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HMRC internal manual

VAT Partial Exemption Guidance

Guidance for specific trade sectors: educational establishments: Higher Education Institutions (HEIs)

Overview of the HE sector

There are approximately 210 HEIs registered in the UK and these consist of HE universities and HE colleges. Their size and activities vary greatly, which is why their partial exemption methods have to be considered on an individual basis.

HE bodies are self governing and regarded primarily as independent of Government although given the funding they receive, there are close links. The HE sector is represented by two bodies:

  1. Universities UK (UUK) - representing the vice chancellors
  2. British Universities Finance Directors Group (BUFDG) - representing UUK for all tax discussions

Over 60% of HEIs’ income comes from UK or EU government sources.

Higher education funding

This is provided by four funding bodies in the UK:

  1. Higher Education Funding Council for England (HEFCE)
  2. Higher Education Funding Council for Wales (HEFCW)
  3. Scottish Funding Council (SFC)
  4. for Northern Ireland, the Department for Employment and Learning (DEL).

The total amount of money available for higher education is decided by central government. It is the responsibility of the funding bodies to allocate money to specific institutions, which is done through the use of formulae. The block or main grant (the “recurrent grant”) is split into two elements: T grant for teaching (based on the number of students and subjects taught), and the R grant for research (based on the quality and volume of research). Once determined, the funding is provided in the form of this ‘block grant’, which the institutions are free to spend according to their own priorities.

The history of the HE sector and Partial Exemption

In 1972 universities argued that they would have difficulty meeting the potentially complex record keeping requirements demanded by the VAT system to deal with taxpayer’s obligations under the legislation. Therefore the Commissioners agreed a simplified partial exemption methodology with the Committee of Vice Chancellors and Principals (CVCP) (the predecessor to UUK). This was known as the CVCP Guidelines or CVCP Concordat. This agreement allowed universities to keep simplified records in return for flat rates of VAT recovery and used a method known by the sector as ‘tunnelling’.

These guidelines were used by the sector for nearly 20 years, but were withdrawn from 1 September 1997. From that date the universities were required to propose and receive approval for individual partial exemption methods. Some HEIs:

  • remain on methods based on the CVCP Guidelines - which then became de facto partial exemption special methods; or
  • are using the standard method; or
  • have approval (de facto or formal) to use special methods.