Schools and colleges could be paying too much VAT
Many schools and colleges offer courses that enable pupils and students to develop both theoretical knowledge and practical skills in the subjects taught. For example, a college that provides a catering and hospitality course may have a restaurant so that students can gain practical experience as part of their education. A college that provides a performing arts course may put on shows for the same reason.
Members of the public will happily pay for a meal at a college restaurant or to be entertained at a school show. Is VAT due on income generated from these activities? According to HM Revenue & Customs (HMRC) the answer is ‘Yes!’
An alternative view is that the income is exempt from VAT because supplies of catering and entertainment by schools and colleges in these circumstances are not an end in themselves but a means of providing pupils and students with education. The reason schools and colleges carry out these activities is to provide pupils and students with education.
In 2015 the Court of Appeal considered the matter in a VAT case involving Brockenhurst College. It noted that the facts in the case were not unusual and the decision could have a wide impact. The interpretation and application of the relevant VAT exemption have yet to be clarified and the matter has now been referred to the Court of Justice of the European Union (CJEU).
What should schools and colleges do now? At the very least, schools and colleges should consider submitting a claim to HMRC to protect their VAT position. This is because there is a limit (broadly four years) on how far back a claim can be made to recover overpaid VAT.
Schools or colleges that wait until the CJEU has made a decision on the matter before submitting a claim may lose out on recovering a significant amount of overpaid VAT. A claim submitted now should cover the previous four years so that the school or college is entitled to a VAT refund for those years if the CJEU decides that this type of income is exempt from VAT. If the CJEU makes this decision within the next four years, a further claim can then be made for the intervening period.