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A chicken wearing a graduation cap | AccountingWEB | VAT: KFC takeaway and school fees
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KFC ruling spices up VAT on private school fees conundrum

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Max Schofield explores how the recent decision over a dip pot in a KFC takeaway meal could ruffle even more feathers for those affected by Labour’s plans to remove the VAT exemption for private school fees. 

14th Jun 2024
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The first tier tribunal (FTT) recently ruled on whether a dip pot in a KFC meal deal should be zero-rated or standard-rated for VAT. 

For the facts of the case see my article (‘KFC dips don’t wing it alone in VAT case’), but in essence: the decision in Queenscourt Limited v HMRC clarified that dip pots included in meal deals are part of a single standard-rated supply, as they are ancillary to the hot food, not a separate item. 

Despite the dips' availability for separate purchase, their primary role is to enhance the main meal, leading the tribunal to dismiss the appeal and affirm HMRC’s position. 

What, you might ask, do KFC’s Boneless Banquets and the Labour’s proposed imposition of VAT on private schools have in common? The answer lies in the treatment of what are known as single “composite” supplies compared to multiple individual supplies. 

Labour clucking down on school fees

With the election looming, the Labour Party has announced their plan to remove the VAT exemption on private schooling – imposing 20% VAT on school fees. 

Assessing the merits or demerits of Labour’s plans, with the tax consequences of reclaiming input VAT and the pass-through in pricing, is beyond the scope of this article. 

What is notable is the possibility of unbundling supplies. For example, if the education is subject to VAT, what about the provision of books (currently zero-rated for VAT) or the fees charged for boarding? One recent Guardian article reads: “Boarding schools will probably find it possible to avoid VAT on lodging. This will motivate them to shift more of the total fee from taxable tuition to lodging, minimising how much VAT they pay.”

There is a VAT exemption for the supply of “welfare services” by charities, public bodies, and state-regulated private welfare institutions. These services include the care or protection of children, but not the supply of accommodation or catering except where it is ancillary to the provision of care, treatment or instruction. 

There may be tax advisers who have investigated the possibility of supply splitting. They may seek to argue that – distinguishable from the education element – the school is providing care for children with ancillary accommodation and catering. I make no comment on the viability of that discrete welfare argument. Advisers will note that accommodation and catering is not care, but ancillary to a principal supply of care. 

However, one issue that private schools may face with the supplies of boarding is whether they are distinct and separate supplies: whether they are an end to themselves.

Tax advisers need to hatch a plan

The issue is similar to the KFC dip pot tax tribunal, where the tribunal found that it was unlikely that the dip would be eaten on its own, and it was unlikely to be used separately when purchased as part of a meal deal.

Tax advisers need to consider all of the circumstances to determine whether these private school services form part of a single indivisible whole with the (intended) standard rated education supply, such that it would be artificial to split them (under (1) above), or whether they are ancillary for the better enjoyment of the principal supply of education (under (2) above). 

There may be some mechanism of splitting the invoicing and payment structure; the ease of this will be noted by the tribunal, and the contractual documents and invoices (past and present) will be scrutinised to find the economic reality and avoid artificiality. It is possible that a Tribunal would consider: (a) the lack of freedom of choice to seek bed and board elsewhere for students attending the school, and (b) the inability to purchase the boarding (or care) without also signing up to the education element. 

As to (a), tax advisers will need to question the reality when it comes to the freedom of choice with regard to the care element – is there an alternative third-party option offering the same welfare and accommodation services for children who attend the school? If such a service exists, is the economic reality that students are prejudiced in choosing it over the school’s boarding option?

As to (b), the ability for the supplies to be “obtained separately” has been a common feature in these cases. It seems highly unlikely for a private boarding school to offer welfare-only services, without corresponding enrolment in education.

Buckets of change

The courts have also sought to ascertain the “overall economic aim”: if the combined services are important to the consumer, this will point towards a single supply. To adopt the phrasing of Advocate General Kokott in Frenetikexito, do the individual elements lose their independence and become secondary to an overarching supply of education?

Cases will be fact dependent, but will need to persuade HMRC or a tribunal that the view of the typical consumer is that they are receiving multiple distinct supplies. If the supplies do form one composite whole, it seems likely that the predominant element will be the education, and therefore standard-rated for VAT. 

We are yet to see the proposed legislation. It may be the case that amendments to the Value Added Tax Act 1994 comprehensively remove private school education from the exemption, along with boarding fees and closely related supplies. 

Under current principles, for boarding schools the answer has yet to be determined. No doubt there will be complicating factors for schools that offer boarding and day options, or partial/ad hoc boarding. 

Additionally, changes to the providers’ structures, so that the supplies are made by different bodies, may also obfuscate the exercise. The courts have generally held that supplies by different entities cannot be combined into a single supply unless the structure is abusive or a sham, ie, intending to produce a tax advantage, where the advantage is contrary to the purpose of the law. HMRC will also be alive to any signs of “value shifting” to make the beneficially taxed supply worth more than the second supply. 

