VAT: did a payment to the recipient of a supply qualify as a discount?
InKumon Educational UK v HMRC[2015] UKFTT 84 (17 February 2015), the FTT found that rewards paid to instructors were discounts on franchise fees.
Kumon is a provider of educational services. It offers franchises of its teaching methods to individual instructors, who pay a licence fee based primarily on a set amount per pupil. Kumon provides training, access to information, workbooks and support. Instructors receive a yearly award for past performance.
The issue was the VAT treatment of the yearly award. This depended on whether it was a contingent discount deductible from the franchise payments made by the instructors to Kumon or whether the award was the consideration of a separate supply made by the instructors to Kumon.
The FTT first noted that the reward payments were linked to the supplies made by Kumon in return for the franchise fee. It was as a result of the agreement that instructors had obligations to Kumon; for instance, promoting the brand and improving their own teaching skills. Furthermore, some elements of the reward payment were linked to elements of the franchise fee; for instance, the number of students. However, the fact that the services were linked did not mean that a separate supply could not be identified.
The FTT concluded that the reward paid to the instructors was for enhancing the basic service for which they paid a franchise fee to Kumon, rather than for a separate supply. By procuring and keeping more students and receiving an award, instructors were effectively paying less per student. Similarly, the element of the reward paid for improved teaching meant that instructors provided improved teaching services to Kumon for the same return.
Why it matters: The case reviews the extensive case law which concerns transactions in which the customer receives a payment from the supplier. This case confirms that the existence of a separate supply by the customer is critical; without it, the payment received will be treated as a discount.
VAT: did a payment to the recipient of a supply qualify as a discount?
InKumon Educational UK v HMRC[2015] UKFTT 84 (17 February 2015), the FTT found that rewards paid to instructors were discounts on franchise fees.
Kumon is a provider of educational services. It offers franchises of its teaching methods to individual instructors, who pay a licence fee based primarily on a set amount per pupil. Kumon provides training, access to information, workbooks and support. Instructors receive a yearly award for past performance.
The issue was the VAT treatment of the yearly award. This depended on whether it was a contingent discount deductible from the franchise payments made by the instructors to Kumon or whether the award was the consideration of a separate supply made by the instructors to Kumon.
The FTT first noted that the reward payments were linked to the supplies made by Kumon in return for the franchise fee. It was as a result of the agreement that instructors had obligations to Kumon; for instance, promoting the brand and improving their own teaching skills. Furthermore, some elements of the reward payment were linked to elements of the franchise fee; for instance, the number of students. However, the fact that the services were linked did not mean that a separate supply could not be identified.
The FTT concluded that the reward paid to the instructors was for enhancing the basic service for which they paid a franchise fee to Kumon, rather than for a separate supply. By procuring and keeping more students and receiving an award, instructors were effectively paying less per student. Similarly, the element of the reward paid for improved teaching meant that instructors provided improved teaching services to Kumon for the same return.
Why it matters: The case reviews the extensive case law which concerns transactions in which the customer receives a payment from the supplier. This case confirms that the existence of a separate supply by the customer is critical; without it, the payment received will be treated as a discount.
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