From education to employment

The Ghost of Christmas Past

Cast your mind back to Christmas Eve 2020; were you already well on your way to enjoying the festive period, work a distant memory? Or were you eagerly clearing down emails in anticipation of starting the festivities? Or were you starring in disbelief at the Tax Tribunal website, reading the decision of the Colchester Institute Corporation (Colchester) case?

Hopefully only those of us working in VAT were in the latter category, but that decision sent shockwaves through the VAT world with implications still to be felt by the further education sector.

As a reminder, Colchester’s decision in the Upper Tribunal found that even fully grant funded education was to be treated as a “business” activity, and VAT exempt. Prior to that decision being released, fully funded provision has been accepted as being “non-business” and outside the scope of VAT. This fundamentally changes the VAT profile of further education as well as potentially other sectors operating fully grant funded services.

The Ghost of Christmas Present

We have now benefitted from HM Revenue & Customs (HMRC) issuing a Business Brief in response to Colchester. Helpfully, this confirms that HMRC will not seek to apply the findings of Colchester but a college is able to choose to do so. If they decide to follow Colchester, then HMRC does expect that they will apply the business treatment of funded education in all aspects of their VAT reporting.

Colleges can therefore choose to continue treating fully funded provision as non-business and take the benefit of VAT relief on new buildings being constructed for the use of those learners, as well as continuing to receive fuel and power at the reduced rate.

The Ghost of Christmas Future

Where does this leave us going forward? The answer remains, in unchartered territory. We have a binding decision in law but we have published guidance from HMRC that purports to permit us not to follow the law. This makes for difficulties with reaching decisions on VAT, particularly for large capital projects where a possible 20% increase in cost is difficult for the Board to gain comfort on.

We know HMRC will not appeal Colchester but are looking to take another cases through the courts to re-visit these issues. That will take time, probably years, and could result in further confirmation of the Colchester outcome.

For now, the future is unknown but steps can be taken to help manage this uncertainty. Understanding the impact of Colchester for your college, taking advice on whether to follow the decision or not, and reviewing capital projects are all recommended. 

A word of caution though – a decision now to apply Colchester may look like the right decision, particularly if you have no plans for any future capital investments in infrastructure.  But, who knows whether that decision will turn out to be the right one when looked back upon in 5, 10 or even 20 year’s time.  Plans change, and the VAT reliefs lost by applying Colchester can be very significant indeed!

Gillian McGill, associate director at RSM UK

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