only document which gave it the right to call itself a 'college' of the University was a 'Special Associate College Agreement' which recognised and built on the special relationship between the parties in relation to the courses provided.

The judge said SAE was not in any legal sense a composite part of the University. It was a separate company operating in the educational field chosen because of its expertise in the field of audio and digital media technologies to provide a limited number of special courses which would qualify successful students for a degree from the University. He said that for that purpose it was necessary for the courses to be validated by the University in terms of qualitative assessment but that would have been and is necessary in the case of any university degree course which is outsourced to an external provider. The accreditation of SAE with its ability to validate its own courses was a vote of confidence in SAE's ability to set and assess its own courses, but it did not in any way alter the constitutional or structural relationship between the two bodies.

He said that the fact that SAE provided only a very small number of highly specialised courses for the University, that it was not accredited to run all the degree courses available at the University and students enrolled on the SAE courses had strictly defined rights in terms of the use of University facilities rather than becoming full members of the University by virtue of their acceptance as an SAE student, were  merely reflective of the fact that SAE was not part of the University with corresponding general rights of admission for all its students.

The judge said that SAE remained a separate commercial organisation which the University, for perfectly legitimate economic and other reasons, had chosen to provide some of its external degree courses. He said that the fact that the contractual arrangements with SAE were subject to periodic review and could be terminated in the event of concerns about academic standards were not consistent with SAE being institutionally part of the university.

Implications

As the decision disagrees with the previous case law on the meaning of 'college of a university' for the purposes of the exemption, this means it is not consistent with the view previously taken by HMRC, which applied the School of Finance and Management factors.

If the case is not appealed to the Supreme Court or if it is and the Supreme Court agrees with the Court of Appeal, we can expect HMRC to revise its guidance and to look more closely at the position of colleges which provide courses under collaboration or partnering agreement.

Colleges in this position need to consider the implications of this decision.

Christine Yuill is a tax expert at Pinsent Masons, the law firm behind Out-Law.com