Colchester Institute and VAT: What academy trusts need to know
For many years, academy trusts have treated core DfE funding as non-business income for VAT purposes, with Section 33B (of VAT Act 1994) ensuring VAT recovery broadly mirrors that of local authority schools.
However, the recent Court of Appeal decision in HMRC v Colchester Institute Corporation (CIC) has prompted questions across the education sector about when government funding should be treated as a non-business grant and when it might represent payment for a supply.
For a fuller explanation of the case and its wider implications across the education and not-for-profit sectors, read our in-depth guide, Colchester Institute and VAT: when does Government funding become payment for a supply?
What did the Court decide?
The Court found that funding from the Education and Skills Funding Agency (“ESFA”) received by a further education college for eligible students was not a grant, but third-party consideration for the supply of education. The funding was directly linked to identifiable students and only payable because educational services were being provided.
As a result, the income was treated as exempt business income rather than non-business funding.
What does this mean for academies?
For most academy trusts, we do not expect the decision to have a significant impact on core funding arrangements. Academies operate under a specific VAT regime, and reclassifying all DfE funding as exempt business income would undermine the purpose of Section 33B, which was introduced to ensure academies are not disadvantaged from a VAT perspective.
Nevertheless, academy trusts should consider whether some separately funded activities could be affected.
Nuances and exceptions within academy trusts
The specific activities within academy trusts that could still be affected are:
- Nursery provisions
- Sixth forms
In these cases, if funding is structured on a per-child or per-hour based, the risk of it being classed as third-party consideration is higher.
Why does it matter?
While both non‑business grants and exempt business supplies can result in no VAT being charged on income, the categorisation does affect the following:
- Whether VAT incurred on related expenditure can be recovered.
- Partial exemption calculations (affecting the proportion of VAT that may be recoverable).
- Interaction with special reliefs (e.g. academies’ Section 33B, capital goods schemes).
The CIC case demonstrates that even where the immediate VAT recovery outcome may seem similar, the legal distinction between non‑business and exempt business can be critical once you consider the wider VAT framework and previous or upcoming capital projects.
What should trusts do now?
HMRC has issued a brief stating that FE funding should continue to be treated as non-business until further guidance is provided.
However, given the direction of the CIC case, some education providers may need to consider whether treating relevant government funding as exempt, starting immediately, would be more appropriate for their circumstances.
Until further guidance is issued, this leaves a degree of uncertainty, and means it’s even more crucial that organisations review whether their own funding arrangements could be affected.
Academy Trusts should:
- Review funding streams that are calculated per child, per place or per hour.
- Assess whether existing VAT recovery methodologies (i.e. Business Non-Business and Partial Exemption) remain appropriate.
- Consider the impact on current and future capital projects.
- Document their VAT treatment and rationale ahead of any future HMRC guidance.
Key takeaway
Whilst mainstream academy funding appears unlikely to be affected by the CIC decision, trusts operating nurseries, post-16 provision or other separately funded activities should take the opportunity to review their arrangements. Understanding where funding may be viewed as payment for a supply rather than a grant will help ensure VAT positions remain robust and defensible as HMRC’s guidance continues to evolve.
How Price Bailey can help
Our specialist education VAT team is already helping academy trusts assess the implications of the Colchester Institute decision, review funding arrangements and understand the potential impact on VAT recovery and capital projects. To find out how we could help you, fill in the contact form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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