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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Creating Careers v Revenue & Customs [2006] UKVAT V19509 (24 March 2006) URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19509.html Cite as: [2006] UKVAT V19509

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19509

VAT – exemption – education – whether appellant's supplies of e-learning software packages constitute provision of education or vocational training or supply of goods or services essential to that provision for purposes of item 5A Group 6 Schedule 9 VATA 1994 – appeal allowed

MANCHESTER TRIBUNAL CENTRE

CREATING CAREERS Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Demack (Chairman)

Mrs Marilyn Crompton

Sitting in public in Manchester on 3 and 4 January 2006

Paul Lasok QC instructed by Deloitte Touche, Chartered Accountants, Manchester for the Appellant

Heriot Currie QC and Nigel Poole, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

Crown copyright 2006


 


DECISION

1. In this appeal by Creating Careers ('CC'), we are required to decide whether certain e-learning software packages it provides to students of further education colleges ('FECs') constitute the provision of education or vocational training, or the supply by the person making that provision of goods or services essential thereto, and thus qualify for exemption from VAT.
2. Section 31 of the Value Added Tax Act 1994 ('VATA') provides that a supply of goods or services is an exempt supply if it is of a description contained in Schedule 9 thereof. Item 5A of Group 6 was inserted into Schedule 9 to VATA came into effect on 1 April 2001 by the Learning and Skills Act 2000 ('the 2000 Act'). It extends the exemption for education in Group 6 to include: "The provision of education or vocational training, and the supply, by the person providing that education or training, of any goods or services essential to that provision, to the extent that the consideration payable is ultimately a charge to funds provided by the Learning and Skills Council for England or the National College for Education and Training for Wales under Part I or Part II of the Learning and Skills Act 2000". Note 5A to Group 6 was inserted into VATA at the same time as item 5A. It reads: "For the purposes of item 5A a supply of any goods or services shall not be taken to be essential to the provision of vocational training unless (a) in the case of the provision of education, the goods or services are provided directly to the person receiving the education; (b) in the case of the provision of vocational training, the goods or services are provided directly to the person receiving the training". Part I of the 2000 Act establishes the Learning and Skills Council for England ('the LSC'). Part II establishes the equivalent body for Wales. The latter's duties and powers largely replicate those of the LSC, so that we need refer only to the LSC and not to the equivalent Welsh council. Local learning and skills councils may be established in particular areas.
3. Under the 2000 Act, the LSC is responsible for the development, planning, funding and management of post-16 education and training. Sections 5 and 6 of the 2000 Act provide for payments to be made by the LSC to persons who provide post-16 education and training, or who support such persons. And since FECs are responsible for educating young people between 16 and 18, their funds are provided by the LSC.
4. Historically, CC accounted for VAT on the packages it supplied at the standard rate. Early in 2004 it was advised by its accountants that its supplies should have been treated as exempt under item 5A, Group 6 of Schedule 9 to VATA. Consequently, on 14 April 2004, it submitted a voluntary disclosure in the sum of £168,944.52 for VAT periods 10/01 to 01/04 inclusive. The Commissioners for Her Majesty's Revenue and Customs ('the Commissioners') rejected the disclosure, maintaining that the packages supplied by CC were standard rated. And, in a letter of 14 May 2004, they indicated that, having regard to the terms and conditions of supply on which CC contracted with various FECs, they had concluded that CC made supplies to FECs, and not to individual students. The Commissioners further indicated that they did not consider CC's supplies to be exempt under item 5A of Group 6 as CC was not the person providing the training, as required, and that no exemptions under Group 6 applied. Finally, by letter of 5 November 2004, the Commissioners confirmed the decision of the 14 May 2004 and elaborated on their reasons for it by saying that FECs united with CC to provide the training programmes and FECs (which were funded by the LSC) did not charge for their services. It is against the decision contained in the letter of 5 November 2004 that CC now appeals.
5. CC's reasons for appealing, as contained in its Notice of Appeal of 26 November 2004, may be summarised as follows:

(a) that its supplies of e-learning services are "the provision of education or vocational training … to the extent that the consideration payable is ultimately a charge to funds provided by the LSC" and, as such, falls within items 5A of Group 6, and accordingly are exempt from VAT;

(b) that it makes an exempt supply of education [within item 1 of Group 6].

(We should add that the claim at (b) above was not pursued before us so that we need deal with it no further.)

