One supply or two - An Educational Case

The VAT treatment of supplies of education are very complex  and business and HMRC often make errors in deciding how transactions should be treated for VAT purposes. The treatment of composite supplies with one overall VAT rate compared to mixed supplies with a different rate is equally complex. In addition the rules relating to disaggregation can also be a minefield for business if they appear to have separated in HMRC’s mind to  gain a VAT advantage. Add all these elements together and the result can be an attack from HMRC as shown in the recent case for Kumon Educational UK Co Ltd (KE) & Kumon Book Services (UK) Ltd (KB).

KE made supplies of licences for instructors to use its teaching method and provided worksheets for students in return for a single royalty payment per student and accounted for VAT until2005. After this date it changed how it operated with KE granting a licence to use its teaching methods which it treated as standard rate for VAT and its subsidiary KB supplying worksheets to instructors for a separate fee that it treated as zero rate for VAT. provided education via a network of self-employed instructors. Until 1 November 2005 it granted a licence to instructors to exploit its teaching method and provided worksheets for the students in return for a single inclusive royalty payment per student. This was treated as a single supply of services.  The total amount paid by instructors remained the same as when they paid KE for its single supply of the licence fee and worksheets.

This was attacked by HMRC who took the view that the supply had been artificially separated and that in fact a single supply had occurred plus standard rate VAT and assessed for VAT on the consideration paid by teachers to KB and alternative assessments to KBS on the consideration it received from the instructors. Unsurprisingly KE and KBS appealed against the assessment. The tribunal rejected HMRC’s view and found that KBS was making a supply of zero rate worksheets that should not be treated as part of KE’s single supply of the right to use its teaching method.

If you or your clients are involved with businesses making supplies of education services, supplies with a mixture of goods and services or where activities are being under taken in more than one business it can be worth calling our free VAT helpline for an initial discussion to ensure that there are no inadvertent VAT consequences to the arrangements.

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