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Confusion over changes to VAT exemption

‘Patently unclear’ regulations could have substantial impact

Universities are concerned that changes to VAT exemptions could have a “substantial” effect on research and they are seeking clarification on the issue from HM Revenue and Customs.

Under current UK rules, universities, government departments and charities do not have to pay VAT on research they commission from each other. However, this exemption has not complied with EU law since 2002. The UK government has agreed to scrap the exemption as of 1 August following a challenge from the European Commission made in 2011.

Research and finance managers at UK universities say HMRC has failed to explain sufficiently which areas might be affected by the changes in a consultation currently running on the subject. One employee at a leading London university said it was “patently unclear what HMRC will and won’t allow”. John O’Dowd, senior grants manager at the University of Glasgow, agrees. “We have no idea how this is going to work, but we fear it could have a substantial effect on university research,” he told Research Fortnight.

The consultation, which closes on 14 March, asks universities to estimate how much of the research they commission might be subject to VAT after August. HMRC has not been explicit about the details and is using the consultation to gauge how big the problem might be. O’Dowd says the lack of clarity means some institutions have no idea how to respond. Philip Dooley, taxation team leader at the University of Nottingham, says they “would like more clarity from HMRC just on who is being impacted”.

The British Universities Finance Directors Group and the Charity Tax Group said in a joint online statement that they believe the “impact on individual research projects may be significant”. Nonetheless, they estimate that the changes will only cost an extra £5 million to £6m a year in VAT payments across all universities. For example, if a university commissions researchers from another institution to carry out work on a project for which its own staff lack the expertise or equipment, it will now have to pay VAT on the bill.

But John Newton, assistant director of finance at Cardiff University, says he is “surprised [the group’s figure] isn’t a lot higher”. He believes the impact on Cardiff will be “substantial”, saying “it’s much higher than I think everyone’s expected”.

Andy Jamieson, VAT manager at the University of Sheffield, is more positive about the £5m to £6m figure, saying, “when you start to break it down, [the financial impact] might end up being that low”. A rough estimate for the University of Sheffield suggests £11m of research could be affected. Jamieson says he thinks almost all of this total could be made exempt using a variety of other tax-saving measures, but universities will now have to jump through “a number of hoops” to ensure that research will not be subject to VAT. One option is to make better use of the VAT exemptions on shared services, which went live in January 2012. “Nobody’s put into them yet, because it’s frightfully complicated to get through the hoops, but we’re working on [it],” he says. “There will be a lot more work and paperwork, but it’s possibly work that’s overdue. VAT uses definitions in ways other people wouldn’t—I’m hoping we’ll get some clarity on these, to help us manage the tax better,” he adds.

Although direct funding from research councils to individual institutions is considered out of scope and will remain exempt from VAT, there are also concerns that the transfer of cash between universities working together in consortia could end up being taxed under the new rules. O’Dowd warns that this could “cost universities millions”. Dooley says he believes there will not be an effect “as long as the [grant proposal] wording is correct” but HMRC must clarify this aspect of the regulation. A further criticism from finance officers is that there is little information on how the transition will work and how existing contracts will be dealt with.

A spokeswoman for HMRC confirmed that VAT charges would not apply retrospectively.