Policy paper

VAT treatment of certain public funds received by further education institutions

Published 27 April 2026

Purpose of this brief

This brief sets out HMRC’s response to the ruling of the Court of Appeal in the case of Colchester Institute Corporation (CIC) [2026] EWCA Civ 363. The judgment was released on 27 March 2026.

Who should read this brief

Further education institutions and tax advisers. 

Background

The ruling concerns the VAT treatment of public monies received by further education institutions to fund the provision of free education to eligible students.

HMRC historically took the view that monies received by these institutions from government funding agencies was a grant and therefore the activity it funded was outside the scope of the VAT system.

However, Colchester Institute Corporation (CIC) successfully argued that the monies represented third party consideration paid by the funding agencies for the supply of education to students.

In reaching its judgment the Court of Appeal undertook a muti-factorial analysis with the appropriate starting point being the terms of the EFA and SFA Funding Agreements themselves.

It concluded that funding was paid in consideration of Colchester Institute Corporation (CIC) delivering approved courses to eligible students, not just as general support, consistent with the Upper Tribunal’s decision on 22 December 2020.

HMRC is not appealing the ruling of the Court of Appeal and will now consider the terms of the judgment in consultation with relevant stakeholders. Any policy change will be announced by way of a Revenue and Customs Brief (RCB) accompanied by updated guidance.

In Revenue and Customs Brief 08/21, following the Upper Tribunal’s decision on 22 December 2020 HMRC gave institutions the option of either:

• applying the third-party consider position
• continuing to treat education as non-business

This was while HMRC tested the Upper Tribunal’s decision in the present appeal.

As this appeal has now concluded, for those institutions that have not previously adopted the third-party consideration position, any change to the VAT treatment of this funding will only apply prospectively from a future date yet to be announced.

For the avoidance of any doubt as HMRC have not changed their position on the substantive issue considered by the Court of Appeal. Institutions do not need to consider or take any actions regarding the application of any VAT that may arise under the private school fees legislation.

These institutions can continue to use appropriate reliefs until the date of any change and HMRC will not revisit these after the date of any change.

Those 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.

Further information

The judgment of the Court of Appeal is available on The National Archives at The Commissioners for HMRC v Colchester Institute Corporation - find Case Law - The National Archives.

Revenue and Customs Brief 08/21 Revenue and Customs Brief 8 (2021): VAT treatment of public funds received by further education institutions.