This is the third in our series of articles about the simplification of the VAT system as detailed in the Office of Tax Simplification (OTS) report published on 7 November.
This article continues the discussion about multiple VAT rates and focuses on the unsatisfactory way they apply, in particular to education and welfare services. This is because the specific way in which the UK has implemented these exemptions has not kept pace with the way in which these services are now delivered. It is hard to find a logical approach to exemption as it is applied by the UK in these areas.
The OTS report recommends a review of how these exemptions are applied to remove these anomalies.
For example in most cases, the education exemption is fixed by reference to the nature of the institution. Is it an eligible body? Not for profit bodies can always exempt supplies of education. However, if you teach English (but not any other language) as a foreign language you qualify for VAT exemption whether you are a charity or a commercial enterprise and irrespective of the quality of the education you provide. Contrast that with a commercial higher education provider which must either be a ‘university’, a title bestowed on the institution by the Privy Council, or a ‘college of a university’ .
The way in which higher education is delivered is changing. Many universities now partner with commercial bodies so that students have a wider choice of degrees, outside the more traditional curriculum and the students on these courses are awarded degrees from the university based on the assessment of the commercial partner organisation. Even if the commercial higher education provider has degree awarding powers granted by a state regulator, as things stand it would still need to charge 20% VAT in comparison to the multitude of institutions in the more traditional sector that do not, just because of the word ‘university’ in their title. There have been multiple cases on the meaning of ‘college of a university’ and the latest involves SAE Education, recently decided for HMRC in the Court of Appeal.
Read more about SAE here in the article published recently in WONKHE.
For welfare services, unless delivered by a not for profit body or a public body, exemption is driven by state regulation (for example CQC or OFSTED), rather than the nature of the body providing the service. But is it right that a charity is able to exempt all welfare services irrespective of whether it is state regulated, but a commercial provider must rely on both being state regulated and further ensure that the particular service it provides is subject to state regulation? Although I would assume this never happens, this does mean that a charity could ignore all of its regulatory obligations and benefit from VAT exemption, whereas a commercial institution abiding by all of its regulatory obligations, potentially ends up with a need to charge VAT. HMRC are pursuing two cases Learning Centre and Life Services and arguing that the lack of state regulation for adult day care services should render these services liable to VAT. If the appellants lose their arguments, this would confirm the unsatisfactory position that VAT should be charged on day care services, in contrast to a local authority providing the same service as a non-business activity.
One other area ripe for an overhaul are the different VAT rules applied to central and local government, which will be brought into sharp relief by the ongoing merger of healthcare and welfare services. A local authority can recover all of the VAT it incurs, in contrast with a NHS body, which is only entitled to recover VAT on certain ‘contracted out services’. When services are merged and the lines are blurred in terms of the person commissioning the service and the person responsible for its delivery, it can lead to unintended consequences in relation to both charging and recovering very large sums of VAT.
I think each of the above examples amply demonstrate the law of unintended consequences. HMRC are responsible for the enforcement of UK VAT law, which is plainly at odds with the desire of the Department for Education and its wish to broaden the base of higher education providers; also with the increasing need of local government to look to the private sector for the delivery of basic care to its local residents and finally VAT rules which are not fit for purpose across different arms of the broader public sector.
The OTS report rightly recommends a greater focus on the nature of the service rather than the status of the provider or the recipient. This would certainly help to sweep away a number of anomalies, not least those mentioned above. Another suggestion to scrap VAT exemptions and replace them with a reduced rate of VAT is also a very interesting concept and given the extensive government funding of bodies in these sectors, an appropriate rate may be possible, which balanced budgets across both the relevant government departments and the local authorities concerned.
The OTS report suggests that reform of exemption is a medium to long term objective, better undertaken after Brexit. However, in my view, there is arguably scope within the current framework to remove these anomalies. The EU exemptions permit member states to exempt the provision of services by bodies recognised by the member state:
- in relation to education – to bodies having similar objects to universities
- in relation to welfare – to bodies devoted to social wellbeing
Further the Principal VAT Directive already permits the application of a reduced rate of VAT to welfare services which fall outside the exemption.
Follow this link to the OTS Report