SAE Education Ltd v HM Revenue & Customs [2019] UKSC 14

SAE Education Ltd (Appellant) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) [2019] UKSC 14 was an appeal to the Supreme Court from the Court of Appeal [2017] EWCA Civ 1116, concerning whether the appellant’s supplies of education to students in the United Kingdom were exempt from value added tax under Note 1(b) to Item 1, Group 6 of the Value Added Tax Act 1994. The Supreme Court allowed the appeal.

The appellant SEL contended that its supplies were exempt because it was a college of Middlesex University. The Commissioners for Her Majesty’s Revenue and Customs had raised assessments in respect of SEL’s accounting periods from 1 May 2009 to 29 February 2012. The First-tier Tribunal allowed SEL’s appeal in a decision dated 28 February 2014, finding that SEL, as the United Kingdom arm of the SAE Institute, had been an “Associate College” of Middlesex University and was a college of that university within the meaning of Note 1(b). The Upper Tribunal allowed the Commissioners’ appeal on 25 April 2016, and the Court of Appeal dismissed SEL’s further appeal on 28 July 2017.

SEL is an English company and a subsidiary of SAE Technology Group BV, a Dutch company, both part of the SAE group which trades worldwide under the name SAE Institute. Since 1 May 2009 SEL has taught higher education courses in the United Kingdom validated by Middlesex University. The relationship between the SAE Institute and Middlesex University dated back to 1998, when a memorandum of cooperation provided for the teaching of Bachelor of Arts degree courses described as “validated collaborative programmes” of Middlesex University. Over subsequent years various memoranda of cooperation and partnership agreements were entered into. In September 2010 the SAE Institute was accredited by Middlesex University to validate, provide, monitor and review courses of study leading to Middlesex University BA degrees in Recording Arts, Film Making, Digital Film Animation and Multimedia Arts. In July 2011 the parties entered into a Special Associate College Agreement recording their successful cooperation over 14 years and describing a long-term partnership building upon the existing status of SAE-UK as a Middlesex University Associate College.

The legislative framework began with the First Council Directive 67/227/EEC and the Second Council Directive 67/228/EEC of 11 April 1967 on harmonisation of turnover taxes. Article 10 of the Second Directive gave member states broad discretion to determine exemptions beyond specified supplies. The Sixth Council Directive 77/388/EEC of 17 May 1977 provided in article 13A(1)(i) for exemption of children’s or young people’s education, school or university education, vocational training or retraining provided by bodies governed by public law or by other organisations defined by the member state as having similar objects. Article 13A(2) gave examples of conditions member states might impose, including that bodies should not systematically aim to make a profit and that exemption should not create distortions of competition. These provisions were recast in the Principal VAT Directive, Council Directive 2006/112/EC of 28 November 2006, with article 132(1)(i) providing for exemption of the provision of university education by bodies governed by public law or by other organisations recognised by the member state as having similar objects, and article 133 setting out examples of conditions member states may impose.

The Court of Justice of the European Union considered these provisions in Minister Finansów v MDDP sp z oo Akademia Biznesu, sp komandytowa (Case C-319/12) [2014] STC 699. The CJEU explained that articles 132(1)(i) and 133 do not preclude educational services provided for commercial purposes by bodies not governed by public law from being exempt from VAT, but the exemption applies only if services are provided by bodies governed by public law or by other organisations recognised by the member state as having similar objects. Member states have discretion in laying down rules defining those similar objects, but must observe the limits of that discretion in applying principles of EU law, particularly the principle of equal treatment, which in the field of VAT takes the form of the principle of fiscal neutrality. The CJEU held that article 132(1)(i) precludes a general exemption of all supplies of educational services without consideration of the objects pursued by non-public organisations providing those services.

The United Kingdom implemented the Directives through the Finance Act 1972 and subsequently the VAT Act. Schedule 9, Group 6, Item 1 of the VAT Act exempts the provision by an eligible body of education. Note 1(b) defines an eligible body as including “a United Kingdom university, and any college, institution, school or hall of such a university”. Parliament has not expressly limited the bodies recognised in Note 1(b) to those which do not make a profit.