6. In the statement of case the Commissioners rejected CC's case on item 5A in the following terms:

(a) the supply of e-learning packages to various FECs does not fall within item 5A of Group 6 and is not exempt;

(b) the supply in CC's case, as evidenced in documents entitled 'Standard College Contract Payment Terms and Conditions 2003/04' and 'Standard College Contract Online Learning Contract Terms and Conditions 2003/04', is in each case between CC and the various FECs. Consequently, with reference to note 5A, the service supplied is not essential to the provision of vocational training in that it "is not provided directly to the person receiving the training".

7. CC was represented by Dr Paul Lasok QC, and the Commissioners by Mr Heriot Currie QC leading Mr Nigel Poole. Oral evidence was given to us by Ms Clare Veitch, CC's product development director, Mr Neil Moult, an employee of CC (who gave evidence in the unavoidable absence due to illness of Mr Philip Knight, CC's curriculum funding director), and Mr Richard Meredith, who has occupied the role of programme development leader for some FECs. We were also supplied with two agreed bundles of documents and attended a presentation of a sample of a CC package at issue in the appeal. From the evidence adduced, in addition to the facts summarised above, we also find the following facts to have been established.
8. CC devises and supplies online learning programmes, based on modern educational theory. Subjects covered include computer studies and equal treatment. It is part of the Vision2Learn programme, which was the first e-learning service specifically designed for FECs in England and Wales, and is a leader in the provision of innovative e-learning. Provided a student is registered with an FEC, his CC online course may be eligible for funding by the LSC. If it is, funding is provided directly to the FEC by the LSC.
9. The software works by steering the student through a course of instruction. He is required to interact with the programme in a manner which is similar to instruction on a one-to-one basis by a tutor.
10. All Vision2Learn courses are designed to provide students with an opportunity to gain vocationally recognised qualifications that are accredited nationally by the Qualifications and Curriculum Authority ('QCA'). They therefore follow guidelines provided by the National Council for Further Education ('NCFE') and are designed to ensure that the targets set by NCFE are met. Each package is complete in itself: it contains everything a student needs to know about its particular subject, and to reach the standard of learning at which it is aimed.
11. Within further education, distance and flexible learning programmes have been accepted forms of learning for several decades. They have enabled a wide variety of students, who could not attend traditional classes, to gain nationally recognised qualifications and improve their employment prospects. In recent years, the process has been accelerated with the encouragement of the Department of Education and Skills ('DfES'). Courses, including e-learning, relevant to the employment and personal situations of students from different backgrounds and educational attainments have been devised. CC claims, and we find, that its courses replace the expertise otherwise provided by a traditional tutor, so that the live tutor is effectively relegated to checking the learning that has taken place, and offering encouragement and pastoral support to the student as he follows his course. The tutor is not involved in determining whether a prospective student is eligible for funding by the LSC.
12. As the vocationally related qualifications provided for by Vision2Learn are accredited nationally by the QCA, it is approved for public funding by the Secretary of State for Education and Skills under sections 96 and 97 of the 2000 Act, and, as previously mentioned, is funded through the LSC.
13. Paragraph 378 of DfES leaflet, 'Funding Guidance for Further Education in 2004/05', explains that:

"The LSC currently recognises two types of delivery arrangements for FE[Further Education]. These are direct provision totally delivered by the provider, and partnership provision – that is, where one or more aspects of the learning programme are delivered in partnership with a third party."

