VAT & FE Sector: Case Update

Court of Appeal confirms VAT treatment of further education funding

We have the latest decision in the series of appeals for Colchester Institute Corporation (CIC), whereby the Courts have dismissed HMRC's appeal and provided important clarity on the VAT treatment of government funding received by further education colleges.

This is a landmark decision, and the implications will be wide - please click here for a link to Greg’s LinkedIn post on this just last week.

The case concerned funding paid to CIC by the Education Funding Agency and the Skills Funding Agency for the provision of approved courses to eligible students. HMRC contended that the funding did not constitute consideration for a supply of services, which would have placed those activities outside the scope of VAT and restricted CIC's ability to recover input tax on related costs.

The Court rejected that position. It confirmed that where funding is calculated by reference to student numbers and course types, is tied to the delivery of specific approved courses, and includes clawback provisions where delivery falls short, there is a sufficient direct link between the funding and the services provided. That direct link is the key test - and on these facts, it was met.

The decision resolves a dispute that had run through the First-tier Tribunal and Upper Tribunal, at both of which HMRC also failed. The substantive arguments were only fully aired at Court of Appeal level, making this the definitive ruling on the point.

For further education colleges, the practical outcome is significant. Government funding of this kind is consideration for a supply of educational services, those activities are economic activities within the scope of VAT, and input tax recovery on associated costs follows accordingly.

Colleges and their advisers should review funding arrangements in light of this decision, particularly where input tax recovery on related expenditure has been restricted or is under challenge.

VITA advises across the education sector on VAT recovery, partial exemption, and funding-related VAT issues. If this decision raises questions about your institution's VAT position, please get in touch.