The domestic authorities included the decision of Burton J in Customs and Excise Comrs v School of Finance and Management (London) Ltd [2001] STC 1690, which considered a non-exhaustive list of 15 relevant factors (the “SFM factors”) for determining whether a body was a college of a university. The Court of Appeal decision in Customs and Excise Comrs v University of Leicester Student’s Union [2001] EWCA Civ 1972; [2002] STC 147 considered whether a student’s union was a college, institution, school or hall of a university. Peter Gibson LJ held that Note 1(b) covered both a university itself and separate entities which are parts of that university, and that the common characteristic of those four entities was that they are suppliers of education. Arden LJ considered that the expression “of the university” denoted a state of affairs whereby the university is an umbrella organisation which provides education and related services in conjunction with other bodies or wherein the body in question has some form of status under the university statutes. In Finance and Business Training Ltd v Revenue and Customs Comrs [2016] EWCA Civ 7; [2016] STC 2190, Arden LJ held that Parliament had decided to draw the line for universities at those colleges, halls and schools which are integrated into universities and which are imbued with the university’s objects. She considered that the combination of Note 1(b) and the SFM factors met the requirements of legal certainty.

The First-tier Tribunal carried out a multi-factorial assessment using the 15 SFM factors and concluded that SEL had been an Associate College of Middlesex University and a college of that university within the meaning of Note 1(b). It attached greatest weight to the status of Associated College combined with Accredited Institution status, long-term links and similar purposes, courses supervised by the university with regulated quality standards, and conferment of degrees by the university at university degree ceremonies.

The Upper Tribunal adopted a different approach. It held that it was necessary to determine first whether the parties had a common understanding of their relationship, then whether they had a common understanding that the undertaking was a college of the university, then whether the relationship was sufficiently close to justify that conclusion (applying the SFM factors), and finally whether the undertaking supplied university-level education. The UT considered that the FTT had failed properly to take the first two steps and would have answered them in the negative. It found that the agreements were made between the SAE Institute and Middlesex University, that the SAE Institute was not a college of Middlesex University, that SEL had the same status, and that Middlesex University was initially unaware of SEL’s existence as a corporate entity.

The Court of Appeal adopted an approach described as more “hard edged” than previous decisions. Patten LJ held that the test required the relevant undertaking to show it was a part of the university in the sense of being a constituent part with all the rights and privileges for its students which that entails. He considered that this required demonstrating a legal relationship establishing and confirming the status of the undertaking, making it a constituent part of the university in a constitutional or structural sense. He found it had not been established that SEL was a part of Middlesex University in that sense. Patten LJ examined the Finance Act 1972 definition of university, noting that at that time the relevant EU provisions gave member states broad discretion as to exemptions. He considered the phrase “college, school, or hall of a university” in the context of United Kingdom universities as they operated in 1972, focusing on Oxford and Cambridge colleges which, though self-governing and legally independent, formed an integral part of the structure of their universities. He found support in the Education Reform Act 1988 and the Education (Listed Bodies) (England) Order 2010, noting that section 216(3)(b) of the 1988 Act was all but identical to the FA 1972 provisions in defining what was included in a university, and that both sets of provisions were seeking to identify the constituent parts of a university.

Lord Kitchin (with whom Lord Reed, Lord Sumption, Lord Briggs and Lady Arden agreed) held that the Court of Appeal had adopted the wrong approach. He began by examining articles 131 to 133 of the Principal VAT Directive. The general objective of the exemptions, so far as university education is concerned, is to ensure that access to higher educational services is not hindered by the increased costs that would result if those services were subject to VAT, as the CJEU explained in Commission of the European Communities v Federal Republic of Germany (Case C-287/00) [2002] ECR I-5811; [2002] STC 982. However, the services must be provided by organisations governed by public law or by other organisations recognised by the member state as having similar objects. In implementing the Directive, member states had discretion in deciding which bodies other than those governed by public law they would recognise, but that discretion was limited. Member states could not exempt all educational services without consideration of the objects bodies pursued, and they were required to respect general principles of EU law including fiscal neutrality, legal certainty and proportionality.

