17 June 2021
HMRC has issued an important statement on the VAT position of grant funding for further education colleges in response to the Upper Tribunal’s recent decision in Colchester Institute Corporation.
HMRC says it will bring a new appeal to challenge the tribunal’s finding (which could have put colleges’ past and future VAT recovery at risk), and has decided not to enforce the Colchester decision while this new litigation is in progress.
The Colchester Institute decision
HMRC’s long held policy is that state-funded further education is a non-business activity for VAT purposes. While this means that further education colleges are not entitled to full VAT recovery on all their costs, this non-business status often allows them to obtain VAT relief on particular items, notably new buildings and fuel and power expenses.
However, in January 2021, the Upper Tribunal decided that Colchester Institute’s education of 16-19 year olds is a business activity, meaning that its grant income from government agencies was considered an exempt supply made by the college.
This finding jeopardises current and past VAT recovery by further education colleges, particularly those seeking zero-rating on current building projects or who have claimed zero-rating on college buildings constructed in the last ten years. It also threatens eligibility for the 5 per cent reduced rate of VAT on fuel and power. The decision could also potentially affect other state-funded educational bodies (such as academies) and possibly other recipients of central grant funding, for example hospices.
HMRC’s latest statement
In Revenue and Customs Brief 8 (2021), HMRC says it will not appeal the Colchester Institute decision, but will instead challenge its finding on the VAT treatment of grant funding through a new appeal. In the meantime, HMRC’s policy concerning grant funded education will remain unchanged and it will not impose the Upper Tribunal’s decision on any further education institution. This means that, until this new appeal is decided, colleges may continue to treat such education as non-business and claim charitable reliefs, provided all the relevant criteria have been met.
HMRC adds that colleges can choose to apply the Colchester Institute decision and treat their education as exempt business supplies of education and submit error correction notices for any under or overpayment of VAT, including adjustments to previous claims for charitable reliefs. HMRC says it will protect its position to secure tax revenues, pending the outcome of its next appeal.
What should further education colleges and other stakeholders do now?
HMRC’s statement is welcome news as colleges can, for the time being at least, stick to their current VAT treatment and retain charitable VAT reliefs while further litigation takes place. HMRC’s statement also indicates that it aims to preserve these reliefs for colleges in the long term.
While non-business treatment of grant funding will be the best approach for the vast majority of colleges, there is an option for those for whom it is favourable to treat the grant income as business and submit a VAT claim to HMRC.
In the meantime, institutions should proceed with caution if considering an expensive capital spend and take this hiatus as an opportunity to establish the potential cost to them should Colchester be implemented in full by HMRC.