HMRC’s response to the Court of Appeal decision in favour of Colchester Institute Corporation (CI) accepts that grant funding of educational courses may be within the scope of VAT.
The consequences matter for UK further education institutions (FEIs).
Following the Court’s judgement, summarised here, HMRC have released a policy paper (Revenue and Customs Brief 3/2026) in which they confirm they do not intend to appeal the decision. The paper outlines an approach for two categories of further education institution:
FEIs that treated their grant income as non-business revenue (i.e. outside the scope of VAT)
These FEIs may continue treating their grant funding as non-business income until HMRC change their policy.
HMRC confirmed that they will change their policy and will communicate this via a future brief, without confirming when.
HMRC confirmed that FEIs that had applied “appropriate reliefs” would not suffer from any adverse retroactive effect when the change takes place.
FEIs that treated their grant income as third-party consideration (e.g. for VAT exempt supplies of education)
According to HMRC, these institutions:
- Should not have applied non-business reliefs
- May need to charge VAT on their grant funding
On the second point, the private school VAT legislation specifically includes education suitable for 16 to 19-year-olds as being potentially VATable where consideration is received. Previously, grant funded education providers would not have needed to consider whether their supplies of education were VATable. HMRC are putting FEIs on notice now that, if they have applied the Colchester Institute route i.e. treating grant funding as third-party consideration, HMRC will “take appropriate action”.
HMRC’s response suggests that they do not intend to take action against all FEIs that treated grant income as consideration for a VAT exempt supply of education. HMRC’s two-pronged approach appears designed to:
- Allow FEIs to continue applying the non-business treatment until HMRC finds an appropriate solution
- Deny education institutions from obtaining an unfair VAT advantage
If an FEI did receive such an advantage, it might be required to account for output VAT on its supplies of education.
When this policy makes its way into standardised VAT compliance questionnaires, there is a danger that the original purpose may get lost. The world of VAT is a complex terrain of rates, reliefs and exceptions. Without specialist tax guidance, unconsidered answers to seemingly straightforward questions during VAT compliance checks could lead to unfortunate VAT consequences.
Colleges and other education institutions receiving grant funding for the provision of education to the 16-19 sector, should make it a priority to review their funding agreements and VAT treatment.
How BKL can help
To discuss what HMRC’s plans could mean for your organisation’s VAT position, please contact Luigi Lungarella using the form below.
