In Kaplan International Colleges UK Ltd (KIC) v HMRC (C 77/19), the European Court of Justice (CJEU) ruled that HMRC was correct to deny a cost-sharing exemption to its subsidiary in Hong Kong.

  • KIC is a member of the ‘Kaplan’ Group which broadly supplies education services.
  • HMRC confirmed to KIC that its subsidiaries are eligible for the Cost-sharing exemption in accordance with Article 132 (1) (i) of the VAT Directive as its services exempt from VAT and the group is not entitled to reclaim any associated input VAT on costs.
  • From 2014, the group incorporated an entity in Hong Kong which was set up as a cost-sharing group and the supply chain costs like marketing and support services were routed through Hong Kong.
    • Hong Kong then recharged the costs incurred to KIC and Hong Kong treated the supply of services as exempt from VAT.
    • This meant that KIC did not need to restrict the recovery of input VAT as no VAT was chargeable on the supply by Hong Kong. This created a very substantial VAT saving for KIC.
  • HMRC argued that the services that KIC receives from Hong Kong (outside the EU) do not fall within the scope of the VAT exemption for cost-sharing groups and are therefore subject to the reverse charge.
  • It issued assessments of about £6 million.
  • KIC argued that the services provided by Hong Kong fall within the scope of the exemption for services provided by cost-sharing groups to their members.
  • KIC, as the representative member of the VAT group, consequently is not obliged to pay the VAT on those services in accordance with the reverse charge arrangement.

KIC appealed to the First Tier Tribunal (FTT) which referred several questions on the correct interpretation of the VAT Directive to the Court of Justice.

  • The main question from the FTT was whether supplies by a cost-sharing group established outside the EU to its members established in the UK qualify for VAT exemption.
  • The CJEU concluded that the provision expressly refers only to supplies of services by independent groups of persons to their members. It does not refer to supplies of services by an independent group of persons to a VAT group whose members are not also all members of that independent group of persons.
  • The CJEU did not directly deal with geographical restrictions of the cost-sharing exemption.

The CJEU followed Advocate General Kokott’s opinion issued in April 2020, who had concluded that the Directive merely allows VAT exemption for supplies by a cost-sharing group to its members. It does not qualify or limit the provision but concluded that the EU legislature did not have in mind cross-border groups outside the EU.

As such, the interpretation puts cost-sharing groups on exactly the same footing as VAT groups membership which is restricted to entities established in the same Member State. The CJEU, therefore, came to the same conclusion as HMRC.

Useful guides on this topic

Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

Costs sharing exemption
Charities, universities and colleges can share costs without triggering a VAT charge by forming a Cost Sharing Group (CSG) under the cost-sharing exemption.

Education & VAT
What rate of VAT applies to education? What sort of services are classed as education? What do you do if your have multiple supplies including education?

External link

Kaplan International Colleges UK Ltd (KIC) v HMRC (C 77/19)

 

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