Colchester Institute Corporation v The Commissioners for HMRC

Introduction

1. The Appellant, Colchester Institute Corporation (“ CIC ”) appeals against the VAT assessments issued by the Respondents (“ HMRC ”) as described in the Statement of Agreed Facts below. Although the assessments comprise underdeclared output tax and disallowed input tax, the appeals against the input tax element of the assessments are no longer pursued by CIC.

2. The issue between the parties in these appeals concerns certain grants received by Further Education Colleges, such as CIC, from government funding agencies and whether these are, for VAT purposes, “consideration” for a supply of services (education and/or vocational training) provided free of charge by the Further Education Colleges to students (the “ Consideration Point ”). Evidence

3. I was provided with a hearing bundle comprising 546 pages. This included a Statement of Agreed Facts, the College’s Notice and Grounds of Appeal, HMRC’s Statement of Case and a witness statement of Gary Horne FCCA the Deputy Chief Executive of CIC. Facts

4. Mr Horne has been the Deputy Chief Executive of CIC since June 2010. Before that he was CIC’s Financial Controller. He is responsible for finance and procurement, corporate development, estates and health and safety, information technology, human resources, marketing, funding, admissions, exams and registry services within CIC and reports directly to its Principal.

5. In his statement Mr Horne refers to two documents that he prepared: the Summary of Funding Processes and A Summary of Funding Allocation Processes in England 2022/2023 . These documents, which were included in the hearing bundle, summarise the processes and procedures for funding Further Education Colleges contained in documents produced by the Education Funding Authority (“ EFA ”), the Skills Funding Agency (“ SFA ”) and the Education and Skills Funding Agency (“ ESFA ”). The EFA and SFA were the Government agencies that funded Further Education Colleges before 1 April 2017 before they merged and were replaced by the ESFA which assumed their funding role from 1 April 2017.

6. Mr Horne explained that he prepared the Summary of Funding Processes for the purposes of CIC’s appeal to the Tribunal in 2017 (against HMRC’s rejection of its claim for repayment of overpaid VAT which was reported as Colchester Institute Corporation v HMRC [2018] UKFTT 479 (TC) ) and that it was accepted by all parties as setting out the correct position regarding the funding processes.

7. Copies of the Summary of Funding Processes have been provided to all those Further Education Colleges that have similar appeals to CIC’s. Statement of Agreed Facts

