VAT and tax issues and opportunities for universities or higher education bodies

Due to their roles as charitable educational bodies, universities (or other higher education providers) can face a complex tax environment, often resulting from the diverse range of income streams and activities provided.

We summarise some of the key VAT and tax issues and opportunities that higher education providers should be aware of below.

Corporation tax on income

Most higher education providers have charitable status, offering a wide range of exemptions on income streams, but not all income streams are necessarily exempt. Below are some examples of potential non-exempt income streams.

• Hire of facilities – for example, conference facilities or sports facilities.
• Research and consultancy – if the work falls outside of the university’s charitable purpose (which may be restricted to the provision of higher education).
• Services provided to other organisations – for example, IT or administrative support, if this falls outside of the university’s charitable purpose to provide.
  Sale of property – if significant development works are undertaken prior to sale, or if the property is sold under an overage agreement which provides the university with a share of developer’s profits.

Payments to overseas bodies

For overseas payments to qualify as charitable expenditure for corporation tax purposes, the provider must be able to demonstrate that appropriate research, monitoring and evaluation has been carried out, to ensure that the payment was applied for charitable purposes.

Further detail on the specific requirements is available here. 

Gift Aid

As charities, higher education providers can claim Gift Aid on eligible donations from UK taxpaying individuals. To do this, the university must register for Gift Aid and must set up a process to request Gift Aid declarations from donors. Alternatively, donations and Gift Aid declarations can be collected through an intermediary fundraising platform.

Investment in subsidiary companies

Higher education providers may choose to carry out certain activities through a subsidiary company to ringfence their assets against risk and to mitigate potential tax exposure on commercial activities. If the provider makes an investment into a subsidiary company, it must be able to demonstrate that the investment is for the charitable or financial benefit of the higher education institution. Note that this includes lending funds through an informal intercompany account, if this account is not cleared regularly. HMRC may ask to see the business plans, cash-flow forecasts and other business projections which informed the decision to make this investment.

International issues

For providers with educational operations outside of the UK, it is important to review the local tax position, as operating in a different country can expose you to a range of potential issues. These include:

• foreign corporation tax exposure, if the overseas operations create a local permanent establishment
• withholding taxes on receipts from overseas bodies
• digital taxes for online teaching and learning
• payroll obligations for overseas staff.

Employment status 

Higher education providers may hire lecturers or other workers as contractors. Depending on the nature of the engagement, contractors may be treated as employees for tax purposes and the institution may be required to deduct taxes under PAYE.

If contractors are hired through personal service companies, the institution may also need to comply with the off-payroll working rules for public authorities.

Expenses and benefits 

Expenses and benefits of employees paid for by higher education providers will generally be taxable income for the employee unless there is a specific exemption.

From April 2027 there will be a mandatory requirement to report benefits through the PAYE system. It is therefore important for employers to be aware of all the benefits being provided to employees and of any changes made throughout the tax year.

Obtaining Zero-Rate VAT relief on costs

A higher education institution's main activity is the provision of VAT exempt educational services, and as a result, heavy restrictions must be applied to recovery of VAT on costs. Therefore, where available, it is important that VAT relief is applied.  

This is especially important for large projects such as building works, where relief is often available, e.g., for the construction of new student accommodation. Where zero-rating is not available, it may be possible that the reduced rate of 5% can be applied. For example, if buildings are being converted into accommodation or the number of dwellings in a building changes. In some cases, design and build contracts can help to mitigate VAT costs, so considering the VAT treatment of a project early stage is beneficial.

It's important to note, that to obtain VAT relief, it is often necessary to provide a certificate of intended use or a letter confirming the VAT treatment prior to works being commenced. So, prior planning is essential.

Recovering VAT on costs and ‘Partial Exemption Methods’

VAT can only be recovered where costs relate to taxable supplies. Where an organisation makes both taxable and exempt supplies, processes must be put in place to attribute costs where possible to the different VAT liabilities and to apportion those costs that relate to both types of income source. The default method for apportionment is known as the standard method and is based on income. While this is easy to calculate, it may not provide a fair result and could lead to more VAT being written off than is fair and reasonable. In these instances, an alternative (Special) method can be applied for and used with HMRC’s consent.

Many higher education providers will apply partial exemption, and it is important that attribution processes and apportionment methods are reviewed to ensure that a fair amount of VAT is recovered based on the activities undertaken. New activities and implementation of different structures or changes to a VAT group can mean that methods need to be changed. This area can often be overlooked, and this could lead to challenges from HMRC during inspections. It can also mean that VAT recovery is forgone unnecessarily.

The ‘option to tax’

The default position for the sale or letting of commercial property is that it is VAT exempt, which means VAT cannot be recovered on associated costs. This can be remedied by opting to tax the property. This is beneficial when tenants are able to recover VAT, which is often the case.

Once made, an option to tax usually lasts for 20 years, so taking this route must be considered carefully. Where options to tax have been place in more than 20 years, it is possible to remove the option. It is, therefore, important to review commercial property portfolios to make sure that the VAT status of the properties is known, documentation is available, and VAT is not being incurred as a cost unnecessarily.

For more information on how VAT and tax can be optimised within your higher education institution, please contact Kieran Smith, Jon Daley or your usual Crowe contact.