14. CC prefers to work in partnership with FECs as it considers that prospective students will consider it attractive to have a college involved in the provision of courses. In such partnerships, CC licences and supplies its online learning packages to FECs, who agree to pay its contract price for them. That is the effect of the documents specified at paragraph 6(b) of our decision. FECs do not become involved with the design of the online learning courses, but retain responsibility for the tutors, one of whom is allocated to each Vision2Learn student.
15. The online learning courses designed by CC, and the way in which it contracts with FECs, have been developed having regard to the funding rules set by the LSC. (In order to access LSC funding, a course has to be undertaken at an FEC). Those rules permit private companies to employ tutors and to operate independently of, or in partnership with, FECs. Since CC operates only in partnership with FECs, a college undertakes the tutor assessment element of the courses.
16. With effect from August 2003, funding for distributed and electronic learning ('DEL') courses is provided inter alia by reference to (a) the actual costs of delivery, or (b) national base rates for the learning aim. All but one of the Vision2Learn courses are funded by reference to national base rates listed learning aims.
17. LSC funding guidance permits the funding of education gained through the accreditation of prior experience and learning ('APEL'), where a tutor assesses the learning that has already taken place. CC claims, and again we accept, that this indicates that learning can take place without the involvement of direct tuition by a tutor. The promise of education by Vision2Learn through the LSC's DEL funding mechanism (which funds the total cost of delivery rather than guided learning hours delivered) is similar, in that the learning imparted by a Vision2Learn course is assessed by the tutor after the learning has taken place. CC claims, and once more we accept, that this shows that the teaching input from tutors is ancillary to the supply of education in the context of DEL, where courses are capable of being followed by a student entirely independently of teaching input from a tutor, his role being the assessment of the learning that has taken place. Thus, it further claims, and yet again we accept, that Vision2Learn online courses constitute teaching in their own right.
18. About 95 per cent of students apply to undertake Vision2Learn courses through one of CC's partner channels. They are websites that include links to Vision2Learn where prospective students can register for an online course, and include Sky, Channel 4, Microsoft and Jobsite. The remaining 5 per cent of recruits to Vision2Learn are introduced by FECs themselves. Access to the courses is at the discretion of the FECs.
19. A prospective online student, who may have few or no qualifications, registers his interest in Vision2Learn courses through its website. He is subjected to an initial diagnostic test provided by Vision2Learn to assess the current knowledge of his subject of interest. That indicates the appropriate level of study. An FEC enrolment form is then sent to him for completion, and, on its being completed, requires processing by an FEC.
20. On an FEC becoming involved, probably, but not necessarily, through an introduction from Vision2Learn, the prospective student may be assessed as to his suitability for the chosen course. A tutor may consider with him his eligibility for the course, the level of learning chosen, and his suitability for online learning. The tutor also determines the student's eligibility for LSC funding.
21. The course tutor's role is principally to support the student throughout his course. He is required to provide the student with pastoral support, and assess and check that the level of knowledge acquired by him has met the standards set by NCFE. The tutor marks assessments submitted by the student, using guidelines and model answers provided on the tutors' (restricted) section of the Vision2Learn website. The tutor informs the student whether he has reached NCFE standards, and where necessary advises on any parts of his course that should be re-studied. Additional help may be provided to a student experiencing particular difficulty, and where that is due to a student's disability or deficiency in basic numeracy or literacy, assistance in remedying the problem can be provided and funded separately from the main Vision2Learn course.
22. The tutor monitors the student's progress against his individual learner plan ('ILP'), which sets agreed targets and milestones for the student at the commencement of his course. The ILP is created using software provided by Vision2Learn. If the student fails to meet course deadlines, the tutor will advise him that, unless his performance improves, LSC rules may require his withdrawal from the course. However, in the majority of cases a student is able to pursue his course satisfactorily with contact with his tutor once every 14 days. Of the 120 hours a student is expected to devote to a course, his tutor is expected to provide only 11 hours of direct support.
23. Vision2Learn incorporates a number of features more traditionally associated with the role of a classroom tutor. They may be divided into two parts; (a) socialisation and activation features; and (b) content, presentation and personalisation features. Those falling into the first part consist of "enhanced learning experiences by creating a sense of belonging, clarifying learning goals and encouraging learners to communicate"; and those in the second part "make learners actively participate in the learning process".
24. CC provides considerable support to tutors to fulfil their role within the system. It includes the provision of marking guidelines for each assessment (on a private section of the website), and training online in using the Vision2Learn system. CC also produces a newsletter designed to keep tutors abreast of recent developments.
25. About 80 per cent of students complete their assessments and achieve a pass mark in their course at the first attempt, indicating, in CC's opinion, that minimal teaching instruction is required from tutors. We accept CC's claim in that behalf.
26. CC also markets Vision2Learn online learning courses commercially under the style of "Workskills 21". Workskills 21 is an e-learning system provided to companies and other organisations to meet their training needs. In those cases, QCA and NCFE accreditation and assessment is not required, and therefore it is unnecessary to provide tutor assessment support. However, the modules of most of the online learning courses are, if not identical, very similar to the Vision2Learn online learning courses, and use many of the same learning objects. Since exactly the same learning is taking place within the Workskills 21 programme as in Vision2Learn, CC claims, and we accept, that tutor input is not essential to complete a Vision2Learn course, and that the same learning outcome (albeit without formal accreditation or assessment) can be achieved by a student without input from a live tutor.
27. CC further claims that the relatively limited role of tutors in the Vision2Learn system is shown by typical levels of remuneration paid to online tutors. A traditional college lecturer might expect to be paid about £20 per hour for e.g. preparing schemes of work, course notes, case studies, examples and practice exercises, worksheets, visual aids, handouts and even e-learning programmes – functions which in Vision2Learn are carried out by CC, rather than tutors. Part-time tutors supporting Vision2Learn students are typically paid in the region of £10 per hour, a figure reflecting their more limited responsibilities, i.e. primarily the marking of a student's work in accordance with schemes prepared for them by CC.
28. CC is continuing to develop Vision2Learn, and is incorporating into it as many pro-active educational features as possible. It maintains that, in doing so, it will continue to reduce the requirement of teaching intervention, even for those relatively few students who presently require it.
29. Against that factual background, Mr Currie submitted that the appeal should be dismissed, advancing five separate reasons for his claim in that behalf. Dealing first and, he maintained, critically with the statutory provisions in point in the appeal, he submitted that the statutory language of item 5A of Group 6 of Schedule 9 to VATA implicitly distinguished education from goods or services essential to that provision: properly understood what CC provided were merely goods or services used in the provision of education and not the provision of education itself. That submission was rejected by Dr Lasok, who maintained that the supplies made by CC clearly fell within the provisions of item 5A of Group 6. We shall deal with the opposing submissions in that behalf shortly.
30. Secondly, Mr Currie maintained that it was instructive to look at the way in which CC described what it supplied when not influenced by VAT considerations: nowhere in any documents did it claim that what it supplied was education itself. (We accept his claim in that behalf, but consider that it does not progress matters). The documents in question, which included the contracts concerned and CC's learning pack, showed that all the terminology was consistent with its supplies consisting of goods or services relating to education, and not to education itself. For instance, the student documentation consisted of learning materials, service online learning products and services. In his submission, that confirmed that what CC was providing was learning materials, and not education.
31. In contrast, Dr Lasok maintained that a supply was exempt if:

