VAT shift could open back door to mergers

But as tax rules ease, institutional unions still face cultural hurdles, say experts. Simon Baker writes

December 15, 2011

Credit: Kobal
Want to do business? A VAT reprieve for institutions and their shared-service providers will encourage joint ventures

Mergers between universities may become more likely once they see the benefits of sharing services under new rules that remove a crucial tax barrier, it has been suggested.

It follows the announcement by chancellor George Osborne in his Autumn Statement that institutions will be able to work together to provide services without incurring a VAT cost.

University leaders have long argued that current rules deter them from sharing "back office" provision because they must save at least 20 per cent to make the project worthwhile.

But under the new proposals, which could come into effect next year, higher education institutions can provide a service together without imposing a tax burden.

Under the detailed plans set out in draft legislation by the Treasury last week, universities would run services via separate "entities" that are wholly owned by the institutions involved.

Although there had been some concern that this in itself could create a large administrative burden, the British Universities Finance Directors Group (BUFDG) has said that the proposed rules appear to be a user-friendly solution that would keep such costs down.

Andrew McConnell, finance director at the University of Huddersfield and chair of the BUFDG, said that even before the announcement had been made, there had been "active" discussions between institutions about potential sharing of services, particularly in the area of ICT.

But he added that it remains to be seen whether the Treasury's announcement would finally lead to an explosion in shared services or "whether it's just that people have been using the VAT obstacle as an excuse".

Jon Wakeford, director of strategy and communications at University Partnerships Programme, a firm that has long argued that the sector could save billions through sharing services even with the VAT barrier, said long-standing cultural barriers had always been a "key hurdle".

"The stumbling block tends to be the notion that somehow institutions will lose what is essential about them, that they will lose part of their character," he said.

He added that he did not see the sense of this argument with respect to sharing purely non-core services such as day-to-day procurement, accommodation and facilities management.

Meanwhile, Damian Shirley, partner and head of indirect tax at legal firm Eversheds, said that once institutions went down the road of clubbing together in certain areas, it could open the door to more full mergers as leaders came to realise the potential to make savings by working together.

"If universities begin to find efficiencies in sharing some of their back-office services, it could raise the question, 'Why aren't we going further and merging our core operations?'" he said. "One can already see those kinds of conclusions starting to emerge."

Mr Shirley also suggested that other factors, such as the threat to jobs among middle management, could come to the fore.

"It will be an interesting time to see if what were seen as incidental issues in the background are now thrown into the foreground and become the reasons why universities are not sharing services," he said.

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