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A new Court of Appeal ruling could reshape VAT treatment for FE college.
18 May 2026
A recent Court of Appeal ruling has brought renewed attention to how VAT is treated in the Further Education sector. While HMRC’s full response to the outcome is still uncertain, the potential implications for colleges could be significant.
For now, the key message is simple: this is an evolving situation, but one that colleges should not ignore.
The case centred on how FE colleges treat VAT in relation to grant funding. The Court of Appeal has ruled that DfE/ESFA funding for FE Education should be treated as business (exempt) income, rather than non-business income, which has traditionally been the approach.
HMRC has issued its initial response in Revenue & Customs Brief 3 (2026), confirming it is not appealing the case further, so it establishes a binding precedent. HMRC is considering the implications, and any VAT policy changes will be communicated in due course, including:
As a result, colleges are in a period of wait and watch, but with a need to understand potential risks.
At the heart of the issue is how grant funding is classified for VAT purposes.
If funding is treated as business (exempt) income rather than non-business income, it could have a knock-on effect on how VAT is applied across a range of areas.
This includes:
While the technical details can be complex, the practical impact is clear: VAT costs could increase.
For many colleges, the main areas of exposure are likely to be:
Colleges have historically benefited from zero-rating on certain new buildings used for non-business activities. If the interpretation changes, this relief may no longer apply, and in some cases, there could be a risk of reviewing past positions.
Many colleges currently benefit from reduced VAT (5%) rates on costs such as fuel and power related to non-business use. A change in treatment could mean these costs are subject to VAT at 20%, placing additional pressure on already stretched budgets.
The potential impact goes beyond technical accounting.
For colleges, this could mean:
More broadly, the case could also influence how VAT is interpreted across the wider education and public sector.
While nothing is confirmed yet, the scale of the potential impact means it is important to stay informed and prepared.
Although there is no immediate need to take action, there are some sensible steps colleges can take to stay ahead.
It is important to understand your exposure. This includes reviewing past and current positions on buildings, VAT reliefs and funding arrangements to identify where risks might arise.
Keeping a close eye on HMRC updates is also essential, as further guidance or clarification is expected as the situation develops.
Most importantly, colleges should avoid making changes too quickly without advice. The position is still evolving, and acting too early could create unintended consequences.
This is one of those areas where the detail is still emerging, but the potential implications are clear. Taking time now to understand the possible impact will help colleges respond quickly and confidently, whatever the final outcome.
VAT in the FE sector is already complex, and developments like this can create additional uncertainty. Having the right support can make a real difference. If you’d like to discuss what this VAT update could mean for your college, contact Bishop Fleming today for expert support and advice.
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