Scottish Court of Session Finds For HMRC on’ Private Tuition’ Issue

Scottish Court of Session Finds For HMRC on’ Private Tuition’ Issue

The Scottish Court of Session delivered its long-awaited decision in the case of EMPOWERMENT ENTERPRISES LTD on 11 October 2006.  Unfortunately, and in our opinion, surprisingly, the Court found for HMRC and overturned the earlier decision of the VAT Tribunal. 


The case concerned training courses in 'craniosacral therapy', which involves a therapist placing their hands lightly on a patients' body and tuning in to what is happening by ‘listening’ with their hands. The tuition in giving this treatment is supplied through the appellant limited company, which employed its principal as a full-time teacher and other teachers on a part-time basis as required.  The disputed matter is the UK law implementation of Article 13A.1(j) 'tuition given privately by teachers and covering school or university education'. It was accepted that the training courses satisfied the last part of these words, so the particular dispute was the correct interpretation of the words 'tuition given privately by teachers'.


The Tribunal Chairman found that the UK exemption was over restrictive in its reference to a 'teacher acting independently of an employer' and was not compatible with European law, which places no restriction based on the legal form of the taxable person. The Chairman took the view that, even where the tuition is supplied through a limited company, exemption is still available for the tuition supplied by all the teachers provided that the tuition is given privately by the teacher (i.e. European law defines exemption in that way to the exclusion of, for example, distance learning and internet-based learning, but once a right to exemption on that basis is established, national law cannot restrict exemption by reference to the legal form of the taxable person supplying the tuition). The Chairman decided that the taxpayer could claim direct effect of European law and allowed the appeal.


In the Court of Session, Lord Macfadyen dismissed the Tribunal's reasoning that the word 'privately' connoted all face-to-face tuition as distinct from distance learning. Counsel for HMRC argued that 'tuition given privately by teachers' connoted tuition given by a teacher acting on his or her own behalf, in a private or personal capacity, and not as the agent or employee of a body or organisation which was the supplier of the service. In other words, this is a case where the identity of the supplier does dictate the VAT treatment. Support for this interpretation was found in the wording of the French, Italian and Spanish versions of the Sixth Directive. Counsel for the respondents argued that the exemption was not as restrictive as argued by HMRC, but applied to any situation, irrespective of the capacity in which the teacher was acting, where there was 'legal or physical specificity' in the relationship between the teacher and the student, as distinct from tuition made available to students generally.


In the end, the judge preferred the HMRC argument, both because he believed it to be the better interpretation of the law, and because he saw great practical difficulty in adopting the interpretation advanced by the respondents. He also decided that it was not necessary to make a referral to the ECJ on the issue.


Comment:  This will be a big disappointment to any companies supplying private tuition, and also to sole traders/partnerships using employees or contractors to provide the said tuition. It is not known at this point whether Empowerment Enterprises will appeal to the Court of Appeal, but we will let you know if that becomes the case.  In the meantime, the Court of Session ruling applies, so anyone that has not declared VAT on such supplies, or has not registered due to the belief it was making exempt supplies, will now have to take the appropriate action.