At 20 per cent, the addition of VAT to shared services may materially impact the viability of sharing services between different institutions. This potential prospect, despite whether it will apply in practice, can be a barrier to some organisations exploring the scope for shared efficiencies.
In the weeks prior to this summer’s Olympics, we explored with various education sector stakeholders whether VAT is always an insurmountable barrier that even the world’s leading pole-vaulters couldn’t surpass, or instead a routine hurdle on the track that athletic education institutions could pass with ease?
The answer is: it depends. Importantly, this means there are scenarios where VAT is not an obstacle. Therefore, it is well worth establishing the height of the hurdle and whether the effort to overcome it justifies the benefit.
The height of the hurdle
It is accurate that most of the activities of the higher education sector do not entitle an institution to recover VAT – exempt and non-business education, and non-business research or other grant-funded activity. However, there are exceptions, most notably commercial research, consultancy services and supplies of intellectual property, which are all usually taxable activity.
It is also worth considering the VAT status of the customer of education, if they are VAT registered then they may be entitled to recover any VAT they incur and, by delivering education through a subsidiary, it may be possible for the education to be a taxable supply. Importantly, for these taxable activities, if a supply is purchased that exclusively supports them, then any VAT incurred on the purchase should be recoverable in full.
So, what to do if purchases don’t exclusively relate to taxable activity, which are most VAT-bearing costs? Well, firstly, it is advisable to establish how much of the VAT incurred will be a cost. Whilst it is true that most higher education institutions’ overall VAT recovery rates are relatively low (less than 20 per cent), some institutions have higher recovery rates for certain activities, where the irrecoverable VAT on a cost is less significant.
Where the VAT cost remains a barrier, then other possibilities can be considered. There are various options for improving performance when sharing services, and the associated effort and complexity vary, as do the VAT consequences.
These include:
- Merging and becoming a single entity or VAT group.
- Joint education delivery, so both parties make their supplies to the end customer (instead of any additional supplies to each other).
- Joint employment of the staff that deliver the shared services.
- Supplies that are closely-related to education, which can be exempt.
- Outsourcing to a shared vehicle or in-sourcing the delivery of a service but with third-party management of the service.
This is not an exhaustive list, but all of these are scenarios that have been explored or implemented. So, let’s explore how these different scenarios impact on the VAT hurdle.
Merging
From a VAT perspective, while there will be a lot of VAT and wider tax points to consider, a VAT cost is unlikely to be a significant barrier to a merger. Where the merger results in common ownership and/or control, then it should be possible for the former institutions to work as a team, either a single legal entity or forming a VAT group. As a consequence, this should remove the VAT on any inter-institution/intra-VAT group charges.
Joint education delivery
There are increasingly instances of qualification content requiring input from multiple institutions. Where the qualification is ultimately delivered by one institution, then it can result in the other institutions effectively supporting it as subcontractors. This can result in VAT being due on those sub-contracted services (subject to one of the other solutions applying, eg the inter-institution charge being for closely-related services). However, where both institutions are seen as jointly delivering their education directly to the customer, the VAT position may be different as there may be no supplies between the two entities, meaning it is more VAT efficient.
Joint employment
At the Olympics there are now an increasing number of competitors that have changed nationalities. In athletics it seems this seldom happens more than once, but joint employment effectively involves a member of staff representing multiple institutions and changing who they are working for regularly. Where staff are employed on joint employment contracts, and under the coaching and instruction of an institution, then there should be no supply of the employment-related costs of those staff between the joint employers. So, an academic could be jointly employed by multiple institutions, working under the instruction of the relevant faculty head of each organisation when they work for that institution, without VAT being applied to the charges for their time.
Closely related to education
In addition to supplies of education in return for consideration being exempt, so are the supply of goods and services that are closely related to the supply of education. This requires that those supplies are directly necessary for delivering the exempt education to the student, and that the supply is for the direct use of the student. The supply must also be made by an eligible body (for the purpose of the education exemption), and could be made directly to the student or to the institution that is supplying the exempt education. Similarly, there is an exemption for the supply of examination services, which can apply between educational institutions.
Shared service vehicles
Much like the pole vault, some solutions to obstacles are more complicated than others but can be used to successfully clear higher barriers. It can be hard to fathom how one begins to pole vault, let alone makes it to the Olympics. Perhaps the cost sharing exemption is the VAT equivalent.
At a high-level, utilising the cost sharing exemption is possible where institutions establish a shared services vehicle, the cost sharing vehicle. Then for the cost sharing vehicle to charge its owners for services without VAT. However, to benefit from the exemption a number of conditions must be met, including that the cost sharing vehicle cannot generate a profit and all services must be supplied at cost. Whilst adding complication, in both meeting the conditions for the cost sharing exemption and being able to demonstrate that the conditions are met to HMRC’s satisfaction, it has been successfully applied in other charitable sectors, sharing facilities management, call centre and back-office services.
Insourcing but with outsourced management
Sometimes there are complicated elements to a relatively simple activity, like the final motions in the high jump after a simple run-up. Likewise for some services like facilities management and cleaning, it may be that employing the delivery staff is easy but managing them more difficult, and it may be that institutions choose to outsource the entire service (ie delivery staff and management).
Full outsourcing usually results on VAT on the full cost, but there are hybrid models if the service cannot be managed in-house. Where the staff are employed in-house but the management of those staff is outsourced, the VAT cost is lower as VAT is only incurred on the management cost, reducing the irrecoverable VAT.
In sum, VAT may not always be the hurdle to working together with other institutions. It is worth exploring your options to help a project across the finish line.
This article is published as part of our Radical Efficiency series in association with KPMG.
