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HMRC internal manual

VAT Partial Exemption Guidance

Guidance for specific trade sectors: educational establishments: activities and supplies provided by HEIs and FECs


| This can be | depending on | || | * non-business; * exempt; or * taxable | * who is providing the education; * to whom it is provided; and * how it is funded. |

Further information can be found in V1-7, Chapter 21 Education.

Educational establishments can provide more than one type of education, which can affect the structure of a partial exemption method.

There are no tuition fees in Scotland, but the rest of the UK has had tuition fees since 1998. variable tuition fees were introduced on 1 August 2006 in England and Northern Ireland and on 1 August 2007 in Wales.


HEIs, in particular, receive income to undertake specific research, Research can be divided into commissioned research and university-led research.

  • Commissioned research would be undertaken at the request of a client for an agreed consideration. While the client usually initiates it, the university may approach potential clients who may have an interest in the research, and ask them to fund it. Commissioned research is a business activity, the liability of which is determined by the status of the recipient and where this takes place.
  • University-led research is initiated by the university and is generally funded in whole or in part by grant funding, typically from the Research Councils, government and charities. This is normally undertaken to advance human knowledge rather than for any business reason. It should be treated as a non-business activity unless the university can demonstrate otherwise.

| Research can be… | Depending on… | || | * non-business; * exempt; * taxable; or * outside the scope with the right to deduct | * to whom it is provided; * where it is provided; and * how it is funded. |

Further information can be found in V1-7 Chapter 21 Education, VBNB and V1-4 Place of supply.

Framework funding

The European Commission has a Framework Programme for research and technological development that provides funding in the form of grants to HEIs so that they can undertake research in various fields.

Each Framework Programme is numbered.

We treat funding under Frameworks 4, 5 and 6 as being zero-rated.

If the framework funding does… any input tax attributable to this activity will be…
not have any involvement by fee paying postgraduate students; fully recoverable.
have involvement by fee paying postgraduate students; residual because it will be attributable to both the zero-rated funding and the exempt supplies of education services to postgraduate students.

After discussions with the sector, agreement has been reached that European Commission Framework Programme 7 income (FP7) is to be treated as a grant and is therefore non-business income.

Post graduate involvement in Research

Following correspondence between HMRC and BUFDG the following has been established:

  • If a taught postgraduate is involved in a research project, there will by definition be an element of education involved in any project that they undertake. In this case the input tax incurred would be residual.
  • Where postgraduate students are employed as research assistants, they are not seen as receiving education in respect of that research project. In these circumstances the input tax is not seen as being linked to an exempt supply of education. (Evidence of employment status should be obtained).
  • Where a taught postgraduate is concerned with a piece of taxable commercial research, any input tax directly incurred by the PG student on dissertation or project costs would be wholly attributable to the exempt supply of education and therefore blocked

Any input tax incurred, say on a piece of equipment, that is used by the taught postgraduate and also for the commercial research, would be non-attributable, as it is partly a cost component of making the supply of education and partly a cost component of making the taxable supply of research

  • Any input tax incurred wholly relating to the supply of commercial research e.g. on another, separate piece of equipment, would be fully deductible as wholly relating to the making of the taxable supply.

It has been suggested that a university would not incur input tax on research projects that also related to the education of the students. The reasoning being that the only taught students involved in research projects were self-taught and therefore they did not receive any education. In these circumstances, you would need to consider what a self-taught post-graduate student receives in return for the fees paid.

Where expenditure is being incurred for the delivery of education to postgraduate students, for example on purpose built teaching facilities for the students, the university should review the activities of their postgraduate students in order to identify those expenses which are incurred not only for the meeting the aims of the research projects but also in meeting the university’s educational obligation to its postgraduate students.

Knowledge Transfer Partnership

The KTP Scheme is a partnership, principally funded by the DTI, between an academic institution (e.g. a University) known as the Knowledge Base Partner, an industrial organisation, and a KTP Associate (a graduate of the university).

The basic idea behind the KTP scheme is that that there will be a “transfer of technology” from the Knowledge Base Partner to the industrial partner. This will involve the KTP Associate working on a suitable project for the industrial partner that utilises both the graduate’s and the University’s expertise to develop new products, services and processes for that business. In return, the University gets to enhance the business relevance of their teaching and research and the graduate gets valuable practical experience.

The KTP Associate is employed by the University and work is undertaken for the industrial partner as agreed. The DTI funds the bulk of the costs by making a grant to the University. This covers most of the KTP Associate’s employment costs, the cost of staff who are directly involved in the Partnership, secretarial and academic support, Associate development, travel, subsistence, equipment and consumables. The industrial partner pays some costs which are invoiced to it by the University. Whoever pays the bulk of the costs is not determinative of the VAT treatment of any supply.

HMRC agree that the supply by the University to the industrial partner is a taxable supply, and that the DTI payment is outside the scope of VAT.

HMRC recognises there are some costs solely related to the making of the taxable supply of staff (the KTP Associate) by the University to the Business Partner. Since the only link between cost and activity for those costs is to a taxable activity, input tax should be recovered in full where it is borne on those costs.

However, there are other costs which are residual, not because they have a link to education through the activity of assisting postgraduate students to develop skills, but because they are related to all of the activities generated by a KTP project. To determine whether input tax incurred on those costs is directly attributable to the supply of staff (recoverable in full) or linked to the general provision of education and research by the HEI (recoverable in part using the University’s partial exemption method) the University needs to consider what activities a KTP project generates.

The KTP grant from the DTI is ring-fenced; it should not therefore be included in the partial exemption calculation, because to do so would allow it to affect other costs and taint the recovery on those costs. Inclusion of the subsidy in the partial exemption calculation would therefore be unacceptable.

This question should be extended to cover the taxable income. It can be argued that because KTP enhances the educational experience of postgraduates off-campus, including the taxable income within a single-pot partial exemption calculation is distortive because the supply does not use the costs of the university in its generation. Whether we would seek to exclude the income in practice will depend on the level of the supplies and the degree of distortion this may cause.

Other income

HEIs and FECs generate income from a wide variety of private sources, including sponsorship, advertising, consultancy services, hiring out student accommodation in the holiday period, summer schools, letting out conference facilities, and gifts (e.g. legacies or endowments).