The Treasury is considering removing VAT on university projects funded under the Private Finance Initiative in an effort to inject life into the flagging scheme.
While there are still hurdles to developing the final package, the move is described by Treasury and Department for Education and Employment insiders as a "serious" attempt to address criticism.
An announcement may be made with the Budget although sources say the VAT modifications are being considered independently of the public expenditure round.
At present, a university joining forces with the private sector to build, for instance, an accommodation block for students is liable for VAT for the fee payable to a firm for management and servicing of the facility. Because of their taxation status, universities cannot recover VAT charges generated in the course of such transactions. This has meant that the private sector has found it hard to achieve competitive rates for services and, in the case of student accommodation, affordable rents.
The VAT obstacle to PFI in higher education was highlighted in a recent joint study by the Committee of Vice Chancellors and Principals and the Department for Education and Employment. The study says the VAT regime is a "major constraint". A PFI deal to provide a service is subject to VAT whereas universities and colleges would not incur it if they provided the service themselves. The working group recommended the Government "examine urgently ways of offsetting the constraint".
In contrast to universities, Government bodies and the National Health Service can reclaim VAT paid on contracted-out services and PFI deals.
The CVCP/DfEE study says that while larger institutions have been able to find ways out of the VAT noose, "these solutions are expensive and will not be applicable in all cases".
Margaret Deacon, finance director at the University of Brighton, says she would welcome a move by the Treasury to abandon VAT on university PFI projects.
"It would clearly make the Initiative a more attractive and cost-effective solution than at present". But she adds: "The PFI is not the only vehicle the universities use for partnership with the private sector. The CVCP/DfEE report proposed that there is a range of different partnerships which would help meet the specific needs of individual universities. In my view if there is to be a change in the VAT regime, it would be more productive if it were more broadly applicable."
Fari Akhlaghi, head of the unit for facilities management research at Sheffield Hallam University, says key contractors, specialising in facilities' services and management are active in PFI schemes involving the health service and local authorities but have shied away from university projects.
"One of the main reasons stated by these companies is the unfairness and complexity of the VAT rules that are applied and which they believe put them at a disadvantage," he says.