(a) it was the provision of education or vocational training, or the supply, by the person providing that education or training, of any goods or services essential to that provision; and

(b) the consideration payable was ultimately a charge to funds provided by the LSC.

32. As to the first of those two conditions, Dr Lasok submitted that CC supplied education to students under the tripartite arrangements between CC, the FEC and the student: the evidence showed that students learned from the courses devised, provided and maintained (while the student was online) by CC. Dr Lasok further contended that the second condition had also been satisfied in that the consideration payable to CC was a charge to funds provided by the LSC. The fact that those funds passed through the hands of an FEC on their way from the LSC to CC was irrelevant: the use of the word "ultimately" in item 5A indicated that the payment need not be made directly by the LSC to CC. An FEC did not use a course: all it did, in conjunction with CC, was to acquire a package for the purpose of its use. Although, in Dr Lasok's contention that was a completely different situation from the one envisaged by Parliament, it constituted education.
33. We consider Dr Lasok's submissions to be correct, and thus accept them. In our judgment, the description of CC's supplies contained in the coursework it supplies to FECs and students is irrelevant in determining whether they constitute the provision of education for VAT purposes. The evidence clearly shows that students learn from CC's courses: they are educated by them. A CC course does not merely consist of a supply of goods or services relating to education: it constitutes the provision of education.
34. Thirdly, in relation to an analysis of the CC's online programmes, Mr Currie maintained that it was clear from the evidence that the learning material incorporated into CC's packages was based on (i) repetition and reinforcement, and (ii) objectivism - a student was presented with standard answers. He claimed that CC's programmes contained the following three elements:

(a) the provision of information in written, graphic and numeric form;

(b) exercises with automated standard answers; and

(c) assessments marked by the tutor.

35. As the contents of a CC course differed but little from a textbook, and no one would regard the supply of a textbook as the provision of education, Mr Currie maintained that its courses did not consist of education. Of a claim by Dr Lasok that CC's courses were interactive, he contended that it was critical to distinguish substance from the medium by which it was delivered. Interactivity meant "clicking on an icon" rather than turning a page; nothing made the contents of a course any different from a textbook or teach-yourself book. As the packages provided nothing of substance that was not provided in a textbook, CC's supplies could not be those of education.
36. In response, Dr Lasok maintained that, on any view, for VAT purposes CC did not supply goods: it was therefore necessary to consider whether its services`were those of education. Rhetorically, he asked, why could a book delivered to an FEC not be education? Education implied some sort of action: books in a box could not educate; they had to be taken out. One could readily identify the point at which books supplied to students became a supply of education. Dr Lasok submitted that "services essential to that provision" in item 5A must refer to services that were not themselves education, e.g. supplies of teachers to cover vacancies. He maintained that the supplies covered in that example did not constitute education; something else had to take place before they became a supply of education, such as the teacher going into a classroom and commencing teaching. There was a difference between a service and the point at which it was effectively transformed into a supply of education. Dr Lasok submitted that it was not possible to say that that two stage process applied to services provided by CC for in the present case that process did not exist: there was no equivalent of the cardboard box containing the books. In CC's case the service was one of "use" of the website; of "use " of the programmes; and of "use" of a course by a student. An FEC did not "use" a course; all it did was to contract with CC to acquire a programme for the purpose of its use. That was a completely different situation from the one envisaged by Parliament.
37. In making his third submission, as we understood him Mr Heriot appeared to be inviting us to reject CC's claim to be providing education because its courses were basic in content and thus somehow unworthy of the description education. Education is education, whether nursery, post-graduate or professional. And, in our judgment, it matters not that different methods of providing it are adopted. Relying on the submissions of Dr Lasok, we consider that we have identified the substance of CC's courses as being those of the provision of education.
38. Fourthly, Mr Currie dealt with the question of whether students undertaking a Vision2Learn course were being educated, and, if so, by whom. He rejected a claim by Dr Lasok that they were being educated by a process of "self-directed learning" by CC, rather than by tutors. Mr Currie submitted that the correct response to that claim was that students were educating themselves, using the virtual material provided by CC. That was plain from CC's own conditions, for where responsibility was allocated between it and FECs, the FECs:

