VAT guidelines
VAT is complicated
You may think your VAT question is a simple one – but though the questions may be simple, when it comes to VAT in Higher Education, 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.
The Tax and Treasury Department can be contacted via vatenquiries@st-andrews.ac.uk
We will always try to help you navigate your way around this complicated tax. In addition, to assist you, we have an A to Z of VAT help sheets that cover more common and tricky areas of VAT.
Be prepared for the answer that the VAT treatment “depends on exactly what is happening”
The HE sector not only undertakes activities subject to all possible rates of VAT, but can also apply charity and other reliefs. 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…”
VAT Coding reflects the wide range of VAT treatments
Selling
S – Standard Rated – VAT @ 20% applied to a sale.
Z – Zero Rated – VAT @ 0% applied to a sale.
E – Exempt – no VAT on the sale.
FS – VAT @5% applied to sale (used for qualifying fuel sales)
O – Outside/ Outwith the Scope of (UK) VAT – no VAT on the sale
OWR – Outside/ Outwith the scope of VAT with the right of recovery – no VAT is applied to the sale, but VAT directly incurred on making the sale can be recovered by HMRC. (Used where the sale is to an overseas customer, where had the customer been based in the UK it would have been a taxable sale). Due to the complexity of determining when this code can be used only the Tax and Treasury department use it.
Purchases/ Buying
N – Non Recoverable VAT – used in the majority of cases as most of the University purchases are for exempt sales or indirectly used to make supplies that cover all types of sale (un-attributable) – see Why is VAT incurred such a problem for the University? Section below.
R – Recoverable VAT – used in the minority of cases to recover VAT charged when linked to a taxable sale– see Why is VAT incurred such a problem for the University? Section below.
O – Outside/ Outwith the Scope of (UK) VAT – no VAT on the purchase.
E – Exempt – no VAT on the purchase.
Z – Zero Rated – VAT @ 0% applied to a purchase.
ZMV - Zero rated medical and veterinary purchases – VAT @0% for the purchase of qualifying items.
F - VAT @5% applied to purchase (used for qualifying fuel purchases) where the Vat is recoverable.
FU - VAT @5% applied to purchase (used for qualifying fuel purchases) where the Vat is non-recoverable.
Teaching and research
Education
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). Therefore all purchases in relation to supplying education will be N coded for VAT purposes
Student accommodation income and student catering is also exempt from VAT as this is closely related to the supply of education.
Research
Research income for universities may be:-
- outside the scope of VAT altogether (often referred to as non-business research). This is generally where the research is funded for the ‘general public good’ and there is no direct benefit for the funding body.
- subject to the standard rate of VAT (if the funder is UK based and receives something in return)
- outside the scope of UK VAT with the right of recovery (if the funder is based overseas and receives something in return).
When considering if something is being received in return often we look to where any intellectual property (IP) arising as a result of the research may reside. With research it is often the ability to commercialise any IP arising that leads it to be a taxable supply.
Often the University will enter into collaborative research whereby all parties are named on the grant application or/and where joint publication is expected which is freely available to all. This type of arrangement would be outside the scope of VAT.
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.
VAT and the reimbursement of travel costs
Members of staff may, at times carry out work (present papers, attend meetings) for other bodies in return for reimbursement of travel costs. In some instances, this travel is arranged and paid through the University and then recharged on to the customer.
Please note that because the University is a VAT-registered body, it may not be as simple as just reclaiming the actual amount paid. The VAT treatment of the recharge follows the supply of the staff member’s time. So, if the staff member is acting in a consultancy or other standard rated capacity then VAT must be charged on top of the travel cost.
For more information, please see the VAT and the reimbursement of travel costs webpage.
Overseas suppliers
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) which can actually happen.
For more information see Buying Goods and Services from Outside the UK
Costs and Opportunities
Why is VAT incurred such a problem for the University?
We have said earlier that costs can be recovered from HMRC if directly used to make taxable supplies and not if directly used to make non-taxable ones.
We have seen in the sections above though that education is not a taxable supply and most grant funded research is not either. The amount of VAT that can be directly recovered therefore is minimal.
But what about overheads and other costs that are indirectly used to make taxable and non-taxable supplies by the University. That’s where partial exemption methods come in – annual calculations are undertaken to determine the proportion of such VAT which can be reclaimed. Most universities are only able to reclaim a very small percentage of the VAT incurred on such costs. On average the University’s recovery is around 7%, which makes VAT is a real cost to the University.
Compare this to other trading businesses – they charge VAT to their customers but can recover all of the VAT they pay to suppliers. Conversely the University does not charge VAT to the majority of its customers and as a result can only recover a small amount of VAT they pay to suppliers.
How does the Tax and Treasury team help save the University money?
Knowing the reliefs and other opportunities available is imperative for the University to reduce its VAT burden. 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. 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 tax and treasury team identify potential areas where reliefs may apply, ensure that the conditions are met to claim them and that the VAT treatment of them is correct. They also seek to reduce VAT leakage by understanding how the University buys and sells and therefore identifying where VAT is unclaimed.
The courts have determined that tax reliefs and their conditions must be construed narrowly (i.e. strictly adhere to the letter of the exemption), and the tax and treasury team provide advice to ensure that relief conditions are met.
Tax Strategy
The University of St Andrews has a tax strategy that outlines the University’s policy and approach to conducting its tax affairs and management of tax risk.
The strategy is encompassed in the following principal aims:
- Pay the right amount of tax
- Act prudently and minimise tax risk using suitable tax planning
- Ensure that staff have a sufficient knowledge of taxation to recognise tax issues and act appropriately
- Develop systems to improve the efficiency of tax compliance
- Comply with a set of tax principles
- Maintain a low risk status with HMRC
Further reading on the University’s tax strategy can be found here.
Why the Tax and Treasury team may ask you a question that has not come up before even though you have been doing the same thing for a number of years.
Firstly, and simply the VAT regulation may have been amended, or HMRC has issued updated guidance on how the VAT regulation is to be interpreted that may differ to used previously.
Even then, 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 case law. 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.
The University has to follow the laws of the land and if case-law overturns treatments that were previously allowed then we may have to revisit our VAT treatment.
In addition, as pointed out in the section above the conditions associated with reliefs may change and we need to make sure we still qualify to use them.
And lastly; although we have treated something in a particular way in the past it does not mean that we cannot re-question or re-evaluate the VAT treatment in the here and now.
We ask these questions not to annoy but to ensure we continue to comply with VAT law.