Colchester Institute Corporation wins Court of Appeal VAT funding battle against HMRC

The Court of Appeal has dismissed HMRC's appeal in The Commissioners for HMRC v Colchester Institute Corporation [2026] EWCA Civ 363, confirming that funding received by a further education college from two government agencies constituted consideration for the supply of education services for VAT purposes under Article 2(1) of the Principal VAT Directive (PVD).

The case concerned funding provided to Colchester Institute Corporation (CIC) by the Education Funding Agency (EFA) and the Skills Funding Agency (SFA) in respect of the VAT period November 2015 to January 2016. The central question was whether that funding — calculated by reference to student numbers, course types, retention factors, and programme cost weightings — was paid in return for CIC's supply of education to eligible students, or merely represented general conditional funding for CIC's activities.

The direct link requirement

The PVD requires a direct link between a supply of services and the consideration received for it. HMRC contended that no such link existed because the funding was not specific to individual course provision, individual students were not identified at the point of funding, and CIC retained substantial autonomy over which courses to offer and how many students to admit.

Lord Justice Foxton, with whom Lord Justice Arnold and Lady Justice Asplin agreed, rejected those arguments. The terms of both funding agreements were treated as the appropriate starting point. Clause 4.1 of the EFA agreement — providing that funding was paid "in consideration of" CIC's performance of its obligations — was identified as particularly significant, consistent with the approach taken by the Court of Justice of the European Union (CJEU) in Rayon d'Or and Saudaçor. The SFA's Financial Memorandum similarly stated that funding was paid "for learning provision" by CIC.

Treatment of Rayon d'Or

HMRC challenged the Upper Tribunal's earlier analysis of the CJEU decision in Le Rayon d'Or Sarl v Ministre de l'Economie et des Finances (Case C-151/13), arguing it was confined to so-called Kennemer-type supplies — where the relevant service is the making of facilities permanently available rather than their actual use. The Court agreed the Upper Tribunal had gone too far in describing Rayon d'Or as "not a case involving a Kennemer supply at all", finding that the CJEU had indeed placed some reliance on the permanent availability characterisation. However, the Court also held that the Upper Tribunal was right to treat Rayon d'Or as providing significant support beyond that narrow classification. Paragraph [37] of the CJEU's judgement addressed the broader proposition that a lump sum determined in advance by well-established criteria can constitute consideration for multiple supplies, a principle applied subsequently in Saudaçor and EQ in contexts that did not involve Kennemer-type services.

Rejecting HMRC's factual objections

On the facts, the Court held that the use of lagged student numbers as a proxy for advance funding did not sever the link between payments and course provision — it was an administratively convenient mechanism for funding in advance of enrolment. Clawback and in-year adjustment provisions in both agreements confirmed that the funding was calibrated to actual delivery. The monthly upload of individualised learner records covering over 200 data fields per student reinforced the character of the arrangement. The Court also noted that CIC issued receipts to all students — whether funded or fee-paying — reflecting the universal provision of services, with eligible students receiving a fee waiver funded by the agencies. That treatment was difficult to reconcile with a characterisation of the funding as merely general institutional support.

The absence of a direct legal relationship between the funding agencies and individual students was not fatal; settled authority confirms that third-party consideration can establish the required direct link without any contractual nexus between payer and service recipient. Equally, the statutory basis for the funding under section 14 of the Education Act 2002 — which expressly contemplates enabling persons to undertake courses of education — pointed towards proximity between the funding and the students who benefited from it.

Both grounds of appeal were dismissed.

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