Supplies of education and fiscal neutrality

The Court of Appeal has held that three Alternative Providers (APs) of higher education were entitled to exempt from VAT their supplies of education on the basis of the direct effect of the provisions of the Principal VAT Directive: St Patrick’s International College Ltd and others v HMRC [2026] EWCA Civ 852. The Court held that, based on the earlier Court of Appeal decision in LIFE [2020] EWCA Civ 452, the UK’s failure to provide for the VAT exemption of such supplies was in breach of the EU principle of fiscal neutrality, since the courses provided by the APs were indistinguishable from higher education courses offered by universities and other eligible bodies from the perspective of the typical customer.

The decision is highly significant for the private higher education sector and potentially opens the way to substantial repayment claims. However, since the decision is based on the direct effect of the underlying provisions of the PVD and the principle of fiscal neutrality, its impact on the post-Brexit period may be very limited. In addition, in view of comments made in the case, it seems highly likely that HMRC may choose to appeal the issue to the Supreme Court.

Background

The case concerned VAT assessments issued by HMRC on supplies of education made by three taxpayers, each of which made supplies of higher education.

Supplies of education provided by “bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects” are exempted from VAT by Article 132(1)(i) of the Principal VAT Directive (PVD). This is implemented in the UK by VATA 1994 Schedule 9 Group 6 which exempts the provision by an “eligible body” of appropriate education and vocational training.

The taxpayers offered higher level and degree-level courses but were not universities or further education corporations (FECs) and did not qualify as an “eligible body” for the purposes of VATA 1994 Schedule 9 Group 6. The taxpayers contended that their exclusion from the exemption was in breach of EU law, because the UK had failed to implement the provisions of Article 132(1)(i) consistently with the EU principle of fiscal neutrality. In particular, the taxpayers pointed to the CJEU decision in Rank that “the principle of fiscal neutrality must be interpreted as meaning that a difference in treatment for the purposes of VAT of two supplies of services which are identical or similar from the point of view of the consumer and meet the same needs of the consumer is sufficient to establish an infringement of that principle”.

The FTT and Upper Tribunal both dismissed the appeals. The UK was entitled to limit the scope of the exemption to bodies governed by public law and to recognise universities as sufficiently similar. The regulatory regime for universities etc did not apply to the taxpayers and, as such, they were not in a comparable position to them. Equally, the taxpayers were not comparable to FECs which are required to be charities. The UT, in particular, concluded that where a "supplier condition" applies, fiscal neutrality does not require a consumer-perspective test as set out in the decision in Rank; rather, comparability falls to be assessed by reference to the regulatory framework governing the respective bodies.

Court of Appeal Decision

The Court of Appeal has held that it was bound by its own earlier decision in LIFE, which had not been cited to the Upper Tribunal. In LIFE, the Court had considered the welfare services exemption under Article 132(1)(g) of the PVD, which, like Article 132(1)(i), contains a supplier condition, and had concluded that the correct question for fiscal neutrality purposes is whether, from the point of view of the typical consumer, the supplies in question are sufficiently similar.

HMRC acknowledged that LIFE was inconsistent with its position, but argued that the Court should depart from it on the basis that the reasoning in LIFE was insufficiently transparent to constitute a binding ratio. The Court rejected this argument. The Court in LIFE had set out the Rank principles, summarised the test, applied it to the supplier condition in Article 132(1)(g), and then tested that against the facts, a process the Court described as transparent.

Applying the Rank test it was clear that from the perspective of a typical consumer that the courses offered by the APs were not materially distinguishable from equivalent courses offered by universities and other eligible bodies. HMRC did not contend otherwise before the Court, and did not challenge the appellants' submission that, if the Rank test was the correct approach, Parliament's exclusion of APs from the exemption constituted a breach of fiscal neutrality.

Comment

Whilst the decision is an important victory for private higher education providers, it should be noted that the decision is based on the requirement to follow the LIFE precedent rather than any endorsement of the taxpayers’ substantive arguments. Indeed, Miles LJ noted that he considered there to be “considerable force” in HMRC’s position on the underlying merits. Accordingly, an appeal to the Supreme Court seems highly likely.

It should also be noted that the appeal concerned pre-Brexit periods when the taxpayers were able to benefit from the direct effect of the underlying provisions of the PVD. Since Brexit there have been significant restrictions on the ability of taxpayers to rely on general principles of EU law (such as fiscal neutrality) to bring a claim and the supremacy of EU law (and therefore direct effect) has, in principle, been removed in the UK by the Retained EU Law (Revocation and Reform) Act 2023 from 1 January 2024. In addition, the Court expressly declined to address the question whether the principle of EU law primacy could even apply to the Court of Appeal in the light of the legislative abolition of the supremacy of EU law following the UK's exit from the EU, noting that the point had not been argued.