8. The parties produced the following Statement of Agreed Facts: Background of CIC (1) CIC is a body corporate incorporated as a further education corporation under the Further and Higher Education Act 1992 , registered for VAT under registration number XXX XXXX 66. Its main campus is in Colchester, Essex, but it has satellite facilities in Braintree and Clacton. The College is an “eligible body” for the purposes of Item 1, Group 6 of Schedule 9, Value Added Tax Act 1994 (“ VATA ”). (2) CIC’s courses are “vocational”, with the aim of providing its students with technical knowledge and skills. Many of CIC’s courses lead to accredited qualifications However, the CIC also provides non-accredited full cost and commercial vocational courses to meet the needs of local employers. Each of the courses provided by CIC which are the subject of this appeal are within the meaning of “education” or “'vocational training”, in Item 1 of Group 6 of Schedule 9 VATA. (3) Appeal TC/2017/06617 relates to the period from 1 November 2014 to 31 January 2015 (“ the Period 01/15 ”). Appeal TC/2017/06609 relates to the period from 1 February to 30 April 2015 (“ the Period 04/15 ”). Appeal TC/2017/06604 is in respect of the period from 1 May to 31 July 2015 (“ the Period 07/15 ”). Appeal TC/2017/06560 relates to CIC's VAT prescribed accounting period from 1 August to 30 September 2015 (“ the Period 10/15 ”). Collectively referred to as “ the Periods ”. (4) In the academic years 2014/2015 and 2015/2016 (as with preceding years) CIC was funded primarily by three government agencies: the Skills Funding Agency (“ SFA ”), the Education Funding Agency (“ EFA ”) and the Higher Education Funding Council for England (“ HEFCE ” This appeal relates to courses funded by the EFA and SFA (the “ Funding Agencies ”). (5) The EFA funded the provision of education and vocational training for students aged 19 and under, certain categories of students aged over 19, and students with learning difficulties aged between 19 and 25. For the year 2015/16 EFA funding amounted to approximately £18.5m. (6) The SFA funded all or part of the provision of education and vocational training for students aged 18 and over who have not achieved a specified level of academic qualification, or who are entitled to free education or training due to their personal circumstances and for courses related to areas of the economy that are treated as priority areas for learning. CIC's income in respect of such students amounted to approximately £4.2m per annum, (7) CIC receives tuition fees for other students who are not eligible for EFA, SFA or HEFCE funding. CIC also generates income from the rental of studio and other space in the evenings, weekends and in the holidays and other income from MoT testing and motor vehicle repairs. (8) The College provides courses to students from age 16 upwards. Students of all ages are educated or trained together, and there is no separation between them on grounds of age. (9) Funding by the Funding Agencies was provided pursuant to s 14 Education Act 2002 . CIC entered into separate agreements with the EFA and the SFA each year in relation to the funding that those agencies provided for the next academic year. The agreements were in standard form, and were not negotiable. The agreement with the EFA is described as the “Conditions of Funding Agreement”. The agreement with the SFA is described as a “Financial Memorandum”. The agreements are lengthy, and refer to (and incorporate by reference) a series of other documents (some of which are in electronic form and are published on the internet). Taken together, these agreements and the other associated documents set out the basis on which the funding agencies would fund CIC, and the obligations placed on CIC to deliver education and vocational training, and to provide information to the Funding Agencies. (10) Neither the SFA nor the EFA agreements set out the courses that CIC must provide. But CIC is only funded by these agencies for the provision of courses leading to qualifications that have been approved by the Government and which are listed on a website maintained by the Government. Theoretically, CIC could have provided courses leading to qualifications that have not been approved – but it would not have been funded by either the EFA or the SFA to provide such courses – and it therefore did not do so. (11) The amount paid by the EFA to CIC for any year is calculated on the basis of a national funding formula that incorporates various factors including student numbers in prior years, student retention, provision of higher cost subjects, disadvantaged students, and area costs. This is supplemented by additional funding for high needs students, bursaries and other financial support awarded to individual students. (12) The basic funding allocation was determined by the following funding formula: (Student numbers) x (National funding rate per student) x (Retention factor) x Programme cost weighting)] + (Disadvantage funding) + (Large programme funding) This amount is then multiplied by the area cost allowance. (13) The funding received by CIC from the EFA is determined by the national funding formula, and was not a negotiated amount. The only scope for negotiation related to student numbers in the event that CIC were to open a new campus for the College, for example. In such a case, the lagged student number formula would not reflect fairly the likely additional students, and in such circumstances the EFA might be prepared to increase the number of students for the purposes of the formula. The terms of the EFA’s funding agreement prohibits CIC from charging fees to students for the courses that it funds. (14) The amount paid by the SFA is based upon a monetary funding allocation calculated before the start of the year, but subject to a claw-back for under-delivery against