Published on 22.9.18

VAT Update No. 46

Welcome to our latest VAT update for FE Colleges. The main topic is the reporting of HMRC’s alleged investigation into the treatment of sub-contracting, including that by FECs.

FEC sector compared to For-Profit training providers

HMRC is quoted as looking at the relationships between primary providers and their sub-contractors. This may have come on the back of a review of how some private sector trainers have been dealing with VAT. The first fundamental point of difference to note is that private For-Profit providers are covered by different VAT rules to FECs. Private sector training providers, are not in VAT law ‘eligible bodies’ and they normally charge VAT on their services – bar an exception covered below. Organisations that are eligible bodies, the definition of which includes all FEC, must never charge VAT on fees or grants for education. Education in this context includes vocational training, examinations, assessments, education quality services and closely related ancillary services.

An exception for private sector trainers having to charge VAT is where the money for vocational training ultimately comes from the ESFA (the old SFA). Hence, when a private sector trainer acts as a training sub-contractor to a FEC and the funding to the FEC comes from the ESFA a special VAT exemption applies. The exemption though is strictly limited only to that part of the training funded by the EFSA, which as HMRC have confirmed includes levy monies distributed by the ESFA.

Sub-contacting, surely it has to be what it says on the tin?

Matters reported in the sector news speculate whether FECs should be accounting for VAT on the difference between what each FEC gets in grant funding from the ESFA and what it pays out to sub-contractors.  This may have been prompted by the misinterpreting of the requirement for FEC to disclose whoever is next in their supply chain. FECs in recent years are required to publicly state who they are using as sub-contractors and how much they have paid from public funds for sub-contracted training. It is somewhat unfortunate in that the describing and disclosing what a FEC gets in funding and what it pays out, the difference has sometimes been called a ‘management charge’. The management charge term could mislead one into thinking the FEC is making a separate supply of management services to the sub-contractor.  Before going further on this issue, one needs to step back and look at the legal relationships.

One must be clear about who supplies what to whom.  The key thing ought to be who is responsible for the education and training and who is a sub-contractor in the chain of supply.

Take the following situation. A FEC is the responsible primary provider of the training, as recognised by the ESFA.  The FEC enrols the students and apprentice trainees as its own. In this situation, the FEC must surely be seen legally as being at the top of the chain of provision.  In VAT terms the “supply” is to learner, who is funded by the ESFA.  This would make the FEC the accountable body for the provision, ensuring proper use of public funds, disclosing the use of the funds and ensuring the educational quality of the provision.  As the accountable body you would expect this to be reflected in the FEC’s financial statements, where the full ESFA funding is shown as income.

Where a FEC chooses to employ as a sub-contractor another training provider, by definition they should be lower down in the chain of supply. Each sub-contractor will be providing training services to its primary FEC and the learners the FEC has enrolled. As discussed above, if the sub-contractor is not an eligible body then VAT does indeed come in to play, except crucially when the ultimate source of funding for vocational training comes from the ESFA.

In summary, we have a situation described where the FEC provides the vocational training to its learners and is responsible for the related public accountability and education quality of ESFA funded provision. The FEC is grant funded for this and what it pays out from the ESFA funding is a VAT exempt cost. The difference between its ESFA income and what is paid out to sub-contractors, is just the College’s margin to cover its own costs. It therefore should not count to be treated as a separate supply to the sub-contractor.

Transparency should not create a VAT issue

The ESFA of course requires full transparency when it comes to use of public funds.  The fact that a FEC may set out that it pays a sub-contractor a rate based on a percentage of the ESFA funding and that this has to disclosed publicly, should not in itself create a new supply for VAT purposes. This would be at conflict with the legal situation set out in the above.  If, for example, an agreement between a FEC and its sub-contractor sets out who does what and that the sub-contractor is paid85% of the ESFA funding to the College. The balancing 15% should not be seen to create a separate service level. It would be perverse to suggest the FEC is providing services to its sub-contractor.  The FEC is the primary provider, it is the responsible body for the whole overarching education provision and its income as an eligible body cannot be liable to VAT.

Common sense to prevail hopefully

Hopefully this issue has been blown up out of confusion over terminology.  Someone is not fully understanding the legal and overarching position of FECs. It might be someone has seized on the words ‘management fee’ and has seen this to indicate there is a separate supply. In the situation above it cannot be and any enquiry from HMRC should be dealt with pointing out the facts of the matter.

The mentioned contractual situation is we understand the one generally prevailing in the FEC sector. Individual Colleges though should review their circumstances and seek advice should they have concerns.

A new VAT topic : MTD

In other news we are anticipating there will be a formal confirmation soon that HM Treasury will be legislating to require digitalisation of specified primary VAT accounting records (expected to be sales invoices, purchase invoices and gross takings) and up loading of VAT returns from April 2019. There is already available draft guidance on the HMRC web site, look for Making Tax Digital or MTD. Software to enable digital uploading of VAT returns will become available to buy during the run in period.

It is therefore recommended that FEC review their VAT accounting arrangements for MTD compliance. An ideal date to make any refinements would be in time for the start of the 2018/19 new financial year.

Annual VAT Seminar

We will be discussing MTD and other current issues in our next VAT update.  We are pleased to advise that the seminar will take place on Friday 8 June 2018 and will be hosted by Christ Church College, Oxford. Invitations to Colleges will be sent later in March. To ensure you are on our invite list please contact:

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