What the Colchester VAT ruling means for charities

Executive summary

The Court of Appeal decision in Colchester Institute Corporation (March 2026) and HMRC Revenue & Customs Brief 03/26 represent a significant development in how funding is classified for VAT purposes, particularly in distinguishing between a grant and consideration for a supply.

For charities, this is especially important. Many receive funding from public bodies to deliver services for the benefit of third parties. The Court confirmed that this type of funding does not automatically qualify as a non‑business grant. Instead, where there is a clear link between the funding received and the activity carried out, it may be treated as consideration for a supply and therefore a business activity. In practice, this means that income which charities have historically treated as non‑business could now fall within the scope of VAT, either as a taxable or exempt supply depending on the nature of the activity.

Key message for charities

HMRC has recognised that this decision has wide‑ranging implications. Although it does not intend to appeal, it will be reviewing and updating its policy in this area.

In the meantime, charities and other affected entities can continue applying their current VAT treatment, and HMRC has confirmed that no retrospective action will be taken.

Why is this important

Many charities receive funding from public bodies where the benefit is delivered to third parties. Following this decision, some of these arrangements may now be regarded as business activities rather than non‑business grants, depending on their structure.

These could fall within the scope of VAT as either taxable or exempt supplies, depending on the nature of the activity undertaken.

What is the impact for charities?

There may be a significant impact on VAT recovery and VAT reliefs for charities.

Many VAT reliefs depend on the level of non‑business use or activity, including:

Zero‑rating on new buildings (Relevant Charitable Purpose – RCP use)
Reduced rate of VAT on fuel and power

VAT recovery for charities is based on business/non‑business apportionment and partial exemption calculations. This judgment is likely to affect existing methodologies currently used.

Recommended next steps for charities

Although there is no immediate requirement to change treatment until HMRC updates its guidance, it is advisable to begin assessing the potential impact.

Existing agreements and contracts involving funding from public bodies will remain valid. However, where these are due for renewal, they should be reviewed in light of the Colchester decision and updated HMRC guidance to determine whether they still qualify as non‑business activities
Any combined method for business/non‑business apportionment and partial exemption should be considered to ensure it remains appropriate
Any partial exemption special method may no longer produce a fair and reasonable result and should be reassessed
Planned RCP building projects should be considered now to lesson any potential impact arising from this decision