Eton to eating

It is likely, however, pending statutory clarification, that private boarding schools will struggle to convince a tribunal that they are supplying multiple services, rather than a composite supply of education. Payments for a boarding school will either form an indivisible supply from the view of the parents, or will include boarding as an ancillary element of the overall package of education. 

In the meantime, tax advisers looking at the issue of single and multiple supplies – whether Eton or eating – will continue to face the difficult task of determining the view of the typical consumer purchasing complex packages of products.

Read Max Schofield’s summary of the KFC and side dip case in full. 

Replies (8)

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By FactChecker
14th Jun 2024 17:58

"standard rated education supply" ... how does that work (let's keep it simple - just for the tuition aspects)?

Eton, bad; Newtown Comp, good.
But, although I'm not an education expert, there are almost as many shades in between as there are education establishments in the UK.

So, Grammars (they still exist - and both Corbyn and Starmer were educated at one)?
or Free Schools? or Faith Schools? or Academies? or Foundation Schools? and on and on.
Oh, and what about private tutors (used by so many who feel public schools are bad but don't want Toby or Miranda to suffer at GCSEs)?

If it's a pure piece of social engineering/levelling, then why not Universities?
Maybe because, in 2019, 29% of Conservative MPs attended Oxford or Cambridge; but so did 28% of LibDem MPs and 21% of Labour MPs.

Thanks (6)
Replying to FactChecker:
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By kim.shaw-and-co.com
17th Jun 2024 20:12

FactChecker wrote:

So, Grammars (they still exist - and both Corbyn and Starmer were educated at one)?
or Free Schools? or Faith Schools? or Academies? or Foundation Schools? and on and on.
Oh, and what about private tutors (used by so many who feel public schools are bad but don't want Toby or Miranda to suffer at GCSEs)?

It's a populist cash grab that will put untold additional pressure on the public sector as UK-based parents pull out of private education. Only the top establishments will survive and become dominated by overseas pupils.

The full 20% will be mitigated to some extent by establishments' ability to recover input tax so it won't all be passed on. The big losers will be British kids whose parents simply cannot afford the fee hike and have to rely on the (pretty appalling) state education.

As long as there's some dumbing down though, it's all good though isn't it ? Classic Labour values ... unless we can have it too then let's make sure they can't either. Until they earn enough to send their own kids to Private school at which point suddenly the criticism, resentment and jealousy ceases ...

Thanks (1)
Replying to kim.shaw-and-co.com:
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By FactChecker
17th Jun 2024 22:32

"Classic Labour values ... unless we can have it too then let's make sure they can't either. Until they earn enough to send their own kids to Private school at which point suddenly the criticism, resentment and jealousy ceases ..."

Certainly true of many of them (including Blair) - with one exception who went in the opposite direction (renouncing his peerage and pulling his sons out of public school in order to become a Labour MP) ... Anthony (Tony) Wedgewood Benn.

Mind you (Wiki citation):
After attending Eaton House school near Sloane Square, Benn entered Westminster School, and studied at New College, Oxford, where he read Philosophy, politics and economics and was elected President of the Oxford Union in 1947.
In later life, Benn removed public references to his private education from Who's Who. In 1970 all references to Westminster School were removed, and in the 1975 edition his entry stated: "Education—still in progress"!

[Strangely his sons (e.g. Hilary) don't make reference to growing up in Holland Park or their public school education before they were peremptorily ejected by their father.]

Thanks (3)
Replying to kim.shaw-and-co.com:
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By ms998
18th Jun 2024 11:40

https://explore-education-statistics.service.gov.uk/find-statistics/nati...

Current projection is for primary school numbers to fall by about 400,000 in next 5 years and secondary to be stay broadly stable with some rises and falls.

School numbers change every year, and even if there was large number of withdrawals from private school to state, the state system will likely cope as it already flexes as population numbers changes.

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Replying to ms998:
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By kim.shaw-and-co.com
18th Jun 2024 12:45

ms998 wrote:

https://explore-education-statistics.service.gov.uk/find-statistics/nati...

Current projection is for primary school numbers to fall by about 400,000 in next 5 years and secondary to be stay broadly stable with some rises and falls.

School numbers change every year, and even if there was large number of withdrawals from private school to state, the state system will likely cope as it already flexes as population numbers changes.

Whether it will cope or not the cost is still shifted back to the taxpayer from individuals who funded their childrens' education out of post-tax earnings.

Forecasts are exactly that - forecasts.

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By adjadj
17th Jun 2024 10:12

Adding VAT to private education will open up a lot of sundry issues. Will VAT be charged on tickets for the school play or a coach trip for a fun or educational activity. If the answer is yes then should VAT be applied in similar circumstances to other educational establishments?

Thanks (1)
Replying to adjadj:
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By kim.shaw-and-co.com
17th Jun 2024 20:07

adjadj wrote:

If the answer is yes then should VAT be applied in similar circumstances to other educational establishments?

I would argue undoubtedly yes - there should not be an advantage enjoyed by those funding pupils of establishments that are not privately funded.

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By vstrad
17th Jun 2024 15:52

The provision of education to children has been a charitable purpose since the Middle Ages. Changing this is both cultural vandalism and child abuse.

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