Up to Pounds 25 million could be drained from the higher education sector if plans by Customs and Excise to change the way in which universities recover VAT go ahead.
The British Universities Finance Directors Group is holding talks with senior customs officials in a last-minute attempt to halt the new calculation method due to come into effect on August 1.
The group's chairman, Miles Hedges, said: "If it goes ahead, universities could be faced with having to cut jobs, reduce library book procurement and make other savings to meet the shortfall. Under the financial pressures we are operating, the loss of this money could be very damaging."
Universities cannot charge VAT on activities such as teaching and research for charitable bodies, but neither can they recover the VAT associated with the direct costs incurred by these activities.
For some activities, such as holding conferences and carrying out commercial research projects, universities pay 17.5 per cent VAT. But they can recover the VAT on all costs directly incurred in delivering these services.
Buildings, maintenance and administration make up a large part of universities' costs. Institutions have been able to recover a small percentage of VAT incurred this way.
Mr Hedges, Nottingham University finance director said: "VAT recovery for support costs could be halved." He estimates institutions could lose from tens to hundreds of thousands of pounds, depending on their size.
says Customs and Excise now want to change the basis on which it calculates the total amount of VAT universities can recover. He said: "It is the one area where Customs has leeway and it seems it is now under pressure to increase its tax take from VAT. If the changes go-ahead, VAT recovery for support costs could be halved."
Mr Hedges estimates the loss for an institution could range from 10s of thousands of pounds to 100s of thousands of pounds, depending on its size.
A Customs spokesman said that the planned changes are not a case of universities being singled out: "All we are trying to do is bring universities into line with other partially exempt organisations and institutions."