Derby College Group v The Commissioners for HMRC

Introduction

1. The Appellant, Derby College Group (the “ College ”), appeals against assessments made by the Respondents (“ HMRC ”) under s 73 of the Value Added Tax Act 1994 (“ VATA ”) as set out in the Statement of Agreed Facts, below. Evidence

2. I was provided with a hearing bundle comprising 156 pages which included a Statement of Agreed Facts, the College’s Notice and grounds of appeal, HMRC’s statement of case, correspondence and directions issued by the Tribunal and a witness statement of Claire Louise Love, the Finance Director of the Derby College Group. Facts

3. Ms Love, has over 20 years of experience in the education sector, with comprehensive knowledge of college funding and Department for Education funding terms and conditions. She was appointed as the Finance Director of the Derby College Group on 1 June 2023. Her role is to lead and develop the finance function, ensuring effective financial management, reporting, and control of the Group’s financial. She reports directly to the Group’s Chief Financial Officer (Joanne Clifford).

4. In her statement Ms Love referred to two documents that were prepared by Gary Horne of the Colchester Institute Corporation. These are titled Summary of Funding Processes , and A Summary of Funding Allocation Processes in England 2022/2023 . The first of these documents sets out the procedures involving funding received, before 31 March 2017 from the Education Funding Agency (“ EFA ”) and Skills Funding Agency (“ SFA ”). The second document sets out the funding procedures from the Education and Skills Funding Agency (“ ESFA ”) which were in place from 1 April 2017.

5. Having compared the funding processes with those set out in Mr Horne’s documents, Ms Love confirmed that the basis of calculation of the funding received by the College, was “entirely consistent” with the following EFA, SFA and ESFA documents: (1) EFA 16-19 Allocation Statement 2014-15; (2) SFA Final Funding Statement 2014-15; (3) EFA 16-19 Allocation Statement 2015-16; (4) SFA Final Funding Statement 2015-16; (5) EFA 16-19 Allocation Statement 2016-17; (6) SFA Final Funding Statement 2016-17; (7) EFA 16-19 Allocation Statement 2017-18; (8) SFA Final Funding Statement 2017-18; (9) ESFA 16 to 19 revenue funding allocation statement 2022-23; (10) ESFA Advanced learner loans 2022-23; (11) ESFA Apprenticeship carry-in 2022-23; and (12) ESFA funded adult education budget 2022-23.

6. Ms Love also confirmed that the procedure in in place with the ESFA for 2022-23 would also have been in place for the period 2017-18. Statement of Agreed Facts