(a) secured funding;

(b) ensured that qualification requirements were met, and

(c) appointed tutors.

39. He maintained that CC's witnesses had been to astute to minimise the role played by FEC tutors in events, saying that even if a minority of students required assistance from their tutor, it was the responsibility and function of the tutor to monitor their progress and advise them on how to improve their performance using the materials provided. He accepted that of the 120 hours a student was required to devote to complete a particular course of study, he would receive only 11 hours direct support from a tutor – a contribution Mr Currie described as "significant, and not de minimis". It was irrelevant to a supply made in the UK that the same programme was supplied to foreign students without the involvement of tutors. Taking into account the role of the FECs and the tutors, Mr Currie further submitted that the programmes consisted of electronic textbooks, and did not constitute education.
40. In Dr Lasok's submission, CC's supplies had to be characterised as services essential to education. Where a 120 hour course included only 11 hours teaching, it was only by use of the services provided by CC that the supply of education could be made. It was not credible to characterise the use made by CC and the use made by a student as being other than the provision of education.
41. We are content to rely on the submissions of Dr Lasok to reject Mr Currie's fourth submission, and to confirm, yet again, that, in our judgment, CC's supplies are those of the provision of education. We do not regard it as irrelevant to supplies made in the UK that CC provides the same courses to foreign students without tutor involvement. Indeed, we would go so far as to say that that clearly indicates the subordinate role of FECs in the partnership provision of the education process with which we are concerned. In this instance, in our judgment the funding process cannot, in isolation, determine the nature of CC's supplies for VAT purposes. Any course requiring some 120 hours of study is a major educational project, and cannot be dismissed as the mere provision of electronic textbooks.
42. Finally, stepping back from the detail involved and looking at the matter broadly, Mr Currie contended that it was not credible, within the ordinary use of the language, to describe CC's supplies as those of education: what it supplied was goods or services used by students and FECs to provide education; and those goods and services were no different from textbooks. If we were to allow the appeal, it might open the floodgates to a variety of claims similar to that of CC.
43. Dr Lasok rejected Mr Currie's "floodgates" argument maintaining that one had to consider what Parliament had in mind when enacting the amendments to the 1994 Act in 2000. The LSC funding was used wholly for the purposes of education, and should not be returned to the Government indirectly. Parliament could not be assumed to have intended to exclude distance learning from education; use of electronic means of learning was consistent with the 2000 Act and the amendments to VATA. It was absurd and archaic to say that any amendments made must be applied to a nineteenth century definition of education.
44. In our judgment, as our decision thus far clearly indicates, CC provides education; its Vision2Learn courses are not merely goods or services used by students and FECs to make such provision. The fact that the funding process requires the involvement of FECs so that they must take part in CC's provision of courses does not affect the status of the courses. As paragraph 378 of the DfES leaflet referred to at paragraph 12 of our own decision explains, the further education with which we are concerned is provided by CC and FECs in partnership. Applying a twenty first century definition to education, as suggested by Dr Lasok, we consider distance learning such as a CC course to be a part of education which qualifies for exemption from VAT. In other words, reverting to Mr Currie's first submission, we hold that the supplies of education provided by CC fall within the statutory definition in item 5A of Group 6 of Schedule 9 to VATA.
45. We allow the appeal, and direct the Commissioners to pay CC's costs of and incidental to and consequent upon the appeal.

DAVID DEMACK

CHAIRMAN
Release Date: 24 March 2006

MAN/04/717