VATEDU36900 - VATEDU36900 - Group 6 Item 1 Education, research and vocational training provided by eligible bodies: what is education?: pre-school education, nurseries, after-school clubs and playgroups

Many children under five attend:

  • state nursery schools;
  • nursery classes attached to primary schools;
  • playgroups in the voluntary sector;
  • privately run nurseries; or
  • after school clubs.

A number of schools provide early or pre-school education (before compulsory education). All children aged four should be able to access an early education place and some early education and childcare services offer free part-time early or pre-school education to three year olds. This is paid for at the discretion of local authorities. Places for children under three in voluntary or private pre-school settings are paid for largely by parents.

The Children Act 1989 as amended by the Care Standards Act 2000 provides the legal framework which sets national standards in most private and voluntary sector children’s services; also under this legislation OFSTED has responsibility for the registration and inspection of childcare for children under the age of 8, (people running day care services for children under 8 must register with OFSTED).

OFSTED will register and inspect the following services:

  • day nurseries;
  • playgroups;
  • private nursery schools;
  • after school clubs and holiday play schemes open for 6 days or more per year;
  • childminders; and
  • crèches.

The provision of pre-school education (without charge) is non-business; breakfast clubs and after-school child-minding/homework clubs are also non-business in the local authority sector even when a charge is made. This is on condition that the school offers the service strictly to its own pupils and that the fee charged is designed to no more than cover overhead costs.

The provision of a day-nursery is a business activity. If the provider is registered with OFSTED, which is most likely as there are few exemptions from registration, then the supplies are an exempt supply of welfare services, as they are being provided in a state-regulated institution (VAT Act 1994, Schedule 9, Group 7, Item 9 refers). Otherwise, the supplies will normally be standard-rated. However, if the supplier is an eligible body and there is clear evidence that the supplies follow an educational curriculum, exemption under Group 6 may be appropriate. If you come across such cases you should consult the Education Unit of Expertise or VAT Reliefs Policy Team before giving a ruling.

Exemption extends to the supply of meals and drinks for the children, as well as other sundry items provided as part of the children’s care such as picture books, crayons and toys. It does not however, extend to supplies such as children’s parties or day trips where the supply is advertised as a separate and identifiable package (this is a provision of entertainment rather than care), or to supplies of meals and drinks to staff and visitors.

Where a local authority provides nursery services to children in care under obligations imposed by the Children Act 1989, this is considered to be non-business.

HMRC previously accepted that where a charity supplies nursery and crèche facilities for a consideration that is fixed at a level designed to only cover its costs, this is not a business activity for business purposes. This was based on the courts’ decisions in Yarburgh Children’s Trust [2002] STC 207 and St Paul’s Community Project [2005] STC 95 where the courts held that the activities of both charities did not constitute a business. This was due to them not being predominantly concerned with the making of taxable supplies for a consideration when they provided nursery and crèche facilities at a fee that only covers the cost of providing the services.

Recent court cases (Longridge on the Thames [2016] BVC33 and Wakefield College [2018] BVC 22) have provided further clarification on how to determine whether or not an activity is a business activity. In view of this, HMRC has now withdrawn its previous policy as set out in Business Brief 02/2005 that, where a charity supplies nursery and crèche facilities for a consideration that is fixed at a level designed to only cover its costs, this is not a business activity for business purposes.

HMRC issued Revenue and Customs Brief 10 2022 on 1 June 2022 to announce the policy change.

In Longridge on the Thames, the Court of Appeal emphasised that the correct test to apply is whether there is a direct link between the services or goods supplied and the payment received by the supplier. The ‘predominant concern’ is irrelevant. This means focusing on whether there is a direct link between the services the recipient receives, and the payment made rather than on the wider context of the organisation’s charitable objectives or motive.

In Wakefield College [2018] BVC 22, the Court of Appeal considered whether the activities were business activities for VAT purposes based on a 2-stage test.

The 2-stage tests are:

Stage 1: The activity results in a supply of goods or services for consideration

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)

Simply because a payment is received for a service provided does not itself mean that the activity is economic. For an activity to be regarded as economic it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.

Charities who supply nursery and crèche facilities for a consideration are now required to apply the 2-stage test in VBNB30000 to determine if their services constitute business activities for VAT purpose.