VAT & Corporation Tax on ELT & Education Businesses

James Dixey started and owned Pilgrims Language Courses (Pilgrims). During James’ ownership of Pilgrims,

he had two battles with HMRC/Customs.

And WON both of them.

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Battle 1 on VAT

When HMRC tried to narrowly interpret the EU’s 6th VAT Directive arguing that the only time students learned English was in the classroom, so only that small slice of the whole supply of ELT was to be exempt from VAT.

Outcome: HMRC lost!

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Battle 2 on Corporation Tax

When HMRC rejected Pilgrims’ correct approach of spreading the VAT refunds from Battle 1 over the corporation tax years in which the refund had been ‘earned’.

Outcome: HMRC lost!

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Brief Summaries of both Battles...

Battle 1 on VAT

• The EU's 6th VAT Directive, specifically Article 13 (A) (1) (i), declared language learning among Member States VAT-exempt to foster language acquisition and strengthen the European Community.
• HMRC, fearing significant VAT revenue loss, argued that VAT exemption for ELT businesses should be narrowly interpreted, applying only to in-classroom English teaching.
• Pilgrims contested this view, arguing their offerings—from breakfast to bedtime activities, including accommodation, excursions, and social events—should all be VAT-exempt.
• The VAT Tribunal sided with Pilgrims. However, following an appeal by Customs that won in the High Court, Pilgrims appealed and secured a victory at The Court of Appeal.
• Outcome: The case of Customs & Excise v Pilgrims Language Courses Ltd [1999] EWCA Civ 1939 (23 July 1999) set a precedent, making ELT in the UK VAT-exempt. View Case Details

Battle 2 on Corporation Tax

• Following the VAT exemption victory, Pilgrims received a substantial VAT refund for payments they had unjustly made.
• They sought professional advice to appropriately allocate this VAT refund across the relevant corporation tax years.
• HMRC contested Pilgrims' method of spreading the refund.
• Pilgrims responded to HMRC's challenge with a firm stance, ready to defend their position in court.
• Faced with Pilgrims' resolve, HMRC ultimately decided not to pursue the matter further.

Learning Points for the ELT and Education industry from Pilgrims’ Battles...

Make sure you, your professional advisers, and your Trade Associations are constantly on the lookout for every potential Tax Threat and Opportunity for your business. When Pilgrims decided to challenge HMRC on their narrow interpretation of the 6th Directive, nobody in the ELT industry was in the slightest bit interested in joining/supporting the challenge; neither fellow EUK Members, nor English UK, nor our Accrediting Body, The British Council; nobody was interested. So, Pilgrims had to risk it and go it alone.

- I am very pleased to say that English UK are now very much on the ball on all matters to do with VAT and Tax for Members.
- Paying the correct and fair amount of Tax is part of the privilege of living in an open and democratic society.
BUT please remember HMRC is made up of individuals just like us and Tax can be very complex.
HMRC’s job is to collect the correct and fair amount of tax from all of us.
HMRC can and do make mistakes so please stay on watch!
- You don’t have to be a big business to challenge HMRC - Pilgrims wasn’t!

Next Steps...

Pilgrims' turnover was less than £1m when we took on Battle 1. But, it did need courage, determination, and excellent planning - characteristics available to all businesses, both big and small. Please contact james@jamesdixey.co.uk if you want to know any more about challenging HMRC on VAT and Corporation Tax; and/or Selling and Buying ELT businesses. www.jamesdixey.co.uk