Erica Conway lays out what universities want from the chancellor’s autumn budget
While a few perfectly formed organisations focused on teaching specific subjects to specific student groups remain in the British university sector, these are now the exception. In order to ensure financial sustainability and to grow, universities have steadily diversified their education offering, with undergraduate courses, postgraduate taught courses, short courses with or without an award, and continuing professional development courses all recruiting both UK and overseas students.
The way they deliver education has also expanded—a trend dating back to before Covid—from classroom-only to seminars that are both face-to-face and virtual, lectures that are both delivered live and recorded for watching back, and some online-only delivery.
Then there’s research, which both informs the educational offering and seeks answers to questions that can be very niche, or wide-ranging. Much of the recent social media lobbying from sector groups has focused on explaining the need for university research to be funded in full; no one can run loss leaders forever.
With a fixed-cost recovery percentage from funders and fees for home undergraduates failing to increase in line with inflation, it is the flexibly priced services that must make up the funding gap: catering, conferences, shops, hotels, investment income, and fees from overseas students, with the latter making up most of the difference.
All sectors diversify over time to provide greater financial sustainability across economic cycles, and universities are no different. But the complexity of managing a partly regulated, partly taxed, and partly publicly funded organisation presents specific challenges.
In this context, what impact could the coming fiscal event have on the sector?
Changes to taxation
While universities with charitable status are not subject to corporation tax, they will have activities deemed commercial for tax purposes that are. Flip-flopping on corporate tax rates is as unhelpful to universities as it is to other organisations.
One of the largest taxes that universities pay is value-added taxation [VAT]. Students do not pay VAT on tuition fees, since such fees are exempt, which means universities cannot reclaim VAT on goods and services purchased to deliver education. However, they do supply some services on which VAT arises (known as taxable supplies) and on these VAT can be reclaimed. Universities are therefore only “partially exempt” when it comes to VAT.
During the Covid pandemic, reduced VAT rates on hospitality helped universities with catering outlets, conference centres and hotels, but I suspect we will not see this repeated in future since it was costly and supported only a sub-section of the economy. What we need now is something with wider-reaching impact to pull us out of recession.
As large employers, universities also pay employers’ national insurance contributions. The increase that was proposed by Rishi Sunak as chancellor, and then later reversed under Liz Truss’s premiership, was a cost to universities, so we are grateful it has not been enforced. However, given the budget gaps that face the government, the risk of it being reinstated remains a concern.
Our costs are rising, and supply chains have been under severe pressure for much of 2022. The energy support extended to businesses includes universities and provides some much-needed, short-term relief for many, but it is only for six months. We need a long-term solution to the increasing costs of energy.
Universities were also affected by the impact of the last fiscal event on the UK markets. Those with sponsored pension schemes with hedging have seen assets sold to provide collateral for that hedging, which will have an impact on future contribution levels.
Interest rate rises will hit universities that are borrowing on variable rates and on fixed-rate deals that are coming to an end, and we anticipate that more interest rate rises will follow.
Those that have been lucky enough to hold investments in the markets have seen the values of these investments change during 2022, largely downwards. While returns on money held in credit may have increased to reflect higher interest rates, this is not a given and inflation erodes any gains. Anyone purchasing goods or services in a currency other than sterling is being hit by the low value of the pound against anything else. While this could potentially make the UK more attractive to overseas students, elasticity of demand in this area is low and the weakened currency has limited impact.
Recent announcements have made little mention of research funding. The suggestion by the Office for National Statistics that we have already met the government’s target of 2.4 per cent of GDP being spent on research does not match past expectations that there would be more cash. It is still a small percentage, and as GDP shrinks, achievement of it is mathematically easier.
Universities are concerned that calls for all government departments to make efficiencies will lead to cuts to research funding somewhere. This is particularly disappointing if one believes that growth relies on progress, and progress relies on research.
Levelling up—another potential research funding source—is now far from certain. Replacement funding for schemes once funded by Horizon Europe and other EU schemes remains to be settled and, in the meantime, universities cannot access European funds for research that were previously substantial.
The 2022 fiscal events or budgets, whatever their names or size, have been short-term in nature, and effecting changes and dealing with the implications of reversals has wasted time that many universities do not have.
Just one example involves reforms to off-payroll working rules, known as IR35, which gave responsibility for determining a contractor’s working status for tax purposes to the organisations (such as universities) using their services. These reforms were repealed in the then chancellor Kwasi Kwarteng’s mini budget, then reinstated by his successor Jeremy Hunt, generating extra work with each change.
Across the UK, medium- and long-term decisions are on hold as university administrators seek some certainty on the economic position for themselves, their organisations, their sector, and the UK. So please, Mr Chancellor, in your statement this week, give us stability—and recognition that what we do is crucial to the UK’s long-term growth.
Erica Conway is chair of the British Universities Finance Directors Group