Parliament has exercised its discretion by exempting the provision of education by a United Kingdom university and any college of such a university. The term “university” is not defined in the VAT Act but over 100 bodies are presently entitled to call themselves a university and they vary greatly in character. Some are private and run for profit. Some are collegiate federal universities in which constituent colleges operate independently. Others comprise a federal system of colleges which are financially independent and self-governing. It is against this background that the meaning of “college of such a university” falls to be determined.

Lord Kitchin identified several material points. First, any college of a university, as an eligible body, must provide education. Secondly, Parliament has recognised for this purpose the provision of education by universities regardless of whether they are charities or private and run for profit, and the same must apply to colleges of universities. There is no justification for treating the two expressions differently in this respect. If private colleges were excluded, they would be obliged to charge VAT, rendering their supplies more expensive and restricting students’ opportunities to access them, contrary to the purpose of the exemption. Thirdly, there is nothing in Note 1(b) or the broader context which would justify limiting the scope of the phrase to colleges which are a constituent part of a university in a constitutional or structural sense. To require satisfaction of such a constituent part test would effectively exclude commercial providers such as SEL from the exemption, contrary to the principle of fiscal neutrality in light of Parliament’s decision not to limit Note 1(b) to bodies which do not make a profit. Fourthly, the United Kingdom must be taken to have recognised that a college of a university within Note 1(b) has similar objects to those of a university which is governed by public law and provides education to young people. This consideration focuses attention on the objects of the body, the nature of the educational services it supplies, and how integrated those services are with those of the university. It is necessary to examine the characteristics of those educational services and the context in which they are delivered rather than the precise nature of the legal and constitutional relationship between the body and its university.

Lord Kitchin recognised that if a college is a part of a university in a constitutional or structural sense then it is overwhelmingly likely that any educational services it provides will reflect this relationship and the college may properly be regarded as a college of that university within Note 1(b). But it does not follow that the converse is true. It is entirely possible that an independent and private body which conducts business of providing education for profit will be so integrated with a university that its educational activities and objects are indistinguishable from those of a college which is constitutionally part of the university or from those of the university itself.

The integration test explained in the SFM case and adopted by the FTT is essentially correct, but the factors to be considered need some refinement. The presence of a foundation or constitutional document or other legal relationship establishing the college as a constituent part of the university in a constitutional or structural sense will be sufficient to prove it is a college of the university within Note 1(b), save in an exceptional case, but that is not a necessary condition. In assessing whether a body is a college of a university, five questions are likely to be highly relevant: whether they have a common understanding that the body is a college of the university; whether the body can enrol or matriculate students as students of the university; whether those students are generally treated as students of the university during their period of study; whether the body provides courses of study which are approved by the university; and whether the body can present its students for examination for a degree from the university. If a body can establish the presence of each of these five features, it is highly likely to be a college of the university within Note 1(b). Whether the degree of integration in other cases is such that a body may properly be described as a college will depend on the particular circumstances of the case.

Some of the SFM factors are likely to be of much less assistance: whether the body is independent from the university; whether the body is financially dependent on the university or financially interdependent; whether the body generates any distributable profit; whether the body is entitled to public funding; the presence or absence of permanent links; the degree of physical proximity; and whether the body has any obligation to offer a minimum number of university places. These matters are unlikely to be determinative, though duration of the relationship and how long it may be expected to last may have some relevance as part of the background.

Lord Kitchin held that the reasoning of Peter Gibson LJ in University of Leicester Student’s Union at paragraph 36 needs some qualification. The words “in those cases where there are separate entities which are nevertheless parts of the university, any of those separate entities” include a college which is separate from the university but is nevertheless a part of it in a constitutional or structural sense, but the scope of Note 1(b) is not limited to such entities. The correct approach was expressed by Arden LJ in FBT at paragraph 55: the question is whether the college and the university are so integrated that the entity is imbued with the objects of the university.

Lord Kitchin considered that the Upper Tribunal did not reject the integration approach or question the value of the SFM factors but introduced a sequential test. While recognition by the university is to be expected and establishing a common understanding is important, these are matters best addressed as part of the general assessment of the relationship, the extent to which activities are integrated and whether the bodies share the same objects.

The Court of Appeal fell into error

Business Training Ltd v Revenue and Customs Comrs [2016] EWCA Civ 7; [2016] STC 2190