New VAT refund rule could hit hard

Universities could be stung for dramatically higher bills for VAT following a decision by the Government to introduce a uniform method of calculating refunds on VAT.

The move could cost some universities more than £400,000 a year, according to John Kennedy, VAT partner at the accounting firm Deloitte and Touche.

Customs and Excise believes that universities are recovering too much VAT - because institutions exclude funding council teaching grants from their calculations.

At least three higher education institutions have been issued with notices of direction by Customs and Excise, ordering them to include teaching grants in their VAT refund calculations.

A survey of universities carried out by Deloitte and Touche found that two thirds of the 50 institutions that responded were in dispute with Customs over the issue - disputes that have lasted several years.

There were wide variations in how these "partial exemptions" are calculated, Mr Kennedy said, and the survey found that 82 per cent of universities wanted a national agreement to ensure conformity.

He expected the issue to be resolved only through litigation, with a test case involving one university. He said the university would stand a good chance of winning.

"Education is an incredibly complex sector, both in terms of VAT treatment and the sheer scale and diversity of its operations. Many universities were not expecting these directions and an appeal to the VAT tribunal is almost certain," Mr Kennedy said.

Many institutions said that Customs and Excise was acting aggressively, particularly as they are deemed to be charities. VAT is incurred on their business activities, however.

Mr Kennedy added: "Universities want to pay the right amount of tax, but no more than they have to."

A Customs spokeswoman said that while most universities complied with the partial exemption VAT rules, there were some that did not.

"Customs and Excise has been working with the sector for six years to agree partial exemption methods and remains hopeful that an agreement can be reached with the universities that are still failing to comply," she said.

Karel Thomas, executive officer of the British Universities Finance Directors Group, hoped litigation would not be necessary to solve the problem.

It was "disappointing", she said, that Customs and Excise had failed to negotiate with the group and Universities UK as much as it could have before issuing the notices of direction. However, a conciliatory approach from both sides remained possible, Ms Thomas added.

In October 2003, the Court of Appeal found in favour of Sussex University in a case against Customs and Excise.

The decision allowed it to recover £4.5 million in underclaimed VAT rebates that dated back to 1973 when the tax was introduced.

chris.johnston@thes.co.uk