VAT and grant funding

The Court of Appeal has held that grant funding arrangements put in place by government agencies to fund a college in relation to the provision of education and vocational training to young people amounted to consideration for those supplies for VAT purposes: Colchester Institute Corporation v HMRC [2026] EWCA Civ 363. The Court has held that there was a sufficient direct link between the funding and the provision of services to students even in the absence of the allocation of amounts to specific individual supplies and this was not simply a case where CIC was being funded generally on condition that it provide eligible courses.

Background

Colchester Institute Corporation (CIC) provides vocational training and education to young people. In relation to its accredited courses, CIC received funding from government agencies, including the Skills Funding Agency (SFA) and the Education Funding Agency (EFA). CIC entered into agreements with both SFA and EFA in relation to the funding received which were in standard form.

A dispute arose between CIC and HMRC over the requirement for CIC to account for deemed output VAT in relation to its activities where it had earlier recovered VAT on building projects under the Lennartz mechanism. CIC claimed repayment of overdeclared output VAT for 2010 to 2014 based on the argument that its provision of education and training was in fact a business activity with the funding representing consideration for those supplies. The UT in that earlier case (CIC UT 2020) agreed with CIC relying on the CJEU decision in Rayon d’Or (Case C-151/13) in which it was held that a lump sum paid by state sickness insurance fund to care home providers constituted consideration for the care provided. However, the UT in that case ultimately held in favour of HMRC on a separate point such that HMRC was unable to seek permission to appeal the consideration issue.

The current proceedings essentially relate to the same arrangements for later periods and involve HMRC seeking to overturn the earlier UT decision that the grants received by CIC amount to consideration for its supplies. This led to the rather unusual, earlier UT decision in which HMRC essentially agreed that the UT was bound by the CIC UT 2020 decision to reject HMRC’s case, with HMRC seeking to leapfrog its appeal to the Court of Appeal.

Court of Appeal decision

In order to succeed in its appeal, it was recognised that HMRC must show both that: the UT in CIC UT 2020 erred in law in its analysis of the Rayon d’Or decision; and erred in its interpretation and application of the direct link requirement between supplies made and consideration received.

In relation to the Rayon d’Or decision, the Court of Appeal has held that it could be distinguished from the facts of this case. The UT in CIC UT 2020 took the view that Rayon d’Or was not a case involving the provision of a right of access to facilities (a Kennemer supply ie where the nature of the supply is the making of particular facilities or services available, rather than their actual supply). Rather, it was authority for the principle that a lump sum payment calculated by reference to a formula can nonetheless constitute consideration for the supply of services even in the absence of being personalised to any specific supply to a particular recipient.

The Court of Appeal has held that the earlier UT were wrong to conclude that Rayon d’Or was “not a case involving a Kennemer supply at all”. It was clear from the CJEU judgment that reliance was placed on the “permanent availability” of the services as and when needed and the Court was relying on the reasoning in Kennemer in that context. Therefore, in misconstruing the decision in Rayon d’Or as being determinative of the case before it, the earlier UT had erred in law.

Direct link

However, the Court also held that the decision in Rayon d’Or was relevant and clearly provided considerable support for CIC’s appeal and the question whether there was a direct link between the grant funding and supplies made by CIC. On that issue, HMRC argued that what was required was a direct link between the grants and the specific benefit provided to an individual student and that, in this case, that link was too general and unspecific. CIC countered that the funding agreements between the agencies and CIC made it clear that funding was provided in return for the provision of learning programmes to students and the absence of a specific price for each supply by CIC of a course did not prevent the necessary reciprocity arising.

The Court agreed that the question for it was whether the funding agencies “were funding certain activities of CIC on the basis that certain conditions were met or paying for supplies of education by CIC to eligible students”. That decision required a multifactorial approach but the appropriate starting point was the contractual arrangements. The funding agreements strongly supported the view that the funding agencies were paying the funds in return for the provision of services to eligible students in the form of approved courses, rather than funding CIC generally on condition it provide such services. In particular, both agreements indicated that payment was made for services provided to the students and that clawback arrangements were in place should estimated student numbers not arise.

The Court also noted that students received a “receipt” in respect of the courses they attended and that a notable difference to cases involving funding that did not amount to consideration was that, in this case, CIC also provided the same services to non-eligible students who were required to pay for them.

HMRC made the point that the identity of individual students who were to be provided with courses was not known at the point of funding. However, the Court rejected the argument this meant the funding could not be consideration for supplies to them. There was no uncertainty as to the identity of students who actually enrolled and took the courses and these were made known to the funding agencies under the arrangements.

Overall, the Court of Appeal has held that the funding arrangements in this case did meet the requirements for a direct link between the funding and the provision of services by CIC to students.

Comment

The question whether grant funding will amount to consideration for a supply or is outside the scope of VAT will very much depend on the specific arrangements entered into in each case. However, since the arrangements with these particular government funding bodies were in standard form, this decision should be widely applicable to other education providers receiving this kind of funding from the SFA and EFA.

More broadly, bodies receiving grants and other funding must assess whether the funding they receive is third party consideration for supplies they are making involving the necessary direct link and reciprocity or whether or it is merely a general subsidy. As always, the contractual obligations entered into will play a significant element in determining the correct analysis and care should be taken in drafting such arrangements accordingly.

In this case, CIC was arguing for the grants to be treated as consideration for its exempt supplies of education such that it would not be required to reverse the Lennartz treatment as its supplies were not outside the scope of VAT, but were part of its business activity. However, in most cases, treating grants as consideration for a supply may have a negative impact as it will require the recipient to either charge VAT on those grants or treat the amount received as inclusive of VAT.