allocation, which is reconciled at the end of the year (and repayable in the following January). No additional payments are made for over-delivery. (15) The SFA’s Financial Memorandum provides at clause 6.2 that: “The College is free to spend its funding as it sees fit providing it fulfils the conditions of funding imposed by the SFA.” (16) Students who are accepted by the College are issued with a document headed “Receipt”. This sets out the courses on which the student is enrolled. In relation to students whose costs are not met in full by one of the funding agencies, the Receipt will set out the fees payable for those courses, the amount paid on enrolment by the student, and any amount that remains outstanding. (17) In the case of a student whose costs are met in full by one of the funding agencies, the Receipt sets out a “fee” for the course (and any associated examinations), but also states that the student is entitled to a “waiver” and that the outstanding balance is nil. In relation to students whose costs are not met in full by one of the funding agencies, the Receipt will set out the fees payable for those courses, the amount paid on enrolment by the student, and any amount that remains outstanding. For students who are fully funded by the EFA or the SFA, the “fee” set out on the “Receipt” does not accurately mirror the funding actually received by CIC for that particular student – but will be the baseline funding amount per student for that course. However, the actual amount paid for that student by the funding agencies will depend on their respective funding formulae. (18) For the EFA, for example, this will reflect the number of students in the prior year, CIC’s retention rates, and disadvantage funding. So, the actual funding received from the EFA by CIC to deliver its courses could be more or less than the aggregate of the amount stated on the Receipts issued for EFA funded courses. (19) Similar kinds of issues arise in respect of SFA funded students – such that the amount actually received by CIC from the SFA (together with any fees charged to the student) in any year would not exactly match the aggregate shown on the Receipts issued in respect of SFA funded courses. The Lennartz Projects (20) CIC reached an agreement with the former Learning and Skills Council (“ LSC ”) to contribute funding to the rebuilding of CIC’s at Colchester – the Property Reorganisation Project (the “ Project ”). This was a £100m project, and the LSC agreed to fund 75%. Phase 1 of the project was the construction of two buildings (Blocks 1 and 6). These were completed in 2008 and the blocks were first brought into use in the VAT quarter ended 31 January 2009. (21) However, LSC was closed by the Government in March 2010. CIC had spent £40m on Phase 1 of the Project at the point when the LSC was closed – and received a contribution of only £12.5m from the LSC towards this. CIC were left with £27.5m unfunded. This shortfall was met from CIC's cash reserves and from a £17.5m loan from Barclays Bank. (22) As regards VAT, HMRC have always considered that the provision of education and vocational training to students, where funded by a relevant funding body, is not a “business” activity within the meaning of VATA – in other words it is an activity outside the scope of VAT. (23) Following the CJEU’s judgment in Lennartz C-97190, HMRC’s understanding of the position was that to the extent that education and vocational training was provided as part of its non-business activity, CIC would be entitled to reclaim the input tax incurred on Blocks 1 and 6, in the percentage that its use related to these non-business activities. However, CIC would subsequently be due to account for deemed output tax over the economic life of the blocks to the extent that their use was for ‘non-business’ purposes. On 1 February 2008, CIC’s then VAT advisor wrote to HMRC seeking to apply the Lennartz mechanism to Phase 1 of the Project. Following correspondence and discussions between HMRC and CIC’s advisors, a revised Partial Exemption Special Method (“ PESM ”) was submitted for approval to HMRC in October 2009, which was formally approved by HMRC on 23 December 2009. On 3 November 2009 CIC made a claim for recovery of input VAT in respect of the Project under the Lennartz mechanism. The claim was in respect of the elements of the buildings that were to be used for what CIC then considered to be ‘non-business’ activities. In December 2009, HMRC made a repayment of £2,087.477 to CIC – being input VAT (including Lennartz input VAT) less accrued output VAT on the deemed supplies arising under Part 15A of the VAT Regulations for the periods 01/09 to 07/09 inclusive. A further repayment of £138,329 was made by HMRC to CIC in November 2010 in respect of input VAT (including Lennartz input VAT) on construction costs, less accrued output VAT on the deemed supplies for the periods 01/10 to 07/10 inclusive. CIC continued to account for output VAT on deemed supplies under Part 15A of the VAT Regulations in respect of the non-business use of the Project buildings thereafter. The Lennartz Claim (24) On 23 April 2014, CIC's VAT advisor submitted a net claim in respect of over-declared output VAT for periods 04/10 to 01/14 minus input VAT overclaimed for the periods 04/10 to 07/10 totalling £1,522,277. The basis of the claim was that the provision of education to students was a business activity, irrespective of how it was funded. In consequence no part of the buildings within the scope of the Project were put to non-business use, and there was no requirement for CIC to account for deemed output VAT under paragraph 5(4) of Schedule 4, VATA (“ Paragraph 5(4) ”) and Regulation 116E. CIC argued that – subject to the four-year cap – the wrongly declared output VAT was reclaimable. A logical consequence of this claim was that the credit claimed