VAT treatment of certain public funds received by further education institutions

VAT treatment of certain public funds received by further education institutions

Following the Court of Appeal's decision in The Commissioners for HMRC v Colchester Institute Corporation [2026] EWCA Civ 363, the VAT treatment of public funding paid to the further and higher education sector has been reframed.

In this case, the Court of Appeal confirmed that public funds paid to a further education institution were not merely non-business grants, and so outside of the scope of the VAT system (on which basis HMRC has historically operated, and as they argued in this case), but rather the funds constituted third party consideration for the supply of education to students.  This has brought the activity of Colchester Institute Corporation – delivering approved courses to eligible students - within the scope of VAT as a business activity, albeit it one that will remain exempt, as a supply of education.

HMRC's response is set out in the Revenue and Customs Brief 3 (2026): VAT treatment of certain public funds received by further education institutions.  This establishes that HMRC accepts the Court of Appeal's judgement, and confirms that it will not pursue a further appeal, but has not yet implemented a substantive policy change, and is instead maintaining the current position pending consultation and further guidance.   In particular, the response is clear that institutions do not need to revisit the application of any VAT that may arise in respect of independent school fees, but those that have already adopted the third party consideration position should continue to do so at this stage.   In the interim, then, higher and further education institutions may continue to apply their existing VAT treatment; any future change in HMRC policy will apply prospectively only.

However, it may be that HMRC seek a means of sidestepping this decision, be that through further guidance or engagement with other government bodies.

Despite representing a taxpayer victory on its particular facts, the decision does not appear to offer any clear or immediate benefit to funders or recipients operating within this sector, nor to other charitable or quasi-charitable bodies receiving comparably structured funding outside the educational context.  The taxpayer in Colchester was in a relatively unusual technical position in terms of VAT liabilities, and so the attraction for them in arguing for 'business' classification of public funding arose from circumstances which are likely to have limited wider application across the education and charity sectors.

There is, though, still potential for the Court of Appeal's decision in this case to have broader significance, and it does give rise to potential adverse consequences for other organisations, which may now be required to treat grant funding as consideration for supplies.  

Firstly, the Court of Appeal's reasoning places emphasis on the substance of the funding arrangement rather than the label attached to it.  The key question is whether there is a direct link between the funding received and a specific supply of services: where funding is conditional on the delivery of a defined service to beneficiaries (eg as in Colchester, the provision of approved educational courses to a defined student group), it is likely to be characterised as third party consideration for a supply.

Secondly, the decision underlines that charitable status is not determinative. VAT treatment does not turn on the status of the institution (including charitable status), and instead depends on the nature of the underlying transaction.   

As a result, in practical terms, higher and further education institutions (including those with charitable status) in receipt of public funds can anticipate increased scrutiny of whether their 'grant income' is in fact, in substance, payment for services - thereby falling within the scope of VAT.   Some organisations may consider whether alternative funding structures could be adopted, including 'block' funding arrangements, which are less directly linked to prescribed outputs or quantified service delivery.  

Overall, then, whilst HMRC has indicated that any formal policy changes will be prospective, it is clear that they are moving away from the long-standing assumption of treating public funding as outside the scope of VAT.  This signals a potentially significant shift in the VAT treatment of publicly funded further and higher education institutions.