On 27 March 2026, the Court of Appeal released its judgment in the Colchester Institute Corporation (CIC) VAT case, and it represents a major development for the further education (FE) sector. HMRC’s appeal has been dismissed, reinforcing the earlier tribunal findings that funding from the Education and Skills Funding Agency (ESFA) and the Department of Education (DfE) for 16–19 education constitutes payment for exempt business activity for VAT purposes.

This decision raises important questions for FE colleges across the UK, particularly in relation to VAT recovery, exposure to output tax, and continued access to charitable reliefs.

Below, we summarise the case, the court’s reasoning and what colleges should do now in light of the judgment.

Colchester Institute VAT case: background

Most FE institutions currently treat ESFA/DfE funding as non business income, meaning they can access valuable VAT reliefs, including the zero rate for the construction of new charitable buildings, and the reduced rate of VAT on fuel and power.

However, litigation has been ongoing since 2018 to determine whether this approach is correct. In 2020, the Upper Tribunal (UT) held that the provision of 16–19 education in the CIC case amounted to exempt business activity.

Despite the UT decision, HMRC has continued to allow FE institutions to choose whether to follow the CIC position or maintain their existing non business treatment.

The Court of Appeal judgment

HMRC appealed the case on two specific grounds, both of which the Court of Appeal has now rejected.

Ground 1: misapplication of Rayon d’Or

HMRC argued that the UT wrongly treated CIC as factually aligned with Rayon d’Or, a key CJEU case involving lump sum payments to a nursing home. They claimed the FE sector does not provide “permanent availability” of education in the same way.

However, the Court of Appeal held that even if Rayon d’Or was not determinative, HMRC failed to demonstrate any legal error in how the UT applied the principles from the case.

Ground 2: no direct link between funding and supply

HMRC asserted that consideration requires a direct and identifiable link between a payment and a supply and that FE funding does not relate to a specific service for a specific student.

The Court disagreed, finding that ESFA/DfE payments are made in return for colleges delivering education to eligible students. On that basis, the required ‘direct link’ exists.

What the ruling means for FE colleges

The Court of Appeal’s decision is binding on all taxpayers, not just those like Colchester which were seeking historical repayments based on VAT principles that have long since become obsolete. Unless HMRC appeal the court’s decision further, it seems highly likely that ESFA/DfE funding will have to be recognised as exempt business income.

If HMRC withdraws the current ability for colleges to choose between treatments, the sector may face:

• Loss of access to charitable VAT reliefs, including zero rated construction and reduced rate utilities.
• Potential exposure to output tax, particularly in the context of recent private school VAT reforms.
• Challenges to previous zero rating certificates, potentially going back four years.
• Change of use assessments, requiring colleges to repay VAT previously relieved.

Although a further HMRC appeal to the Supreme Court is possible, institutions should not assume the existing ‘choice’ will remain available.

What should colleges be doing now?

We recommend that FE institutions take proactive steps while the sector awaits HMRC’s response:

Begin scenario planning

Model the financial impact of a shift from non business to exempt (and possible standard-rated following the private school VAT changes) business treatment, both retrospectively and prospectively.

Review capital projects (past, ongoing and planned)

Projects undertaken within the last decade may be particularly vulnerable if charitable reliefs fall away.

Prepare a board level VAT risk assessment

Now is an ideal time to draft briefing papers for governors or senior leadership teams.

Reassess any protective ‘Brockenhurst’ claims

Such claims (relating to the VAT treatment of student led supplies to the public) may be interpreted as a commitment to CIC treatment and could unexpectedly expose the institution to the post 2025 rules affecting independent schools.

Model potential output tax exposure

All institutions — even those without historic claims — should assess what future VAT accounting obligations may arise.

How our VAT team can help

Our VAT specialists are closely monitoring developments and are supporting FE institutions across the UK as they assess the implications of the judgment.

We would be pleased to arrange an initial, free of charge meeting to discuss:

• Your institution’s current VAT position.
• The potential financial and operational impacts of the Court of Appeal ruling.
• How to prepare for any changes HMRC may implement.

FE colleges could face significant VAT exposure following this ruling. If you’re unsure how your institution may be affected, our specialists can help you quickly assess risk and identify practical next steps.

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