Colleges win VAT battle, but will HMRC win the war?

Four recent FTT decisions have gone in favour of colleges, reaffirming the position set by the Upper Tribunal in 2020. At the heart of these cases is a key question: do government grants for free education count as “consideration” for VAT purposes? While the latest rulings provide clarity for now, HMRC has reserved its arguments, and the issue is heading to the Court of Appeal in June 2026 – a decision that could reshape VAT treatment across the sector.

Key Facts

• The cases concerned whether grants from government funding agencies constituted a “consideration” for VAT purposes for the supply of education and vocational training provided free of charge to students.

• HMRC had issued assessments to each of the colleges, applying output tax adjustments under the Lennartz mechanism.

• The Tribunal noted that the funding was allocated under statutory authority, based on national formulas, and subject to claw-back for under-delivery. Importantly, the agreements prohibited charging fees for funded courses.

• The FTT concluded that it was bound by the Upper Tribunal’s decision in Colchester Institute, which held that such grants do amount to consideration, meaning the supplies fall within the scope of VAT.

• As a result, the colleges’ appeals succeeded on the substantive point, and the assessments were overturned – Lennartz payments were not due.

Why This Matters

Although the FTT decisions have consistently favoured colleges, these cases were determined on the papers without a hearing.  HMRC has reserved its arguments on the ‘consideration’ point, which is scheduled to be tested in the Court of Appeal in June 2026. This appeal will revisit whether government funding for free education constitutes consideration for VAT purposes, a question with significant implications for:

• VAT recovery on capital projects (and the continued relevance of the Lennartz mechanism),

• Treatment of grant-funded education as a business activity, and

• Eligibility for zero-rating and charitable reliefs.

Until then, the current position remains shaped by the Upper Tribunal’s 2020 ruling, but the sector should be alert: a reversal at the Court of Appeal could fundamentally alter VAT treatment for further education institutions.