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HM Revenue and Customs Brief 27/08


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Issued 19 May 2008

Interpretation of Article 13 of the Principal VAT Directive – “bodies governed by public law” and “special legal regime”

HM Revenue and Customs has reconsidered its interpretation of the terms “bodies governed by public law” and “special legal regime” in the context of article 13(1) of the Principal VAT Directive (Directive 2006/112/EC) (“article 13(1)”) as well as the application of this provision.

Our current interpretation is based on the decisions in the Court of Session’s judgment in Edinburgh Telford College (ETC) [2006] CSIH 13 XA18/05;XA22/05, the High Court’s judgment in Riverside Housing Association (Riverside) [2006] EWHC 2383 (CH) and the decision of the VAT and Duties Tribunal in The Chancellors, Masters and Scholars of the University of Cambridge (Cambridge University) LON/05/0958.

This Revenue & Customs Brief explains HMRCs’ current thinking on the matter. While the Brief is of immediate interest to further and higher education providers, it may be relevant to other bodies as well.


1. Legal position

Under article 13(1), “states, regional and local government authorities and other bodies governed by public law” are not regarded as taxable persons when they engage in activities as “public authorities”. Case law has confirmed that such public bodies engage as public authorities when they undertake their duties under a legal regime which applies to them and not to other bodies (a “special legal regime”). This is subject to certain mandatory exclusions and competition criteria.

This provision therefore only applies to the types of body specified, and only in the circumstances when they engage as public authorities. In any other circumstance the normal VAT rules apply.

2. ETC

ETC is a further education college providing further education as defined in the Further and Higher Education (Scotland) Act 1992 (amended by the F&HE (Scotland) Act 2005) and is funded by the Scottish Education Funding Council.

ETC argued that, when it provided further education courses for which it charged fees, it did so as a “public authority” within the meaning of article 13(1) so that it should not be treated as a taxable person in respect of that activity - taking the provision of such education outside the scope of VAT. There was no dispute over courses which are wholly funded through grants paid by the Scottish Further Education Funding Council which are outside the scope of VAT as the grant funding is not consideration for any supply either to the funding provider or to the students.

The Court of Session agreed with ETC, finding that the College’s activities were undertaken under the umbrella of a special legal regime deriving from the Further & Higher Education (Scotland) Act 1992, the Scottish Further Education Funding Council (Establishment)(Scotland) Order 1998 and implemented in the funding agreement between the Scottish Further Education Funding Council and the College. The essence of the dispute was whether (as ETC argued) it is necessary to make judgements based on the wider legal regime governing the management and conduct of an activity, or (as HMRC argued) to focus solely upon the legal regime governing the delivery of a particular service. Although cases must be examined in the light of their own facts and on their own merits, HMRC accept that it is necessary to consider the wider legal regime.

The question of whether or not ETC was a body governed by public law was not considered by either the VAT and Duties Tribunal or the Court of Session because HMRC had accepted that the College was such a body. However, the High Court decision in Riverside has led HMRC to reconsider its interpretation of what is meant by a “body governed by public law” for the purposes of article 13(1) and to revise its policy in this area as set out below. This policy change will be reflected in changes to the current guidance on the meaning of a “body governed by public law” which is currently to be found at paragraph 3.7 of V1-14.

3. Riverside

Riverside is a large social housing provider registered with the Housing Corporation as a ‘Registered Social Landlord’ (RSL). So far as is relevant hereto, Riverside argued that its activities were non-business on the basis that it was a body governed by public law for the purposes of article 13(1) and that the Housing Corporation rules, to which RSLs must adhere, amounted to a special legal regime. That contention was rejected by the Tribunal and the High Court.

Even though Riverside was subsidised by Government funds and required by statute to adhere to certain rules applying to RSLs, its supplies of social housing were nevertheless held to be made in the course of business.

In referring to article 13(1), the Tribunal stated that “The provision clearly contemplates government organisations which are institutions of a democratic state and the European jurisprudence on the topic shows that the concept of a public body is to be narrowly construed……..It is in my view clear from the legislation itself, interpreted in accordance with the jurisprudence of the Court of Justice, that the "other bodies" contemplated by the article are those of a kind similar to government bodies, carrying out quasi-governmental functions, of which examples might be the Financial Services Authority and the Housing Corporation itself, with organisations such as the Institute of Chartered Accountants when undertaking its regulatory role. Riverside, by contrast, does not have a regulatory or similar role; it is itself the subject of regulation. It is a private sector organisation which happens to undertake functions on behalf of the state, but that does not make it a public body”.

Body governed by public law

In the light of the decision in Riverside, HMRC has concluded that the term “body governed by public law” in article 13(1) is narrow in application. HMRC consider that a body will only satisfy this criterion if it is a public sector body which forms a part of the UK’s public administration, such as a government department, a local authority or a non-departmental public body. Article 13(1) is not intended to enable other bodies to claim special treatment merely because they have delegated powers, are regulated in some way by the State, are funded by public money or are subject to certain specific rules in the pursuit of their activities.

This view has recently been endorsed by the VAT and Duties Tribunal in the Cambridge University case.

Accordingly HMRC no longer accept that the generality of FE and HE providers are bodies governed by public law as defined in article 13(1).

A number of FE and HE bodies have sought to rely on article 13(1) to support an argument for entitlement to zero-rating under Group 5 of Schedule 8 and/or reduced rating under Schedule 7A to the VAT Act. FE and HE bodies should be aware that HMRC does not agree that such bodies can assume that they fall within this provision: rather it is necessary to examine the facts of each case separately.

Further, HMRC is of the view that, even were a body to come within article 13(1) in respect of a particular activity, that would serve only to take supplies in respect of that activity outside the scope of VAT and would not affect the liability of supplies made to that body.

Further guidance

For further help and advice please contact HM Revenue and Customs’ National Advice Service on 0845 010 9000.

About the Author

© Crown Copyright 2008.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

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Article Published/Sorted/Amended on Scopulus 2008-05-28 23:24:10 in Tax Articles

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