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Charging VAT for advanced learner loan funded provision could undermine the nation's skills base

HMRC’s decision not to exempt provision funded through advanced learner loans from VAT does not sit well with the government’s commitment to improving the quality of vocational education

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HMRC’s decision not to exempt provision funded through advanced learner loans from VAT does not sit well with the government’s commitment to improving the quality of vocational education

HMRC has now clarified that private providers of vocational training for over-19s will be compelled to charge VAT on any training they provide that is funded by advanced learner loans. Given the government’s laudable ambition to encourage young adults to take up vocational courses – or to retrain – many private providers were assuming that their services would be VAT exempt. Unfortunately, we now know that this will not be the case.

The clarification was issued on 24 January, in a Revenue and Customs brief. VAT is complex, but the spirit of the rules leans towards the provision of education being exempt, yet the letter of the law does not entirely agree. As the advanced learner loans don’t count as direct funding from the department of education and aren’t always supplied to so-called "eligible bodies" – namely government or not-for-profit institutions – HMRC has been able to interpret the 1994 VAT Act in the way it has.

Peculiar approach to VAT

This seems a peculiar approach from a government that last year claimed vocational education was at the heart of its industrial strategy – and that also needs to work very hard to avoid a Brexit-induced skills shortage. The advanced learner loans are available to fund a variety of non-degree level courses, including vocational qualifications, at a properly registered training provider. Many young learners studying for diplomas in areas like plumbing or electrical studies with private training providers fund their courses by means of an advanced learning loan. 

The scheme, therefore, provides valuable support for the technical and vocational skills of the UK’s future workforce. Private training providers affected by this clarification face a potential erosion of their profit margins if prices cannot be changed to absorb the VAT increase. Even if the provider does succeed in raising their prices to compensate for the imposition of VAT, an additional 20 per cent charge on training could make or break for people signing up to training – and may ultimately determine whether a private training provider succeeds or fails in the market.

HMRC’s decision doesn’t sit well with the government’s commitment to improving the quality of vocational education and the way in which it is viewed. At the beginning of 2017, the government promised to address the "historic undervaluation" of technical education in the UK. Announcing the government’s industrial strategy, Theresa May highlighted that boosting technical education would allow the same respect to be given to those pursuing technical routes as those who go to university.

Future skills base of the nation

It doesn’t seem sensible to take a decision with the potential to undermine the future skills base of the nation. Compelling private providers to charge VAT on their courses – and exempting government and not-for-profit organisations from the same charge – makes the adult skills market starkly unlevel and much less competitive.

The advanced learner loan scheme is an increasingly popular avenue to further education funding, especially since the minimum age requirement was lowered from 24 to 19 in May 2016. In the 2016-17 academic year, 83,900 learners started courses funded by the scheme, up from 69,200 in the 2015-16 academic year and 55,100 in the 2014-15 academic year. The loans are not means tested and there are no credit checks. Students begin paying the loans back when they have completed their course and are earning more than £21,000.

There may still be a challenge to HMRC’s decision on behalf of one of the training providers affected. However, assuming HMRC’s decision will stand, private training providers need to carefully consider their position. HMRC has stated that where it has provided incorrect rulings on this matter, they will contact the taxpayer in question and discuss a settlement. However, taxpayers without a ruling – and who have treated this income stream as VAT exempt – should review their VAT position. They may have a historic VAT liability they have to deal with.

Alison Horner is a VAT partner at accountancy firm MHA MacIntyre Hudson

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