Education finance in focus: planning ahead with confidence

As the new academic year approaches, finance teams across both single academy trusts (SATs) and medium-sized multi-academy trusts (MATs) are entering a key planning period. Budget setting remains front of mind, but this year it sits alongside tighter cash flow, closer HMRC scrutiny and fresh uncertainty around VAT treatment in the education sector.

Taken together, these issues make it more important than ever for trusts to take a joined-up approach to financial planning.

Strong budgets start with a wider view

Budget setting should never be treated as a once-a-year task. The strongest trusts see it as an ongoing process that supports curriculum delivery, staffing, estates planning and wider strategic goals.

Pupil numbers, school improvement plans and pay costs will always be central, but the Department for Education continues to encourage a broader approach. For SATs, that includes using external benchmarking and sector data to test assumptions. For MATs, it means creating consistency across academies while still allowing for local accountability.

Planning for pressure, not just performance

The Department for Education’s latest guidance makes it clear that good financial planning must sit within a strong framework of governance and accountability. Trust leaders are expected not only to set realistic budgets, but also to test how those budgets would hold up under pressure.

That means looking closely at pupil number changes, running different scenarios and identifying where the main risks sit. This matters because many trusts continue to face pressure from rising staff costs, growing SEND demand, estates investment needs and possible changes to disadvantage funding.

Cash flow still needs close attention

Alongside budget planning, cash flow remains a challenge for many trusts, especially those that are growing.

The timing of grant income, the need to fund capital works and the level of available reserves can all create pressure points during the year. A clear reserves policy, regular cash flow forecasting and, where appropriate, centralised treasury management can all help trusts stay in control. Financial resilience is not just about balancing the numbers on paper. It is about having the visibility and flexibility to respond when pressure builds.

VAT changes are adding another layer

Trusts also need to keep a close eye on VAT, as recent developments could affect how some funding is treated.

A recent Court of Appeal decision in HMRC v Colchester Institute Corporation confirmed that certain government funding received by education providers should be treated as payment for education services rather than as a non-business grant. In practice, that means those activities are treated as VAT-exempt business activities, which can reduce the amount of VAT an organisation is able to recover. Although the case involved a further education college, the decision could have wider relevance across the education sector.

Why this matters now

This ruling matters because it could affect how trusts calculate VAT recovery on their costs.

HMRC has not yet updated its guidance, which leaves some important questions unanswered. Trusts may need to consider whether the decision could affect earlier periods, whether current VAT recovery methods still stand up, and whether partial exemption calculations need to be reviewed. Waiting for absolute clarity may not be the best option. Reviewing your position now is the more sensible move.

HMRC is taking a closer look at VAT126 claims

At the same time, HMRC is carrying out more checks into VAT126 refund claims, particularly for academies and MATs.

These reviews are becoming more detailed and are often focused on whether activities have been correctly treated as non-business. HMRC is looking carefully at cases where parents or third parties are charged, where activities are optional rather than core, or where contributions are requested, even if they are labelled as voluntary. It is also testing whether VAT claimed under the VAT126 scheme is directly linked to eligible non-business activity.

School trips are one area under the spotlight

One area drawing particular attention is school trips.

HMRC is examining whether trips are a genuine part of free education or whether they are optional activities supplied to parents or pupils. Where parents are asked to contribute, HMRC may argue that the activity is a business supply and that VAT should not be reclaimed under VAT126. Even where a trust’s approach is broadly right, weak records or unclear explanations can still lead to challenges. Common issues include reclaiming VAT on mixed-use costs, inconsistent treatment of income and a lack of clear supporting evidence.

A joined-up approach matters more than ever

Financial planning, VAT treatment and governance are no longer separate issues. They are closely linked, and trusts need to view them that way.

A strong financial position depends not only on a well-built budget, but also on clear oversight, sound judgement and good supporting evidence. Trustees and local governors need to be able to challenge assumptions, understand risks and ask the right questions, whether that is about cash flow, reserves, VAT recovery or HMRC exposure.

Looking ahead

For trusts preparing for the year ahead, this is a good time to step back and review the full picture.

Looking again at budgets, cash flow and VAT treatment now can help avoid problems later. In a climate of continued pressure and greater scrutiny, a proactive approach will always put trusts in a stronger position.