2 March 2011
Government should address the anomalies that see colleges paying considerably more in VAT than schools, Public Finance has been told.
An Association of Colleges survey found that, in 2009/10, further education and sixth form colleges paid £221m in ‘irrecoverable’ VAT. This sum is equivalent to 3% of their total income.
Colleges are obliged to pay VAT on the purchase of most goods and services, including audit fees, energy supplies and agency staff, but cannot charge VAT on many of their supplies, chiefly education and training.
The net effect of this is VAT costs are carried by colleges on all of their taxable purchases, the AoC said. It added that none of the 28% of colleges not registered for VAT are able to reclaim their VAT costs.
Respondents to the survey, completed by 161 (43%) of colleges, described current arrangements as ‘unfair’ and ‘dysfunctional’. Several pointed out that the recent hike in VAT to 20% would add significantly to their cost base.
One respondent said: ‘The VAT situation in colleges is absurd. Approximately 90% of our funding comes (ultimately) from the government. After incurring time and expense in managing VAT – which can be complicated in colleges and carries penalties if we get it wrong – we pay £400k back to another government agency.
‘VAT rules are stopping real benefits and value-for-money improvements being gained from shared services.’
Julian Gravatt, assistant chief executive of the AoC, told PF it was ‘slightly galling’ that a different approach was taken with schools and colleges and criticised the complexity of the system.
The AoC has calculated that in 2009/10 colleges spent £2.5m on fees for VAT consultants.
Gravatt also criticised the perverse incentives caused by the regime.
‘If you’ve got a college and you’ve managed to get the VAT off for a new building because it’s for non-business use, you’re better off not running things in the evening,’ he said.
He also pointed out that the current VAT regime acted as a tax on outsourcing, as colleges had to pay VAT on outsourced services, but not on those provided in-house.
‘Maybe that’s a good thing but it doesn’t fit particularly [well] with some of the wider objectives the government has about sharing services,’ he told PF.
The AoC expects this month’s Budget to contain provisions that allow academies to reclaim VAT on both VAT-able and exempt supplies by creating a new section of the 1994 VAT Act.
Gravatt said: ‘It’s good they’ve recognised the issue for academies and it would be good if they could then take the issue on and address the anomalies that exist in colleges as well.’
