HMRC have published 'Revenue & Customs Brief 3 (2026): VAT treatment of certain public funds received by further education institutions' in response to the Court of Appeal (CoA) ruling in HMRC v Colchester Institute Corporation [2026] EWCA Civ 363.
The Court of Appeal (CoA) ruling released on 27 March 2026 found that monies received by further education institutions to fund the provision of free education to eligible students was paid in consideration of delivering approved courses to eligible students, not just as general support. It was not, therefore, outside the scope of VAT.
HMRC historically viewed the monies received by these institutions from government funding agencies as a grant, so the activity funded by those monies was outside the scope of VAT.
Colchester Institute Corporation successfully argued that the monies represented a third-party consideration paid for the supply of education to students.
- HMRC has decided not to appeal the ruling, and any policy change will be announced by way of a future Brief.
In Revenue and Customs Brief 8 (2021), following the Upper Tribunal's decision, HMRC gave institutions the option of either:
- Applying the third-party consideration position.
- Continuing to treat education as non-business.
For those who had not previously applied the third-party consideration, any change in VAT treatment of this funding will only apply prospectively from a future date.
Institutions do not need to consider or take action regarding the application of VAT that may arise under the private school fees legislation.
- Appropriate reliefs can continue to be used until the date of any changes. HMRC have said they will not revisit these after the date change.
- Institutions that chose to adopt the third-party consideration position should continue to do so.
- These institutions should not have continued to apply reliefs appropriate to their previous non-business status and HMRC will take appropriate action in respect of this.
- These institutions may be within scope of the private school fees legislation and should ensure that they understand all the VAT obligations and financial consequences that would follow.
Useful guides on this topic
Private school fees & VAT
On 29 July 2024, the Chancellor announced that from 1 January 2025, all education services, vocational training and boarding services supplied by a private school, or a connected person, will be subject to VAT at the standard rate of 20%. What does this mean?
Education & VAT
What rate of VAT applies to education? What sort of services are classed as education? What do you do if you have multiple supplies, including education? What cases are there on VAT and education?
Time of supply (Tax Point)
The time of supply of goods or services determines the date on which VAT becomes due. There are a number of different rules which must be considered.
Input VAT: What constitutes a valid claim (& VAT invoice)?
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