The recent Court of Appeal decision in favour of Colchester Institute Corporation (CI) has important implications for further education colleges across the UK.
The Court confirmed that government funding received for non-paying students can constitute consideration for a supply of education services. As a result, these activities are business activities within the scope of VAT, albeit ones that remain exempt from VAT as supplies of education.
This distinction is significant. While the income may not necessarily become VATable, treating the activity as business (rather than non-business) may affect colleges’ approach to input VAT recovery.
Background to the case
During the period in question, Colchester Institute Corporation provided education to both fee-paying and non-paying students. Government funding was received to support the delivery of education to those students who did not pay fees themselves.
Where an organisation receives public funding, the VAT treatment depends on its nature. Broadly, funding will either:
- Constitute consideration for a supply (and therefore fall within the scope of VAT); or
- Represent general funding (and therefore fall outside the scope of VAT as non-business income)
The key question is whether there is a sufficient link between the funding received and the services provided.
Court of Appeal decision
The Court placed significant weight on the terms of the funding arrangements between CI and the relevant government bodies.
HMRC argued that, because students did not pay for their education, the activity was non-business and outside the scope of VAT. However, the Court disagreed.
It found that:
- The funding was paid specifically in return for CI delivering education services
- CI was required to provide defined services
- The funding had to be used solely for that purpose
On this basis, the Court concluded that there was a direct link between the funding and the services provided. The funding was therefore properly characterised as consideration for a supply, bringing it within the scope of VAT.
Importantly, although the activity is within the scope of VAT, the supply of education remains VAT-exempt (subject to meeting the exemption conditions).
HMRC’s position
- The education provided to non-paying students was not a business activity
- There was no direct link between the funding and specific services
- The funding was general support rather than payment for supplies
CI’s position
- The same education services were provided to both paying and non-paying students
- The only difference was the source of payment (government rather than the student)
- The funding was given in return for delivering education and should be treated as consideration
Court’s view
- CI’s analysis was preferred
- The funding was conditional on delivering education services
- This created a direct link, meaning the activity falls within the scope of VAT (but remains exempt)
Key principles reinforced by the case
- Describing funding as a “grant” does not determine its VAT treatment.
- The wording and structure of funding agreements are key in determining whether a supply exists.
- Where funding is tied to the delivery of specific services, it is more likely to be treated as consideration for a supply.
- Payment does not need to come from the recipient of the service. A third party (such as government) can provide consideration.
- Even if funding is calculated using formulas or variable factors, it can still constitute consideration.
Why this matters for further education colleges
The decision shifts government-funded education more clearly into the category of business activity (albeit VAT-exempt, where eligible) rather than non-business activity.
This may have important consequences, including:
- Reassessment of how income is classified for VAT purposes
- Changes to partial exemption methodology
- Interaction with charitable VAT reliefs
Colleges should review their funding agreements and VAT treatment to ensure they align with the principles established by this decision.
How BKL can help
To discuss what this ruling could mean for your organisation’s VAT position, please contact Luigi Lungarella using the form below.