7. The parties produced the following Statement of Agreed Facts. Background of Derby College (1) The College is a body corporate incorporated as a further education corporation under the Further and Higher Education Act 1992 , registered for VAT under registration number XXX XXXX 05. The College is categorised by the Department of Education as a general further education college. (2) Its campuses are at Roundhouse, Derby and Ilkeston, Derby. The College is a provider of further and higher education and of vocational training programmes. (3) The College is an “eligible body” for the purposes of Item 1, Group 6 of Schedule 9 VATA. (4) The College’s courses are “vocational”, with the aim of providing its students with technical knowledge, skills, and attitudes to secure and succeed in employment. Many of the College's courses lead to accredited qualifications. However, the College also provide non-accredited full cost and commercial vocational courses to meet the needs of local employers. (5) Each of the courses provided by the College which are the subject of this appeal are within the meaning of “education” or “vocational training”, in Item 1 of Group 6 of Schedule 9 VATA. Appeal of Assessments (6) The College has appealed against two decisions of HMRC, made on statutory reviews under s 83C VATA. (7) The first is set out in a letter from HMRC to the College dated 21 October 2016. It upheld the assessments under s 73 VATA in respect of its prescribed VAT accounting periods 01/15 to 04/16 notified to the College by a letter from HMRC dated 29 June 2016. The Assessments were for a total of £1,003,711.63 (excluding interest) in respect of output tax underdeclared for the periods. This is the subject of appeal TC/2016/06341. (8) The second appeal is set out in a letter from HMRC to the College dated 17 September 2018. It upheld an assessment under s 73 VATA in respect of the College’s prescribed VAT accounting periods 07/16 to 01/18, notified to the College by a letter from HMRC dated 5 July 2018. The Assessments were for £1,064,840. This is the subject of appeal TC/2018/06476. (9) The Second Assessment was subsequently amended on 23 February 2022 to reduce the amount to £977,405. This amendment was due to a revision of the amount due to £87,435 of the amount assessed for VAT accounting period 01/18 falling beyond the point of Fiscal Balance. (10) Both of the appeals concerned assessments raised by HMRC for output tax adjustments for ‘Lennartz’ accounting purposes. The total value of the appeals is £1,981,116.63. Education Funding Agency & Skills Funding Agency (11) During the periods covering the appeals, the College was funded primarily by three government agencies: the SFA, the EFA and the Higher Education Funding Council for England (“ HEFCE ”). This appeal relates to courses funded by the EFA and SFA (the “ Funding Agencies ”). The EFA and SFA merged to become the ESFA on 1 April 2017. Nothing materially changed in the funding. (12) The EFA funded the provision of education and vocational training for students aged 19 and under, certain categories of students aged over 19, and students with learning difficulties aged between 19 and 25. (13) The SFA funded all or part of the provision of education and vocational training for students aged 18 and over who have not achieved a specified level of academic qualification, or who are entitled to free education or training due to their personal circumstances and for courses related to areas of the economy that are treated as priority areas for learning. (14) The College receives tuition fees for other students who are not eligible for EFA, SFA or HEFCE funding. (15) The College provides courses to students from age 16 upwards. Students of all ages are educated or trained together, and there is no separation between them on grounds of age. (16) Funding by the Funding Agencies was provided pursuant to s 14 Education Act 2002 . The College enters into agreements with the EFA and the SFA each year in relation to the funding that those agencies provide. The agreements are in standard form and are not negotiable. The agreement with the EFA was described as the ‘Conditions of Funding Agreement’. The agreement with the SFA was described as a ‘Financial Memorandum’. The agreements are lengthy and refer to (and incorporate by reference) a series of other documents (some of which are in electronic form and are published on the internet). Taken together, these agreements and the other associated documents set out the basis on which the agencies will fund the College and the obligations placed on the College to deliver education and vocational training and to provide information to the funding agencies. (17) Neither the SFA nor the EFA agreements set out the courses that the College must provide. But the College was only funded by these agencies for the provision of courses leading to qualifications that have been approved by the Government and which are listed on a website maintained by the Government. Theoretically, the College could have provided courses leading to qualifications that have not been approved – but it would not have been funded by either the EFA or the SFA to provide such courses – and it therefore did not do so. (18) The amount paid by the EFA to the College for any year was calculated on the basis of a national funding formula that incorporates various factors including student numbers in prior years, student retention, provision of higher cost subjects, disadvantaged students, and area costs. This is supplemented by additional funding for high needs students, bursaries and other financial support awarded to individual students. (19) The basic funding allocation was determined by the following funding formula: (Student numbers) x (National funding rate per student) x (Retention factor) x (Programme cost weighting)] + (Disadvantage funding) + (Large programme funding) This amount is then multiplied by the area cost allowance. (20) The funding received by the College from the EFA is determined by the national funding formula and was not a negotiated amount. The terms of the EFA’s funding agreement prohibits the College from charging fees to students for the courses that it funds. (21) The amount paid by the SFA is based upon a monetary funding allocation calculated before the start of the year, but subject to a claw-back for under-delivery against allocation, which is reconciled at the end of the year (and repayable in the following January). No additional payments are necessarily made for over-delivery. (22) The SFA’s Financial Memorandum provides at clause 6.2 that: “The College is free to spend its funding as it sees fit providing it fulfils the conditions of funding imposed by the SFA.” Relevant Legislation

8. The legislation in force during the period with which these appeals are concerned is set out in the Appendix to this decision. Discussion and Conclusion

9. It is common ground that these appeals turn on an issue that arises from the agreed facts described as the “Consideration Point”. This is whether, for VAT purposes, grants received by the College, a further education college, from the SFA and EFA are “consideration” (within the meaning of s 5(6)(a) VATA and Article 2(1) of the PVD) for a supply of services (education and/or vocational training) provided free of charge by the College to students.

10. If the Consideration point is decided against HMRC it is agreed that the output tax assessed was not due from the College and its appeal must succeed.

11. Although HMRC reserves its arguments on the Consideration Point, a matter due to be heard by the Court of Appeal in June 2026, the parties agree that the Consideration Point was determined against HMRC by the Upper Tribunal in Colchester Institute Corporation v HMRC [2020] UKUT 368 (TCC) at [65] – [89]. As I am bound by the decision of the Upper Tribunal, it therefore follows that the College must succeed on the Consideration Point.

12. Accordingly its appeal is allowed. Right to apply for permission to appeal

13. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 11 th AUGUST 2025