28th May 2021
Colchester Institute Corporation (CIC) is a further education college which like most such colleges, is predominantly grant funded. At the time of the judgement it received grant funding of £31.9m compared to tuition fees charged to students of only £700k.
CIC had assumed that it was carrying out grant funded, non-business activities and acted accordingly. They then constructed a building and, in accordance with what is known as the Lennartz principle, deducted input tax in full on this, but accounted for output tax on deemed supplies of education and vocational training, thus securing a cash flow advantage. The Lennartz mechanism is no longer used and so the reason for the case is of somewhat academic interest, but what follows is not.
CIC then decided that it was engaged in business activities after all and that the grant funding was in fact third party consideration for exempt supplies of education and vocational training. CIC therefore submitted a claim for repayment of the deemed output tax. It did offset against this some of the input tax on the construction costs but most of this was time barred such that it ended up having recovered most of its input tax, without accounting for output tax.
Unsurprisingly, HMRC took issue with this and refused to repay the output tax. It argued firstly that there was no supply for consideration and that CIC was engaged in non-business activities as it had originally believed. On the contrary, S81(3A) of the VAT Act allows them to bring into account all of the input tax on the construction costs which under normal rules would be time barred. The output tax on the construction costs would offset any output tax that was repayable if CIC succeeded in winning its main argument that it was in business.
HMRC was supported in this by the First-tier Tax Tribunal which held that CIC was engaged in non-business activities. Then in late December last year, the Upper-tier Tribunal upheld an appeal by CIC and said it was making exempt supplies in return for third party consideration in the form of grant funding.
However it went on to uphold HMRC’s alternative view that it could bring the input tax back within time, thus wiping out the claim. In a sense CIC lost the battle but won the war.
The decision was a surprising one in many respects but both judges are experienced, one of them having acted as Counsel both for and against HMRC in many VAT cases prior to becoming a judge as well as having acted for a number of clients of haysmacintyre.
This is an important case as it opens up the possibility that other types of grant funding might actually be in consideration. This means that the grant recipients are actually engaged in carrying out business activities with possible implications for VAT recovery.
On 26 May, HMRC published a Brief stating that they do not intend to appeal the case because they won on their alternate grounds, but that they do not agree with the Upper Tribunal’s decision on the primary point and will be seeking to find another case to appeal against to overturn the Upper Tribunal’s decision.
This decision is extraordinarily cynical of HMRC as it means whoever’s case that is chosen to challenge the CIC judgement will know that they will have to go to the expense of a First-tier Tribunal hearing knowing HMRC will lose because they will be bound by the Upper Tribunal’s decision, but knowing also that HMRC will then appeal the decision to the Upper Tribunal to be followed by a further appeal to the Court of Appeal. All of this will come at considerable expense to the unlucky person they select as their test case.
A more principled approach would have been to appeal the Upper Tribunal against the decision in CIC and run the risk of losing on both grounds, though that risk seems incredibly small.
We also have the extraordinary position where instead of HMRC saying that they disagree with a judgement and intend to appeal, they are effectively saying we are going to ignore the law.