VAT in Further Education Survey Summary

BACKGROUND

The impact of Value Added Tax (VAT) on colleges is complex and is a constant cause for complaint.

Further education (FE) colleges buy-in products and supplies (computer equipment, telephone usage,
furniture, stationery, etc) on which VAT is payable. They will also pay standard-rated VAT on any
building repairs and alterations and on any buildings intended for business-use. Buildings intended
for non-business use do not have VAT levied on them as they are classified as zero-rated. Non-
business use buildings include those used exclusively for the teaching of students aged under 19.

Her Majesty’s Revenue and Customs (HMRC) allows further education (FE) colleges, as statutory
corporations, to register for VAT. Education sales made by any organisation run on a not-for-profit
basis are exempt from VAT, so FE colleges do not charge VAT on courses, but registration does
enable them to charge VAT on sales of products not related to education (hot food to non-students,
sales of art-work, charges for photocopying, etc.).

Registration pushes up the price of non-education sales, but this small amount of VAT sales enables
colleges to claim back some of the VAT that they have paid out, typically less than 5%, but some
colleges are able to claim more. The remainder of VAT on purchases which can not be claimed back is
known as irrecoverable VAT. Those colleges which are not registered for VAT are not able to claim
back any VAT and therefore all of the VAT that they pay is irrecoverable VAT.

To help establish some basic facts, AoC, in collaboration with Saffery Champness, sent out a survey
on VAT in Further Education colleges on 20th May 2005. The findings are based on the responses
received from 104 colleges, which represents 27% of further education colleges in England. About
90% of general FE colleges are registered for VAT, with less than a quarter of sixth-form colleges
registered.

Irrecoverable VAT suffered costs the sector £191m a year (excluding building costs)
Out of the 104 colleges that responded to the survey, 83 have provided sufficient data to be able to
calculate the percentage of turnover lost in VAT. These 83 colleges lost 3.3% of their total spend in
irrecoverable VAT. Across the sector this would amount to an annual loss of £191m in 2004/05.

VAT costs affect building plans

42% of colleges said that VAT costs have resulted in building projects being curtailed or postponed.
The annual amount of irrecoverable VAT on buildings will vary from year to year, but is estimated to
be in the region of £20m- £30m.

CONCLUSIONS

VAT costs the Further Education sector in the region of £191m a year (excluding building costs)

FE colleges This burden might be mitigated by taking advantage of VAT concessions available.

Many colleges feel that the administrative burden of VAT registration does not make any reclaim
worthwhile.