The Budget and universities

The headline stories will be about funding for research and innovation including a centre for research in aerodynamics, two new catapult centres for Transport Systems and Future Cities: “These will bring together world leading IT companies, innovative SMEs and leading universities to commercialise technologies that will increase efficiency and improve the quality of life for transport users and city residents.” There is also £100 million for new university research facilities designed to attract ‘co-investment’ from the private sector. This may tie-in with January’s announcement from David Willetts about new private postgraduate and research ‘universities’ (§2.32).

Tucked away in the passages on VAT reform are two further references which are likely to have more profound long-term implications.

One is familiar:

2.191 VAT: cost sharing – Following the announcement at Autumn Statement 2011 the Government will introduce a VAT exemption for services shared between VAT exempt bodies including charities and universities.

The other is not:

2.186 VAT: providers of education – The Government will review the VAT exemption for providers of education, in particular at university degree level, to ensure that commercial universities are treated fairly.

The first relates to shared services exemption from VAT which is likely to drive further outsourcing in the sector. The second signals changes to the rules governing VAT exemption on educational services and should be read alongside the commitment to amend UK law governing the status of public bodies ‘to ensure that there is clear transposition of EU agreements relating to the VAT treatment of public bodies carrying out their statutory duties in competition with the private sector’ (2.192).

HMRC provides a complex document on the VAT status of Education and Vocational Training (June 2011).

The key word ‘commercial’ heads up section 4.2, ‘Commercial providers of education’. These are private providers who do not enjoy charitable status. In the terms of the document, they ‘distribute profits’. Currently these providers are unlikely to be VAT exempt and so that cost must be included in the fees they charge for their training.

We should note that the Budget Statement therefore misuses the protected title, ‘university’, since by definition universities in the UK are not commercial in the sense meant here. As the document states, any education or training provided by a university or a university trading company is exempt from VAT. Similar exemptions apply to schools, sixth form colleges, FE colleges etc.

What the budget is then proposing is either to abolish VAT exemption at degree level, unlikely, or to allow ‘commercial’ providers the same exemption.

This is a further example of the government aiming to ‘create a level playing field’ for private education providers.

It creates conditions on the ground that erode the taxation advantages that non-profit operations enjoy and thus boosts the competitive challenge of new for-profit provision at degree level. We know that private equity groups and hedge fund lobbyists are keen to open up the English HE system as an investment opportunity. This change makes it more likely that established universities will seek to convert to alternative corporate forms.

There is one main advantage that profit-making companies enjoy: they can take equity investment (you cannot buy a share in a charity). What that means is that there can be no level playing field between charities and for-profit operations: if all other differences are erased then the game is rigged, with only those charities which can raise large donations (ie Oxbridge) unthreatened.

This post originally appeared at Critical Education