The Court of Appeal has ruled that government funding received by further education institutions constitutes payment for the educational services supplied to eligible students. The Court confirmed that funding agencies provide money in return for the delivery of approved courses, supported by contractual obligations and detailed learner‑level reporting.
This establishes that government‑funded education represents a business activity carried out for consideration, even when students do not personally pay fees.
Consequences for Further Education Institutions
1. Reclassification of Core Educational Activity
The judgment confirms that government‑funded education supplied by Further Education (FE) colleges is an exempt business activity, signalling a move away from the assumption that such activity is wholly non‑business. This aligns with previous tribunal commentary indicating that grant‑funded education can constitute an economic activity.
2. Implications for VAT Recovery
Colleges will already have VAT recovery methods in place that include business/non-business and exempt activities. The reclassification of the non-business element to exempt shouldn’t have a huge impact on overall recovery percentages but it may be worthwhile Colleges reviewing their existing partial exemption methods.
In addition, colleges may lose entitlement to important VAT reliefs traditionally available to charitable or non‑business bodies, including:
- Reliefs on qualifying new buildings used for a relevant charitable purpose (RCP)
- Reduced VAT rates for fuel and power
- Other charitable VAT concessions dependent on non‑business status
This may lead to substantial increases in capital and operational costs across the sector.
3. Private School Fee Legislation
The other significant impact of the ruling is that FE colleges will potentially now fall within the VAT legislation introduced on 1 January 2025 that makes fees charged for the education of 16-19 year old students standard rated. Currently FE Colleges have been excluded from this legislation on the basis that the majority of their supplies have been non-business. This ruling changes that position as now the majority of FE colleges income will be classed as business which falls within the scope of fees that are liable to VAT at the standard rate.
4. Historic and Ongoing VAT Claims
The decision also affects colleges that have submitted or intend to submit VAT claims relating to past capital projects or earlier VAT periods under the Lennartz accounting treatment. Several institutions have already secured significant VAT repayments.
The Court of Appeal’s ruling strengthens the legal position underpinning such claims. Nevertheless, further litigation or policy changes could still alter the longer‑term landscape. Institutions with historic claims or exposure arising from former Lennartz accounting treatments should reassess both risks and opportunities.
5. Next Steps
It is clear that this ruling will potentially have a significant impact on the further education sector not only from a financial perspective but also from a VAT compliance perspective. It is anticipated that guidance on the implications will be issued by HMRC is due course and we will keep you updated as soon as this becomes available.
In the meantime, if you want to discuss the impact in further detail, please let us know by contacting either:
Louise Gray – [email protected] or Kate Connolly – [email protected]
