VAT rule change confirmed over education grants after UK Court of Appeal ruling

UK tax authority HMRC issued an updated brief over treatment of public funds by further education institutions, which confirms education facilities will no longer have a choice over how to apply VAT rules to grants in the near future.

It comes after the Court of Appeal found in favour of the Colchester Institute Corporation after it argued that grant money – previously considered to be outside the scope of VAT – should constitute third party consideration.

Andrew McCarthy, a universities tax expert with Pinsent Masons, said the ruling would mean institutions may need to reconsider their previous approach to the issue.

“Affected institutions for the moment can apply relevant VAT reliefs – so for areas such as charitable use reliefs related to buildings, fuel and power, and so on,” he explained.

The long-running case came after CIC had challenged whether funding for education for 16-19 year olds is classed as exempt business activity payment for VAT purposes. Previously, such funding had been classed as non-business income, which enabled VAT relief in some areas.

In 2020 the Upper Tribunal agreed with CIC that the funding constituted third party consideration for an exempt business supply, and now that position has been upheld by the Court of Appeal.

HMRC said in its guidance it would not be appealing the decision, and that while it had previously allowed institutions to either apply the third-party consideration position or treat education as non-business, it would be changing to align with the ruling at a future date.

“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,” it said in the guidance.

Bryn Reynolds, a VAT and disputes expert with Pinsent Masons, said there could be broader impacts for institutions as a result of the ruling.

“Institutions that have already treated the funding as business/consideration for a supply of education should continue to do so and consider whether any corrective action is needed in respect of previously claimed reliefs,” he said.

“Partial exemption frameworks will need updating as will, potentially, capital goods schemes.”