for input VAT under the Lennartz mechanism was also wrongly reclaimed. To the extent that this input VAT fell within the four-year time limited period, it had to be repaid to HMRC. It was for this reason that the claim was netted-off to reflect the small sum of overclaimed input VAT that was still “in time” for adjustment. Lennartz Assessments (25) CIC’s advisors informed HMRC that CIC would, forthwith, and from period 01/15, not be accounting for deemed Lennartz output tax, but would pay any assessments properly raised by HMRC in respect of the Commissioners’ interpretation of the law, although it would appeal against the issuing of any such assessments. (26) Appeal TC/2017/06617 relates to an assessment in the amount of £132,830.60 for the Period 01/15. CIC’s original VAT return submitted, which was for repayment of £133,942.21. Output tax on the VAT return was increased from £0 to £154,492. This was in part Lennartz output tax in the sum of £102,934.73 for 01/15 period (that had not been accounted for on the VAT return). The further £51,557.37 output tax related to other output tax due (and not in dispute) but that had been removed in the initial 01/15 VAT return submission in order to make an adjustment to reclaim output tax the Appellant considered was overpaid for period 10/14. HMRC disallowed this correction as an amendment of this quantum is not permitted under regulation 34 of the VAT Regulations 1995 and HMRC did not agree that this was an error in the 10/14 return. With respect to input tax claimed, £51,377.36 claimed as input tax was disallowed as it was a correction for period 10/14 and an amendment of this quantum is not permitted under regulation 34 of the VAT Regulations 1995 (the sum of the two amendments in relation to the 10/14 adjustment that was not permitted was £102,934.73 and was the amount of Lennartz output tax that had been accounted for in 10/14. An additional £46,178.50 (as correctly identified in the review decision of 13/07/2017) was disallowed in respect of amounts claimed by way of input tax incurred in respect of goods and services in respect of which CIC had no right to deduct input tax. The balance of the adjustment of input tax (£14,798, subject to an error by HMRC of £73.15 in CIC’s favour) was in respect of incorrect calculations in not applying the right recovery percentage rate as per CIC’s PESM. (27) Appeal TC/2017/06609 relates to an assessment in the amount of £139,758 for the Period 04/15. CIC's original VAT return submitted, which was for a net repayment claim of £17,350.79. In an adjustment letter dated 23 March 2017, HMRC increased output tax due by £102,934.73, in respect of Lennartz output tax that had not been accounted for. With regards to input tax, £48,532.48 was disallowed in respect of amounts claimed by way of input tax incurred in respect of goods and services in respect of which CIC had no right to deduct input tax. The balance of the reduction £15,051.23 was in respect of incorrect calculations in not applying the right recovery percentage rate as per CIC’s PESM. (28) Appeal TC/2017/06604 relates to an assessment in the amount of £124,639.35 for the Period 07/ 15. CIC’s original VAT return submitted, which was for a net repayment claim of £41,049.93. In an adjustment letter dated 23 March 2017, HMRC increased output tax due by £102,934.73, in respect of Lennartz output tax that had not been accounted for. With regards to input tax, £48,532.48 was disallowed in respect of amounts claimed by way of input tax incurred in respect of goods and services in respect of which CIC had no right to deduct input tax. The balance of the reduction £14,222.07 was in respect of incorrect calculations in not applying the right recovery percentage rate as per CIC’s PESM. (29) Appeal TC/2017/06560 relates to an assessment in the amount of £64,061 .94 for the Period 10/15. CIC’s original VAT return submitted, which was for a net repayment claim of £68,470.15. In an adjustment letter dated 23 March 2017, HMRC increased output tax due by £83,090.47, being £98.965.88 in respect of Lennartz output tax that had not been accounted for less £15,875.41 being a partial exemption adjustment. With regards to input tax, £46,063.19 was disallowed in respect of amounts claimed by way of input tax incurred in respect of goods and services in respect of which CIC had no right to deduct input tax. The balance of the reduction £3,388.44 was in respect of incorrect calculations in not applying the right recovery percentage rate as per CIC’s PESM. (30) The input tax assessments are agreed and are not in issue in this appeal. Relevant Legislation

9. The legislation in force during the period with which these appeals are concerned, as contained in HMRC’s Combined Statement of Case in these appeals, is set out in the Appendix to this decision. Discussion and Conclusion

10. As noted above, the issue between the parties concerns the Consideration Point. It is common ground that if HMRC are unsuccessful on this issue the output tax assessed on CIC was not due and its appeal must succeed.

11. Although HMRC reserves its arguments on the Consideration Point, a matter due to be heard by the Court of Appeal in June 2026, the parties agree that the Consideration Point was determined against HMRC by the Upper Tribunal in Colchester Institute Corporation v HMRC [2020] UKUT 368 (TCC) at [65] – [89].

12. As I am bound by the decision of the Upper Tribunal it follows that the College must succeed on the Consideration Point. However, given that CIC no longer pursues its appeal against the input tax element of the assessments and it is agreed that these are not in issue, its appeal cannot succeed in its entirety.

13. Therefore, for the reasons above, the appeal is allowed in part. Right to apply for permission to appeal

14. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: