Thursday, April 6, 2017

In which Philippa goes down the VAT rabbit hole

It’s been a while since I was in the VAT game, but having spent ten years wrestling with the finer points of it, this whole ‘VAT on private school fees’ thing made me revert to my previous life of digging around on the European Commission website, and as there’s no football on today, here we go.
VAT law in the UK is currently required to be within the parameters set by EU legislation, primary being the VAT Directive (2006/112/EC).
In Chapter 2, this lists certain “Exemptions for certain activities in the public interest”. The cool and groovy social / cultural ones are in article 132 (along with the more ominous ‘human organs, blood and milk’, which I think was a rejected title for a Thermals album) and they include at article 132-1(i) :
the provision of children's or young people's education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects
There’s a follow-up in article 133 that allows Member States to make exemption by bodies other than those governed by public law subject to certain conditions, which include at art 133(a):
the bodies in question must not systematically aim to make a profit, and any surpluses nevertheless arising must not be distributed, but must be assigned to the continuance or improvement of the services supplied
The Directive is enacted in UK law mostly by VAT Act 1994, and the relevant section is Schedule 9 Group 6.
Here, item 1(a) exempts the supply (i.e. paid for, rather than free) of education by ‘an eligible body’. Note 1 defines ‘an eligible body’.
Now. A lot of people think that private schools’ ability to exempt fees relies on them having registered charitable status. This isn’t actually the case. They exempt fees because they are schools.
Note 1(1) For the purposes of this Group an “eligible body” is—
(a) a school within the meaning of the Education Act 1996, the Education (Scotland) Act 1980, the Education and Libraries (Northern Ireland) Order 1986 or the Education Reform (Northern Ireland) Order 1989, which is—
(i) provisionally or finally registered or deemed to be registered as a school within the meaning of the aforesaid legislation in a register of independent schools; or
(ii) a school in respect of which of which grants are made by the Secretary of State to the proprietor or managers; or
(iii) a community, foundation or voluntary school within the meaning of the school Standards and Framework Act 1998, a special school within the meaning of section 337 of the Education Act 1996 or a maintained school within the meaning of the Education and Libraries (Northern Ireland) Order 1986; or
(iv) a public school within the meaning of section 135(1) of the Education (Scotland) Act 1980; or
(v). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(vi) a self-governing school within the meaning of section 1(3) of the M10Self-Governing Schools (Scotland) Act 1989; or
(vii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(viii) a grant-maintained integrated school within the meaning of Article 65 of the Education Reform (Northern Ireland) Order 1989;
Yes, there is a ‘charity’ (more specifically, not-for-profit) definition of ‘eligible body’ in Note 1(e) being
a body which—
(i) is precluded from distributing and does not distribute any profit it makes; and
(ii) applies any profits made from supplies of a description within this Group to the continuance or improvement of such supplies;
That is the ‘charity’ exemption, but private schools are already in under Note 1(a). While charitable status in the UK is different from the not-for-profit ‘eligible body’ status drawn directly from the Directive, it is extremely similar to the requirements for UK registered charity status. Thus, they aren’t an exact match but charity status would almost inevitable imply note 1(e) status. And the inclusion of ‘schools’ as the first group very strongly implies that these are ‘bodies governed by public law’ where Member states shall exempt supplies of education – with no ‘may’ involved.
Lil joke there.
The key point is that if the UK remains within the EU it would be nigh-on impossible to charge VAT on private school fees, given the Directive. Even if the UK decided that note 1(a) should be binned, while private schools can obtain registered charity status they’d be within 1(e) as a back-up.
And you can’t bin 1(e) without crashing into the charity sector.
If you tried to take private schools out of charity registration that wouldn’t matter as the not-for-profit exemption is different from charity status, and there would almost certainly be an almost certainly successful appeal by various private schools (probably jointly) if they were deemed to be different from charity-registered not-for-profits by virtue if their charity status was withdrawn (to say nothing of what the Charity Commission would – eventually – say about that, and the wranglings needs to change the Charities Act without any innocent bystanders anyway).
So. The new proposal by the Labour Party would be practically impossible to enact if the UK remains in the EU.
A brief look at the results for “left-wing argument for Brexit” takes in the Guardian (natch), New Statesman, Socialist Review, Vice (?) and the Huffington Post, who in a dozen results I checked are the only ones to mention VAT specifically, and they were talking about Jaffa Cakes and tampons. Which are clearly important. But it does rather look like the Labour Party has managed to reverse-engineer a left-wing case for leaving the EU, which wasn’t actually on the table last June.
They may not even know that’s what they’ve done. Or, they may have had this in the pocket their entire time, waiting for the big issues of kinky fruit, lightbulbs,  and whether or not burgundy is a sufficiently masculine colour for passports to go away, before pointing out to the Conservatives that if they crack on with this, they will go for a higher tax bill on provider and consumers in their core demographic.
Like I say, they may not even know what they’ve done.
But if they did know, or now realise, then it’s worth having a look at one of the other groovy social / cultural exemptions in article 132 (Schedule 9 Group 7 of VATA 1994).
If you’re going after private education, then this would be the natural follow-up. Same ‘shall’ in article 132, and item 4 in the UK legislation exempts:
The provision of care or medical or surgical treatment and, in connection with it, the supply of any goods, in any hospital or state-regulated institution
‘Hospital’ isn’t defined but note 8 on ‘state-regulated institutions’ is also interesting:
In this Group “state-regulated” means approved, licensed, registered or exempted from registration by any Minister or other authority pursuant to a provision of a public general Act, other than a provision that is capable of being brought into effect at different times in relation to different local authority areas.  
It would seem impossible to be a functioning hospital/clinic in the UK without falling into the exemption. Even if the institution didn’t qualify (which it would) then item 1 also exempts:
The supply of services by a person registered or enrolled in any of the following—
(a)the register of medical practitioners or the register of medical practitioners with limited registration;
So basically if I rocked up at your home with a Stanley knife offering to do your transplant then that would be outside the exemption, but if a qualified doctor treats you then any fee is exempt, or if an unqualified person in a registered hospital treats you then any fee is exempt, and let’s face it, you’ll want both of those things to be true because that’s how medicine works. Any attempted change to that within the scope of the EU Directive and oversight by the ECJ would be (as above) doomed to fail.
But if the UK leaves the EU then any VAT exemption would be entirely within the purview of the UK government. They’d still have to deal with the Charities Act but private healthcare providers are much less likely to be registered charities than private schools. This could be even lower-hanging fruit – although item 9 also exempts ‘welfare services’ including (note 6) ‘care’ by a charity, state-regulated or public body so they'd have to have at that as well – but only if the Labour Party knows what it is doing.
In conclusion, both of these things would nigh-on impossible to do if the UK stays in the EU. But if it leaves, then the Labour Party can have a pledge to tax the providers and consumers of private education and healthcare and the simple explanation that this is now possible because the EU no longer poses an obstacle to that.
They could simply abolish VAT, of course. But even they aren’t that daft.
Clarification – I have lived in France for nine years, I voted for Britain to remain in the EU. But I don’t remember seeing any decent (non-fruit/bus-based) arguments for leaving. That seems to have changed, even if inadvertently. I am simply interested in the knock-on effects that triggering Article 50 might have, if – biiiiiiiiig if – there is a change in government.
Second clarification - rabbits are zero-rated if for food, standard-rated if pets or skinned for clothing.