Following the Court of Appeal decision which determined that certain grant funding provided to Colchester Institute Corporation (‘CIC’) constituted third party consideration for the provision of educational services, HMRC has now published Revenue and Customs Brief 3 (2026).

For earlier commentary and background on the case, see our article published on the Court of Appeal decision here.

The brief sets out HMRC’s response to the decision and confirms that HMRC will not be appealing to the Supreme Court. HMRC has stated that it will now consider the judgement in consultation with stakeholders, following which any change in policy will be announced in a separate Revenue Brief and updated guidance.

Interestingly, HMRC refers to the multifactorial approach taken by the Court in reaching its decision. HMRC has said that its starting point is to review the contractual arrangements which may indicate that it is considering whether the decision should be ring-fenced to the college sector, particularly if there are differences in funding arrangements for other sectors such as school academies or charities more generally.

It is highly unlikely that such a ring-fenced approach would be challenged, given that the original CIC appeal arose from a unique set of circumstances involving the application of the “Lennartz mechanism”, which was withdrawn in 2011.

In the meantime, there are some important points for colleges to consider:

• Colleges that have treated government funding as third party consideration should now review the private schools legislation, introduced from 1 January 2025, to determine whether supplies of education could become subject to VAT. Any VAT reliefs previously claimed should also be reviewed, as adjustments may be required where there is no entitlement due to business use

• For colleges progressing capital projects and continuing to follow HMRC’s policy that grant funding supports non-business activity, there may be merit in ‘fast tracking’ such projects if the funding is available. This could allow institutions to continue benefiting from available zero-rate VAT reliefs on new building construction before any future policy changes are introduced. HMRC’s confirmation that previously claimed reliefs will not be revisited will provide reassurance to many institutions

• Colleges that followed HMRC's policy and treated government funding as grants, in line with HMRC’s previous guidance following the Upper Tier Tribunal decision, (Revenue and Customs Brief 8 (2021): VAT treatment of public funds received by further education institutions - GOV.UK), can continue to use non-business reliefs

• HMRC will apply any changes following the consultation from a future date and it will not revisit these if there is a change in Policy

For the wider charity sector and school academies, there is currently no immediate action required. However, organisations should continue monitoring developments closely while awaiting further HMRC guidance. The key question will be whether HMRC seeks to limit the wider application and impact of the decision by distinguishing CIC on its specific facts and funding arrangements.

See HMRC’s brief here.

How we can help

The implications of the CIC decision could be significant for colleges, academies, and charities with capital projects, complex funding arrangements, or partial exemption considerations.

If you would like to discuss how the decision may affect your organisation, planned projects, or VAT recovery position, please get in touch with our VAT team.