Hefce chief: VAT hampers savings plan

Big efficiency savings through shared services will be 'difficult' without tax change. John Gill reports.

February 7, 2008

Hundreds of millions of pounds in "efficiency savings" being demanded by the Government are achievable, according to a senior sector administrator.

But progress in encouraging universities to save money through sharing services such as payroll management will be hindered by current tax laws, Steve Egan, deputy chief executive of the Higher Education Funding Council for England said in an interview this week.

Times Higher Education last month reported concerns over the more than £1.5 billion in savings being sought from the universities, innovation and skills budget, which included £700 million that had not been accounted for.

Mr Egan this week predicted that the universities' share of the savings to be made would amount to £500 million by 2010-11.

"The majority is set out in the Department for Innovation, Universities and Skills value-for-money agreement," he said.

Some £100 million would be saved by ceasing to fund students taking qualifications at an equivalent or lower level than qualifications they already held; £150 million saved through efficiencies in "shared services and procurement"; and other savings as a result of "the utilisation of assets and the use of information technology".

Mr Egan sought to reassure the sector over a statement in the annual grant letter to Hefce from John Denham, Secretary of State for Innovation, Universities and Skills, which said that unspecified savings would come from "rationalising special funding streams".

Hefce reviewed every special funding stream before its financial commitment ended, said Mr Egan, with a "hyper-critical" approach, as it would always prefer to move funding to the block grant.

"Some funding streams come to an end; for example, we set up the Leadership Foundation, and the amount it gets now is less than at the start. That's not getting rid of a funding stream, but it is reducing it. What we don't want to do when we've made a commitment is to stop midstream," he said.

One potential sticking point is the target of £75 million in savings from shared services, which Mr Egan said would be "difficult, if not impossible" without a change in the tax laws.

Under current rules, universities are classed as VAT-exempt but cannot reclaim the VAT paid on services they buy in.

For example, if two or three institutions were to share payroll services, they would all have to pay VAT to the provider - even if one university was providing the service to the others.

Mr Egan said: "There are benefits from a shared service, but you have to make a lot of savings to justify the VAT penalty. It's difficult to see how those targets can be achieved without a change."

As Times Higher Education reported last week, Mr Denham's grant letter also ordered that future capital funding should be linked to institutions' progress in cutting carbon emissions.

Mr Egan said Hefce would offer a carrot rather than wield a stick.

"Our new system of capital allocation already seeks assurances on sustainability. We need to see how much further we should take that to meet these requirements.

"Most institutions want to reduce their carbon emissions, if only because it saves them money, so I don't think there will be any difficulty in achieving this," he said.

"The big carrot is the capital funding. We're saying: 'We'll give you this capital funding and you need to make sure you use it to reduce carbon emissions'.

"I suppose it's a stick if you don't get more, but we're not taking away - we're saying: 'In order to get more, this is what you need to do.' I think it works best as an incentive."

Mr Egan acknowledged that universities with older buildings would have to spend more to make inroads into emissions than those with modern estates.

"Then again," he said, "they're the ones with the opportunity for savings because they've got inefficient buildings.

"The sector is on notice that, come the next set of capital funding, in order to convince the Government to invest again in the capital infrastructure of higher education, higher education has to convince it (Whitehall) that it is serious about reducing carbon emissions.

"The sector has a couple of years to make sure that it can make that case powerfully and persuasively."



Total funding is just under £7.5 billion - a cash increase of 3.3 per cent on 2007-08. This will maintain the Hefce unit of funding for teaching in real terms and increase the recurrent funding for research by 2.9 per cent

The grant includes:

- £4.632 billion for teaching, of which £364 million is for widening access and improving retention;

- £1.456 billion for research, including £62 million to support business-related research, £185 million to support charity-funded research and £199 million to support postgraduate research;

- £341 million for special funding;

- £120 million for the Higher Education Innovation Fund;

- £25 million as a supplementary allocation for very high-cost laboratory-based subjects that are vulnerable because of a mismatch between supply and demand.

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