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HMRC internal manual

VAT Education Manual

Group 6 Item 1 Education, research and vocational training provided by eligible bodies: what is education?: pre-school education, nurseries, after-school clubs and playgroups

Many children under five attend:

  • state nursery schools;
  • nursery classes attached to primary schools;
  • playgroups in the voluntary sector;
  • privately run nurseries; or
  • after school clubs.

A number of schools provide early or pre-school education (before compulsory education). All children aged four should be able to access an early education place and some early education and childcare services offer free part-time early or pre-school education to three year olds. This is paid for at the discretion of local authorities. Places for children under three in voluntary or private pre-school settings are paid for largely by parents.

The Children Act 1989 as amended by the Care Standards Act 2000 provides the legal framework which sets national standards in most private and voluntary sector children’s services; also under this legislation OFSTED has responsibility for the registration and inspection of childcare for children under the age of 8, (people running day care services for children under 8 must register with OFSTED).

OFSTED will register and inspect the following services:

  • day nurseries;
  • playgroups;
  • private nursery schools;
  • after school clubs and holiday play schemes open for 6 days or more per year;
  • childminders; and
  • crèches.

The provision of pre-school education (without charge) is non-business; breakfast clubs and after-school child-minding/homework clubs are also non-business in the local authority sector even when a charge is made. This is on condition that the school offers the service strictly to its own pupils and that the fee charged is designed to no more than cover overhead costs.

The provision of a day-nursery is a business activity. If the provider is registered with OFSTED, which is most likely as there are few exemptions from registration, then the supplies are an exempt supply of welfare services, as they are being provided in a state-regulated institution (VAT Act 1994, Schedule 9, Group 7, Item 9 refers). Otherwise, the supplies will normally be standard-rated. However, if the supplier is an eligible body and there is clear evidence that the supplies follow an educational curriculum, exemption under Group 6 may be appropriate. If you come across such cases you should consult the Education Unit of Expertise or VAT Reliefs Policy Team before giving a ruling.

Exemption extends to the supply of meals and drinks for the children, as well as other sundry items provided as part of the children’s care such as picture books, crayons and toys. It does not however, extend to supplies such as children’s parties or day trips where the supply is advertised as a separate and identifiable package (this is a provision of entertainment rather than care), or to supplies of meals and drinks to staff and visitors.

Where a local authority provides nursery services to children in care under obligations imposed by the Children Act 1989, this is considered to be non-business.

Following the High Court decisions in Yarburgh Children’s Trust (Ch D 2001, [2002] STC 207) and St Paul’s Community Project (Ch D 2004, [2005] STC 95; [2004] EWCH 2490 (Ch)) it has been accepted by HMRC that, where a charity supplies nursery and crèche facilities for a consideration that is fixed at a level designed to only cover its costs, this is not a business activity for business purposes.

The change in HMRC policy was announced in Business Brief 02/05 which reaffirmed the business test announced in 04/03 as set out below.

Is the activity a serious undertaking earnestly pursued? This considers whether the activity is carried on for business or daily work rather than pleasure or daily enjoyment.
Is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity? When considering this test one should consider how frequently the supplies will be made.
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?  
Is the activity conducted in a regular manner and on sound and recognised business principles?  
Is the activity predominately concerned with the making of taxable supplies for a consideration? This has in many instances been seen as the most important and arguably the most problematic indicator. In the appeal of The Institute of Chartered Accountants England and Wales, the House of Lords found that the test must be read as asking ‘what is the real nature of the activity’ - in other words, is the real nature of the activity the making of taxable supplies for consideration or is it something else?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?