Claiming
Can HMRC refuse a VAT refund because your customers paid the VAT?
Short answer
It can try. Section 80(3) of the VAT Act 1994 gives HMRC a defence where repaying VAT would unjustly enrich you because your customers bore the cost. HMRC has to prove it with economic evidence. Its own guidance starts from the assumption that a supplier selling to customers who cannot recover VAT absorbed the cost to stay competitive.
Who was your customer?
Start here, because the answer changes the argument. A college teaching its own students has the students as its customers. A delivery partner teaching for a university or FE college may have the institution as its customer instead, depending on the agreement and on who paid whom.
- Students cannot recover VAT. If your fees were VAT-inclusive, HMRC may argue that the VAT came out of your students' pockets rather than yours, so repaying it to you would be a windfall.
- A university or FE college mostly makes exempt supplies, so it usually cannot recover much of the VAT it is charged either. Where you invoiced the institution plus VAT under a contract, HMRC may argue the institution bore the cost. The pricing terms of the agreement and how the fee was negotiated matter a great deal.
This is often the biggest single question in an education claim, and our VAT specialist looks at it at the start of every review.
The burden is on HMRC
The Court of Appeal held in Baines & Ernst Ltd v HMRC [2006] EWCA Civ 1040 that it is for HMRC to prove unjust enrichment and that no presumptions apply. Quoting prices as plus VAT does not by itself prove the VAT was passed on.
The starting assumption in a free market economy is that a supplier will absorb the VAT cost to stay competitive.
HMRC VAT Refunds Manual, VRM12200
What points each way
| Suggests you absorbed the VAT | Suggests students bore the VAT |
|---|---|
| You compete with universities and FE colleges that charge no VAT on similar courses | Little competition for your courses |
| Your contract price with a university or college was fixed as a total that did not move with VAT | The contract priced your teaching net, with VAT added on top |
| Thin margins | High margins |
| Fees did not rise when you registered for VAT or started charging it | Fees rose by the VAT when you started charging it |
| Fees are set by what the market will bear, such as the student loan cap | Fees are clearly built up as a net price plus VAT |
The reimbursement route
If HMRC's defence would succeed, VAT Notice 700/45 describes a reimbursement scheme. You sign undertakings to pass the repayment on to your former customers, refund them within 90 days of receiving it, and return anything you cannot pay out to HMRC within 14 days. For a college with years of former students this is hard work, so it is usually a fallback rather than a plan. Where the customer was a single university or college, reimbursement is simpler to arrange but still has to be agreed with them.
Evidence worth gathering early
- Your fee history, especially around when you registered for VAT or started charging it.
- Fees charged for similar courses by universities and FE colleges in your area.
- Your agreements with each university or college, including the pricing schedules and any renegotiation.
- Management accounts showing margins by course.
- How fees were set and approved, for example board papers or pricing notes.
Sources
- VAT Act 1994 section 80(3): legislation.gov.uk
- HMRC VAT Refunds Manual VRM12200: GOV.UK
- Baines & Ernst Ltd v HMRC [2006] EWCA Civ 1040: caselaw.nationalarchives.gov.uk
- VAT Notice 700/45, section 9 on unjust enrichment and reimbursement: GOV.UK