R & C Brief 8 (2021): VAT treatment of public funds received by further education institutions

HMRC have published Revenue & Customs Brief 8 (2021): 'VAT treatment of public funds received by further education institutions' which provides interim guidance following the Colchester Institute Corporation decision until the position is further tested. 

Colchester Institute Corporation

This Brief follows the decision in Colchester Institute Corporation v HMRC [2020] UKUT 0368, where the Upper Tribunal (UT) found that government funding to educate a particular group of students represented a consideration for the provision of Education: an exempt supply for VAT purposes.

The consequence of accepting the UT decision in Colchester Institute Corporation (CIC) is that further education institutions, educating 16 to 19-year-old students, are providing education and training which:

• Falls within the scope of VAT.
• Is an exempt business supply, as opposed to an outside-the-scope non-business supply. 

This will impact the ability to obtain certain zero-rated VAT reliefs, for example on new buildings, which are available to certain Charities carrying out non-business activities.

HMRC's view

• HMRC's view is unchanged as a result of the CIC decision.
  • In HMRC's view, public monies received by further education institutions to fund the provision of education to 16 to 19-year-old students (and certain other categories of students entitled to full funding) are grants: the activity funded is outside the scope of VAT. 
• HMRC acknowledge the CIC decision and do not intend to appeal further because they were successful in their alternative arguments. 
• Steps are being taken by HMRC to test the treatment of public monies via a new appeal.

HMRC will not seek to apply the CIC decision in respect of grant-funded education to other further education institutions. 

What now?

• Education institutions can continue to treat such education as non-business, to claim charitable reliefs (where all the relevant criteria are met).
• Alternatively, institutions can choose to apply the CIC UT decision and treat the associated education as an exempt supply. 
  • This may result in the need to adhere to the Partial exemption rules. 
  • Error correction notices for any under or overpayment of VAT, including adjustments to previous claims for charitable reliefs, should be completed accordingly. 

HMRC will protect its position to secure tax revenues, pending the outcome of an appeal. 

Useful guides on this topic

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?

Land & Property: Relevant residential & relevant charitable purpose
What are the VAT rules for land and property that is used for a relevant residential purpose or a relevant charitable purpose? What are the clawback provisions affecting a change of ownership or use?

Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

External links

Revenue and Customs Brief 8 (2021): VAT treatment of public funds received by further education institutions

Colchester Institute Corporation v HMRC [2020] UKUT 0368