HMRC has ruled out an appeal to the Supreme Court over a long-running VAT battle with Colchester Institute. In a policy briefing published this week, the tax agency confirmed it will not appeal last month’s Court of Appeal ruling that paved the way for colleges to reclaim VAT on pre-2010 building projects. Officials now plan to “consider the terms of the judgment” in consultation with stakeholders before publishing updated guidance. However, colleges that have chosen to apply the same VAT discounts on large building projects as Colchester Institute “may” fall under the same tax rules as private schools, HMRC has warned. The dispute brings an end to a complex nine-year court fight between HMRC and the Essex college over what tax discounts can be claimed on a large building project it started in 2008. It is understood to impact an estimated 20 to 30 colleges with similar claims – made using a rule known as the ‘Lennartz mechanism’ that was withdrawn in 2010. Judges have repeatedly accepted Colchester Institute’s arguments that government grants paid to colleges are a “business activity” for tax purposes, because funding agreements suggest they are for delivering approved courses to eligible students. HMRC argued grant funding agreements were for more “general” financial support. The tax agency’s decision means colleges with Lennartz claims can continue to recoup VAT paid on certain pre-2010 capital projects. But the ruling has also cast uncertainty over college sector finances, as they could lose access to charitable “reliefs” worth millions, such as zero-VAT rate for new-build construction projects and 5 per cent tax rates on fuel and power. Await further guidance The HMRC briefing confirmed that colleges that have not followed the Colchester Institute can continue to use these reliefs until new guidance is issued on “a future date yet to be announced”. It also warned colleges which have followed Colchester that they “may be” within the scope of private school fees legislation and should ensure they understand “all the VAT obligations and financial consequences that would follow”. Socrates Socratous, VAT consultancy partner at accountancy firm Buzzacott, said it is very important that colleges claiming reliefs will not face any “retrospective impact” when the rules change. He added: “It is however noted that HMRC refers to the multi factorial analysis of the court and the need to review the funding agreements. “This might give an opportunity to limit the potential wider effect of the decision, hence the reference to further consultation.” An HMRC spokesperson said: “We have accepted the Court of Appeal’s judgment and will now consider its implications with stakeholders before announcing any policy changes.” The case highlights long-running concerns from colleges that the sector is losing hundreds of millions of pounds because, unlike schools and academies, they cannot reclaim VAT on purchases linked to education and training. In December, the prime minister pledged to “have a look” at the issue and “talk to the Treasury”, admitting that further education needs “more resource”. Downing Street did not respond when asked for an update this week. Julian Gravatt, deputy chief executive at the Association of Colleges, said: “The HMRC update seems to provide clarity on a very complicated area of VAT, but individual colleges may need to check with their tax advisors and/or use the non-statutory clearance request process to ascertain their position. “Colleges and their students benefit from the VAT reliefs on energy bills and zero-rated new building costs but still pay a net cost of more than £200 million a year. “Unlike schools and other public sector organisations, they cannot reclaim these costs and, as a result, there is less money available to be spent on further education and equipping the next generation with the skills they need to help the UK thrive.”