Grant funding and VAT: What the Colchester Institute ruling means for colleges

Grant funding may no longer be treated as outside the scope of VAT following the Colchester Institute ruling. Instead, it could be seen as payment for services, which may affect VAT reliefs and recovery for colleges and other organisations.

How do we treat grant funding?

In the VAT world, we have typically treated genuine grant funding as outside the scope of VAT, meaning that no VAT is accounted for on the amounts received. That funding might be connected to a non-business activity of the recipient, or it might not; “non-business” in this context being (very broadly) things that the organisation does without making a charge. However, all of this has been thrown into sharp focus with the recent release of the Court of Appeal judgment in HMRC v Colchester Institute Corporation.

What does this decision mean for colleges?

For now historic reasons, Colchester Institute Corporation (CIC) was arguing that the funding it received from central funding agencies for providing education was not outside the scope of VAT, but instead represented payment to CIC for the services that it provided to students and was therefore a business activity. As CIC’s services of education fall within the exemption for education, it would still not have to account for VAT on this income but would no longer be regarded as having non-business activities.

The same conclusion had been reached by the Upper Tribunal, which resulted in HMRC issuing a Brief advising that other taxpayers could choose whether to follow that earlier decision or to continue to treat themselves as having non-business grant funding. It remains unclear whether HMRC will rescind its previous Brief or whether it will appeal the matter up to the Supreme Court.

The change of grant funding from non-business to coming within the scope of VAT as consideration for a service will have significant VAT consequences across the sector. “Non-business” status brings with it some valuable VAT reliefs, notably that fuel and power can be taxed at 5% VAT rather than at the standard rate of 20%. In addition, construction costs of new buildings that are to be used for non-business activities can be charged at zero-rate VAT rather than 20%.

Although few new builds are taking place in the current funding environment, the loss of the reduced rate on fuel and power alone could represent a significant cost increase for colleges.

In addition, depending upon the particular VAT recovery calculation used by a college, the inclusion of grant funding as exempt income may further restrict VAT recovery, potentially reducing the recoverable proportion of VAT.

Does this have implications outside the college sector?

At this stage, we do not know for certain. However, it is important to note key features mentioned by the Court in its decision that are likely to read across to other sectors that receive grant funding:

• Funding subject to specific criteria as to what activities it can support
• Payments linked to results and data reported by the college
• The same provision given to funded and unfunded students

It’s clear that HMRC will be unhappy with losing this case, so future announcements from HMRC might explicitly seek to limit the CIC judgment to the further education sector.

Recommendations

Colleges should assess how this judgment affects their VAT profile, including the monetary impact from both:

• removal of VAT reliefs; and
• increased exempt income in partial exemption calculations.

Organisations in other sectors with similar funding arrangements should start to review their agreements to identify any grant income at risk of being re-characterised as generating business income.

Need help?

If you would like to discuss the implications of this decision, get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk.

Gillian McGill