Educational Franchise - Rebate or consideration for supply

March 2015

Kumon Educational UK v HMRC (2015) TC 04291

Award payments – whether discounts from franchise fee

The appellant is the well known provider of vat---education-al services to 5 to 17 year olds. It offers franchises of its teaching methods to individual instructors who pay a licence fee based primarily on a set amount per student.

Franchisees were paid a yearly award subject to various vat---education-al targets being met. The VAT treatment of this payment was called into question.  HMRC argued that the payment represented a distinct supply of services from franchisee to franchisor.  The appellant suggested that the pavement was a rebate which acted to reduce the value of the licence fee.

The Tribunal noted that the reward payments were linked to the supplies made by Kumon in return for the franchise fee. Under the terms of the agreement, instructors had certain obligations to Kumon; e.g. 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.

The Tribunal 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.  The rewards therefore operated as discounts on the franchise fee.



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