VAT: HMRC Head Back to School

As the Student Union of the University of Exeter has recently discovered, the VAT teams at HMRC are taking a closer look at organisations in the Higher and Further Education sector, says Chris George, Tax Advisory Manager.  In the light of HMRC’s tax bill for over £280,000 sent to the University of Exeter, it is more important than ever for organisations within this sector to review their VAT processes to see how well they would stand up under scrutiny from HMRC.

In the case of the University of Exeter, the Student Union had interpreted a letter from HMRC in 2003 in a way which meant they understood that they should not account for VAT on their food sales.  Following a more recent HMRC review, HMRC have interpreted their own letter differently, and consequently have made an assessment for unpaid VAT of £269,000 plus interest of £14,000.  This misinterpretation goes to show the complexities of the current VAT system and how expert guidance may be needed to avoid a significant tax bill.

Organisations within the education sector are complex entities and are often affected by a wide range of different VAT rules. Educational institutions increasingly work with multiple different income streams, which means it can be difficult to determine if VAT should be charged on an individual supply of goods or services.  If it is determined that the supply in question should not have VAT applied, it could be because the supply is zero-rated, exempt or non-business income and therefore outside the scope of VAT.  All three have the same VAT applied, zero, but each one has a different impact on the recovery of input VAT.

As well as HMRC examining whether VAT is charged at the correct rate on sales, our experience also shows that they are additionally looking into partial exemption calculations and the operation of the Capital Goods Scheme.  Both these areas are complex, and impact on other parts of the calculations in VAT Returns.  Organisations within the education sector can also have an agreed special method for partial exemption arranged with HMRC, which can greatly impact on the calculations.

Scrutton Bland has a significant number of clients in the education sector and our experienced team of tax advisers can guide you through all aspects of VAT, including arranging for a review of your existing VAT processes and providing advice on whether your partial exemption method is appropriate.