SAE Education Ltd v Revenue and Customs [2019] UKSC 14

SAE Education Ltd, a commercial education provider closely linked with Middlesex University, claimed VAT exemption as a 'college of a university'. The Supreme Court allowed its appeal, holding that integration of educational activities, not formal constitutional status, is the correct test.

Facts

SAE Education Ltd (SEL) is the UK arm of the SAE Institute group, a commercial provider of education in audio and digital media technologies. Since 1998, SAEI had entered into a succession of memoranda of cooperation and partnership agreements with Middlesex University (MU), under which MU validated SAEI’s degree courses. Students were enrolled by SAEI, considered members of MU, taught by SAEI under MU’s quality safeguards, and awarded MU degrees. In September 2010, MU accredited SAEI to validate its own courses leading to MU degrees, and in July 2011 the parties entered into a Special Associate College Agreement confirming SEL’s existing status as a Middlesex University Associate College. MU had no financial interest in, or governance role within, any SAE group company.

SEL contended that its supplies of education were exempt from VAT under Note 1(b) to Item 1, Group 6 of Schedule 9 to the Value Added Tax Act 1994, as a ‘college of a university’. HMRC disagreed and issued assessments. The FTT allowed SEL’s appeal; the Upper Tribunal reversed; and the Court of Appeal dismissed SEL’s further appeal, holding that a ‘hard edged’ test required SEL to demonstrate that it was a constituent part of MU in a constitutional or structural sense.

Issues

The appeal raised two principal questions: first, whether the Court of Appeal had adopted the correct approach in determining whether SEL was a ‘college’ of MU within Note 1(b); and secondly, if not, whether on the correct test SEL satisfied the requirement.

Arguments

Appellant (SEL)

SEL contended that it was sufficiently integrated with MU to be regarded as a college of MU. It relied on the long-standing relationship, the validation and accreditation arrangements, the treatment of its students as MU students, and the conferment of MU degrees upon successful completion of its courses.

Respondent (HMRC)

HMRC argued that SEL was not a constituent part of MU in a constitutional or structural sense, that SAEI (not SEL) was the contracting party with MU, that MU was initially unaware of SEL’s corporate existence, and that there was no common understanding that SEL was a college of MU.

Judgment

Lord Kitchin, giving the sole judgment with which the other Justices agreed, allowed the appeal.

The correct approach to Note 1(b)

The starting point was articles 131-133 of the Principal VAT Directive, which require member states to exempt university education provided by public bodies or by other organisations recognised by the member state as having similar objects. Exemptions must be strictly construed but also consistently with the underlying objective of ensuring access to higher education is not hindered by VAT costs (following Commission v Germany Case C-287/00). Under MDDP Case C-319/12, member states cannot grant a general exemption to all educational services irrespective of the provider’s objects, but they may include commercial providers.

Parliament exercised its discretion in Note 1(b) without expressly limiting recognised bodies to non-profit providers. The phrase ‘a United Kingdom university’ extends to private, for-profit universities, and the same must apply to ‘any college of such a university’; otherwise commercial colleges of universities would be precluded from the exemption, contrary to its purpose and to the principle of fiscal neutrality.

Lord Kitchin rejected the Court of Appeal’s ‘constituent part’ test. Nothing in Note 1(b) limits the phrase ‘college of such a university’ to bodies constituting part of a university in a constitutional or structural sense. Such a test would effectively exclude commercial providers and offend fiscal neutrality. The correct focus is on the objects of the body, the nature of the educational services supplied, and the integration of those services with those of the university.

Refinement of the SFM factors

The ‘integration’ test as applied in Customs and Excise Comrs v School of Finance and Management (London) Ltd [2001] STC 1690 was essentially correct, although the factors required refinement. Lord Kitchin identified five questions likely to be highly relevant (at para 53): (i) whether there is a common understanding that the body is a college of the university; (ii) whether the body can enrol or matriculate students as students of the university; (iii) whether students are generally treated as students of the university during their studies; (iv) whether the body provides courses approved by the university; and (v) whether it can present students for examination for a university degree. Other SFM factors (independence, financial dependence, profit, public funding, physical proximity, etc.) were considered of much less assistance.

Errors in the courts below

The Court of Appeal had erred in (i) focusing narrowly on Oxford and Cambridge colleges, (ii) treating the Education Reform Act 1988 and orders thereunder as an aid to construction, though they serve a different purpose, (iii) failing properly to distinguish between the discretion conferred by the First/Second Directives and that of the Sixth and Principal VAT Directives, and (iv) relying on Peter Gibson LJ’s reasoning in University of Leicester Student’s Union, which required qualification. The Upper Tribunal’s sequential test, while not wholly wrong in emphasising common understanding, was best subsumed within a general assessment of integration.

Application to SEL

The FTT had carried out a careful and comprehensive analysis, finding that SEL was an Associate College of MU since May 2009, that its activities were substantially integrated with MU’s, that its students became MU students and received MU degrees, and that its purposes were similar to those of MU. These findings were properly grounded in the evidence. The Upper Tribunal’s criticisms, particularly as to the distinction between SAEI and SEL, were not fair: from May 2009, SEL was the entity through which SAEI’s activities were conducted in the UK. The FTT was entitled to conclude that SEL was and remained a college of MU within Note 1(b).

Implications

The decision establishes that, for the purposes of Note 1(b) to Item 1, Group 6 of Schedule 9 to the VAT Act 1994, a body need not be a constituent part of a university in a formal constitutional or structural sense to qualify as a ‘college’ of the university. Rather, the test is whether the body’s educational activities are so integrated with those of the university that it may properly be said to share the same objects.

The judgment clarifies that commercial, profit-making providers are capable of qualifying under Note 1(b), reflecting Parliament’s decision not to limit recognition to non-profit bodies and the requirement to respect fiscal neutrality. Lord Kitchin’s five refined questions (at para 53) provide the central framework for future assessments, though the evaluation remains fact-sensitive and no single factor is determinative.

The decision is of particular significance to private education providers operating under validation or accreditation arrangements with UK universities, and to HMRC’s administration of the education exemption. It also confirms that several of the traditional SFM factors—such as financial interdependence, profit distribution and physical proximity—carry limited weight. The decision does not address supplies outside the context of university education, and its outcome turned on the particular and well-established integration between SEL and MU.

Verdict: Appeal allowed. SEL was held to be a college of Middlesex University within the meaning of Schedule 9, Group 6, Item 1, Note 1(b) of the Value Added Tax Act 1994, and its supplies of education were accordingly exempt from VAT.

Source: SAE Education Ltd v Revenue and Customs [2019] UKSC 14