An unfair 'trading' tax to be avoided

July 7, 1995

Recent moves by the Inland Revenue to impose taxation on universities and further education colleges will add millions of pounds to the cost of providing higher education.

The introduction of new tax guidelines will necessitate a comprehensive and costly reorganisation of universities' financial arrangements that legitimately reduces the tax. Following this, it is unlikely that any new tax will be collected but substantial additional administrative costs will be incurred in the process. When Government policy is placing an onus on universities to make further "efficiency gains" through stringent cost controls, it seems odd that the Treasury should allow the Inland Revenue to change long-established practices and add to the administrative burdens.

As registered charities providing education, universities would be assumed to be exempt from Corporation Tax. Not so. According to the Revenue, "trading" activities, such as profits from conferences, letting accommodation to non-students during vacations and from certain research and consultancy activities, are considered taxable because they are not closely enough linked to the university's primary purpose of educating its students.

Ironically, the emergence of a higher level of "trading" activities in universities is in direct consequence of the success of Government policy in making the higher education institutions more self-sufficient by increasing the proportion of funding obtained from the private sector. This policy has pushed universities into improving the commercial exploitation of their existing physical and human resources by such means as increased letting activity and the provision of expertise in research and consultancy. If the profits from these activities were being diverted from higher education, or applied beyond the confines of the university itself, taxation would be understandable but this cannot happen as charitable status ensures that all funds are reinvested in education.

The legislation imposing the tax is not new, but, for many years, in keeping with a more benign and helpful approach to charities, the Inland Revenue did not seek rigid compliance. The new tax guidelines, which are complex, follow a long period of consultation with the Committee of Vice Chancellors and Principals commencing in 1991. The outcome was that profits from "trading" activities of higher education institutions should be subject to Corporation Tax at a rate of 33 per cent with effect from August 1, 1994.

Why that date, when the most recent guidance notes on the application of tax were only issued in March 1995 remains a mystery, but it is unlikely that any new tax will be collected. Higher education institutions will restructure their finances to avoid the tax by using a long-established but costly tax avoidance mechanism. For many years, with the approval of the Inland Revenue, other charities facing similar difficulties have been able to avoid corporation tax by separating out their "trading" activities. The charity sets up a subsidiary company through which the trading activity is carried out. Its profits are paid to the charity under deed of covenant, or gift aid, reducing the taxable profits to nil and avoiding a tax liability in the company. No tax is collected and the profits from the subsidiary's activities can be applied by the charity for its beneficiaries, in this case the students.

If the new tax guidelines are fully implemented universities and further education colleges will respond en masse by setting up these new companies. If no tax is paid to the Exchequer the taxpayer or students will eventually bear the full costs of expensive financial reorganisations.

This will be tens of millions of pounds. New companies will be registered with attendant formation and administration costs. Legal and other professional advice will need to be sought and paid for. New financial systems will be purchased to cope with the accounting changes but most telling, expensive management time will be tied up when it could be utilised in providing support for the education of students.

The Government should put a stop to this nonsensical bureaucracy now. When the public sector borrowing requirement has overshot its target by Pounds 5 billion, and education budgets are creaking under the strain, parents and taxpayers are right to question whether they are getting value for money. If the new tax guidelines are implemented as they stand the answer is clearly no and a reversion to the status quo long overdue. There can surely be no better way of convincing voters of a genuine commitment to improve higher education through efficient public sector finance.

Kenneth W. Aitken is an independent tax consultant advising a number of universities.

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