The issue was whether charges to parents for joining a fee refund scheme where pupils were unable to attend school fell within the exemption applicable to education.

The appellant school was an independent day school and a registered charity. Parents of the pupils were sent an invoice at the commencement of each term requesting payment of fees for the forthcoming term. On the invoice, the appellant offered parents the chance to participate in a scheme described as a fees refund arrangement. For a payment of 1.5% of the fees, the fees would be refunded on a pro rata basis in situations where the pupil became unable to attend school through illness, accident, etc. The invoice for fees each term was prepared on an opt-out basis so that parents were required to delete the scheme charge from the invoice if they did not wish to participate. The appellant was able to operate the scheme by purchasing an insurance policy under which it was indemnified for any fees it refunded.

The commissioners had previously accepted that the grant of a right by the appellant to participate in the scheme, and similar grants by other schools, were part of the exempt supply of education. However, following a review of the position, the commissioners took the view that the supply was a separate standard rated service.

The primary case for the appellant was that there was, in reality, a single supply of education of which the provision of the fee refund scheme simply formed a part. Terms concerning fees were an integral part of the contract between the appellant and the parents for the supply of education. The fact that parents were given a choice as to whether fees were refundable did not alter the character of the supply; it simply altered the level of consideration for the supply. Alternatively, submitted the appellant, if the tribunal were to find that the transaction comprised two elements, there was a composite supply with the exempt educational element being the principal supply and the scheme being ancillary thereto. Finally, the appellant argued that in the event that participation in the scheme was a taxable supply in its own right, the taxable value should take into account sums refunded to parents. The commissioners submitted that the appellant made two supplies for VAT purposes: one of education and one of the fee refund scheme. In their view, the scheme was an independent and distinct transaction. In response to the appellant's alternative contention that there was a composite supply with the scheme being ancillary to the education, the commissioners did not dissent from the appellant's analysis of the law, but submitted that the facts of the case did not support the contention that the scheme was ancillary. Parents had a choice of joining the scheme and this choice existed outside and independent of the obligation to pay school fees. Further, the scheme was not ancillary to the education because it was not a means of better enjoying that service. The education was not enhanced by the scheme; it was not part of an educational package. The commissioners urged the tribunal to dismiss the appeal as the appellant had failed to prove that there was either one exempt supply or a composite exempt supply.

The tribunal dismissed the school's appeal.

1. Whilst the fee refund scheme related to the supply of education by the appellant, it could not in itself be described as a supply of education. Two separate supplies were made by the appellant: one of education and one of entitlement to the refund of school fees in prescribed circumstances.
2. The scheme was neither an integral part of the service of education nor a means of better enjoying that principal service. Accordingly, it was not ancillary to the provision of education.
3. In the opinion of the tribunal, it was possible for the appellant to operate the fee refund scheme as part of an exempt supply of education by making relatively minor changes to it but, on the facts of the case, the scheme was a separate service and VAT was due at the standard-rate on the value of the payments received from the parents.

No. 20,122