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HMRC internal manual

VAT Education Manual

Group 6 Item 4 Closely related goods and services sold to third parties

This guidance explains the HMRC’s position following the Brockenhurst College case (C-699/15).  Revenue & Customs Brief 39/14 is hereby cancelled.

Following the judgment in Brockenhurst, further education colleges and other bodies are able to treat certain supplies to the public in the course of education or vocational training undertaken by students as exempt from VAT, provided they meet the conditions described below.

The Brockenhurst Case

The Brockenhurst case concerned vocational training where the students learnt a particular trade through practice (catering, hospitality, performing arts) and generated ‘sales’ by doing so.

Brockenhurst College challenged a decision rejecting voluntary disclosures for:

  1. the supplies made from its restaurant, used for training chefs, restaurant managers and hospitality students. The claim was made on the basis that these were exempt supplies of education and not standard rated supplies of catering.
  2. the tickets for concerts and other live performances put on by students as part of their educational courses. These were similarly claimed to be exempt.

Both the First Tier Tribunal and the Upper Tribunal concluded that the supplies in question were exempt as being closely linked to exempt supplies of education made by the college concerned because:

(a) the College was an eligible body and so its principal supplies were exempt supplies of education;
(b) the supplies were integral and essential to those principal exempt supplies;
(c) the supplies were made at less than their cost;
(d) the supplies were not advertised to the general public. Instead, there was a database of local groups and individuals who might wish to attend the restaurant or performances; and
(e) the supplies were not intended to create an additional source of income for the College.

The Court of Appeal referred the matter to the Court of Justice. The latter Court noted certain key factual findings:

  • The restaurant and stage facilities were provided for the sole purpose of enabling students enrolled on courses to learn practical skills under the supervision of tutors and were an integral part of the courses concerned. They were thus essential to the type of education being provided.
  • The restaurant and the performances were only open to a limited public, composed of people taking an interest in such events who had registered in a database in order to receive newsletters about the events.
  • The restaurant functions were all undertaken by students in what was effectively a classroom, the price of meals was set at only about 80% of cost, and if restaurant bookings did not meet a minimum number, the event was cancelled.  All the events in question were offered at a reduced price as part of the students’ education.
  • It was evident that the basic purpose of the transactions was not to obtain additional income from supplies that were in competition with those of commercial enterprises and the Court saw them as provided under conditions that were quite distinct from services provided by commercial services.

The court also confirmed that services could only be regarded as closely related to education where they were supplied as ancillary services to a principal exempt supply of education and thus enhanced the benefit of the education provided.

HMRC policy following the Judgment

HMRC accepted the supplies concerned were exempt.

HMRC will apply the judgment in the case to other cases where the facts similarly indicate that the services are not being provided in competition with commercial enterprises. This will be the case where the services are not offered to the general public through advertising, including over the internet, and the costs of providing the supplies to the general public clearly exceeds any income generated from that activity.

HMRC will apply the guidance of the Court on a case by case basis (for example where cases have been stood behind Brockenhurst) to decide whether the supplies are exempt as being closely related to exempt supplies of education, or are standard-rated.

There are three main criteria that must be satisfied:

  1. The education in question must be being provided by way of business.

Most further education is fully grant funded, and as such is regarded as a non-business activity. If a Further Education College has claims which relate to both grant-funded education and exempt education for fees, HMRC will require the proportion of students whose education is ‘business (i.e. fee-paying, not fully grant funded) in each case. This will vary from one course to another, but is likely to be in the region of 15-20%.

  1. The activity in question must be student-led and ‘essential’ to their education.

In the Brockenhurst case, both the training restaurant and the theatrical productions were staffed by students, for whom the activity was akin to a classroom. The wording ‘essential to the transactions exempted’ comes from the mandatory condition in Article 134 (a) of the Directive.

  1. The activity must not have the purpose of generating additional income for the body in direct competition with commercial enterprises.

In Brockenhurst, the training restaurant only provided meals to those who were on a restricted list, and only recovered 80% of the cost of the food. Hence they were not in competition with commercial enterprises, and were not generating additional income. Claimants must therefore be prepared to demonstrate whether the restaurant (theatre, beauty salon or other activity) is run so as not to generate additional income, and to provide figures which demonstrate this.