It feels like a simple question to ask of anyone specialising in value added tax (VAT) in higher education – but though the questions may be simple, when it comes to HE VAT, the answers invariably are not. VAT is not for the faint-hearted: back in 2001, in the Court of Appeal case of Royal and Sun Alliance vs. Commissioners of Customs & Excise, Lord Justice Sedley told us that “beyond the everyday world …. lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted”, which sums it up – bizarre, exasperating and illogical, but occasionally fun.
There isn’t just one single rate of VAT. With two positive rates of VAT, a zero rate, exemption from VAT and the possibility of payments being outside the scope of UK VAT or outside the scope of VAT altogether, the picture is confusing enough before you add the HE sector’s own special quirks into the mix.
The HE sector not only undertakes activities subject to all those possible rates of VAT, but can also apply charity reliefs. And this is further complicated by HE’s unclear public sector status. Sometimes it is a part of the public sector – for example, for the new IR35 rules relating to engaging contractors. But sometimes it is not – a case related to the University of Cambridge deemed universities do not to meet the specific definition of “a body governed by public law” for VAT purposes. This latter issue affects institutions that undertakes commercial activities but also provides much for free or below cost. And with universities buying and selling both goods and services across borders the complications only grow.
All this in combination means that determining a university’s VAT position can become something of a headache. You can see why the headline question is so often answered with “it depends…”
Teaching and research
Even looking at just the main activities carried out by universities, a complex picture emerges. The main supplies of education by a university are exempt from VAT. This brings its own costs and complications as any VAT incurred on the costs of providing that education is not reclaimable from HMRC (because VAT is recoverable on costs of making ‘taxable supplies’ and not recoverable on costs of undertaking exempt or non-business activities). Student accommodation income is also exempt from VAT, so construction of student accommodation needs to be carefully planned to avoid incurring large irrecoverable VAT costs. The cost of construction of student accommodation may be relieved of VAT but using the accommodation for other purposes outside of term time can invalidate the relief. It’s possible to use another zero-rating provision to avoid a VAT cost, but that has its own strict conditions. So construction is an area that needs to be considered in-depth as an unexpected 20% additional cost can make such projects financially unviable.
Research income for universities may be outside the scope of VAT altogether (often referred to as non-business research), may be subject to the standard rate of VAT (if the funder is UK based and receives something in return), or may be outside the scope of UK VAT (if the funder is based overseas and receives something in return). VAT is not recoverable on the cost of providing non-business research, which can lead to issues with research funders if this irrecoverable VAT hasn’t been costed into the funding application. But it is recoverable on the cost of providing research on which VAT is charged or which is outside the scope of UK VAT with a right to recovery.
Goods and services purchased from overseas may look like a bargain as there is often no VAT charged by the supplier. Don’t be fooled though – the likelihood is that UK VAT will be due in the form of reverse charge VAT (self-charged VAT on the purchase of services from overseas), acquisition tax (self-charged VAT on the purchase of goods from EU countries) or import VAT and duty (charged by HMRC when goods enter the country from outside the EU). Again, costing this VAT into projects upfront is vital to ensure the project doesn’t run into financial difficulties later. And don’t assume that if the overseas supplier does charge local VAT that there won’t also be a UK VAT cost. While unusual, double taxation is not unheard of on the purchase of services from overseas (as the recent introduction of Goods & Services Tax in India has highlighted).
Overheads & Opportunities
But what about overheads and other costs which don’t relate solely to taxable supplies with full VAT recovery on costs, or to exempt or non-business activity with no VAT recovery? That’s where partial exemption methods, and business/non-business splits come in – annual calculations undertaken to determine the proportion of such VAT which can be reclaimed. Most universities are only able to reclaim between 1% and 20% of the VAT incurred on such costs so at least 80% of this VAT is a real cost. The method of calculation itself is agreed between each individual university and HMRC and should be revisited every few years or when the university’s activities change. A new method can take many months to agree. It could take years in the past, but things have improved for many universities since BUFDG and HMRC agreed a Partial Exemption Framework for the HE sector.
Knowing the reliefs and other opportunities available is imperative for universities to reduce their VAT bills. There are many reliefs available, some which are used frequently and others which are more obscure, but all of which have many conditions which must be met before the relief can be claimed. So this is an area of frequent confusion and error among universities and suppliers. Reliefs include the purchase of certain qualifying equipment used for medical or veterinary research or teaching, the purchase of advertising to the public, and the construction of certain buildings. The courts have determined that tax reliefs and their conditions must be construed narrowly, so considerable time and money is spent in the HE sector ensuring that the relief conditions are met for high cost items such as buildings.
Once you think you know VAT, a court decision will come along and show that you don’t! The VAT landscape for HE is an ever-changing one thanks to caselaw. And even once a case has been decided at the First-tier Tribunal (FtT) the implications can change (more than once) as the case can be appealed at several levels. The ultimate arbiter for UK VAT is currently the Court of Justice of the European Union (CJEU) as VAT is an EU tax governed by EU law. This looks set to change with Brexit on the horizon, but the CJEU is still likely to be a court of persuasion in the UK, if no longer a court of precedence.
There have been plenty of recent cases relating to education – the Newcastle University FtT decision released in January regarding reverse charge VAT on overseas agents’ fees, the FtT decision in Summit Electrical Ltd regarding the zero-rating conditions for constructing student accommodation, and the Court of Appeal decision in SAE Education Ltd looking at the VAT liability of education provided by alternative providers partnered with universities, which could have a major effect on how the HE sector provides these courses, as well as a major financial impact on universities currently working with such partners.
But it’s not just cases relating to education which affect universities – for example, during September alone the CJEU released several decisions which could impact universities. The Aviva, DNB Banka and the EC vs. Germany cases all relate to Cost Sharing Groups (but none in the education sector) and so will affect how HMRC in the UK applies the Cost Sharing Exemption which is available to universities in certain circumstances; and the recent CJEU decision in Iberdrola Inmobiliaria Real Estate Investments, while specifically relating to a company building a holiday village, confirmed the principle that VAT on costs incurred on work which benefits someone else may still be recoverable if that work was necessary in order for you to make your taxable supplies.
Advice and support
This whistle-stop tour of just some of the complexities of VAT in the HE sector illustrates why it’s important for universities to invest in VAT expertise – whether in-house or appropriate external experts – particularly when undertaking new activities, or large transactions or projects. It’s also important for HMRC to understand more about the HE sector and how it operates, to reduce the burden of unrealistic and unnecessary demands. BUFDG has been developing a relationship with the HMRC compliance team which deals with HE and FE for the last three years, meeting regularly to discuss issues arising in the sector and to escalate problems universities may be having. The same HMRC team is also forging links with the UK’s HE funding bodies to try to understand the sector better.
All of which is very promising, but will it ever make VAT in HE the simple tax that was promised in 1973? While I’d like to answer with the usual ‘it depends’, I think the answer in this case is a clear ‘no’.