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HMRC internal manual

VAT Partial Exemption Guidance

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Guidance for specific trade sectors: educational establishments: Partial Exemption methods for HEIs and FECs

These can only be considered after calculations have been made for:

  • non-business activities; and
  • regulation 103 supplies (see PE34000); unless a combined partial exemption special method has been agreed.

Due to the level of non-business activities for both HEIs and FECs, many may decide to adopt the Seeling/Lennartz approach for their relevant assets (see PE66000 - Lennartz treatment).

The standard method for HEIs and FECs

It has been found that some HEIs and FECs say they are using the standard method, but in reality they are using a special method because either they are:

  • are using values from their statutory accounts rather than using the value of supplies made and received; or
  • accounting for the longer period adjustment in a later period than that specified in regulation 107.

The Commissioners do not consider that the standard method gives a fair and reasonable result because it does not allow for the inclusion of a proxy to compensate for the subsidised exempt education provided to UK students. UK students do not pay a ‘real’ fee for their education; rather they pay tuition fees, either fees set at a level decided by Government for students starting their courses before September 2006, or variable tuition fees for students starting after 1 September 2006. The remainder of the cost of providing the education is subsidised by the Government through the recurrent grant. According to HEFCE the tuition fees represent about a quarter of the average cost of tuition, although this will vary greatly depending on the subject and the institution. The fees charged to overseas students might be as much as eight times higher. If an HEI is using the standard method, it is likely the standard method override will be applicable (see PE32500 - The standard method override). Any instances where the override is considered likely to apply should be referred to your Regional Partial Exemption Specialist Officer.

Special methods for HEIs and FECs

Historically those HEIs that accounted for tax using the CVCP Guidelines did not have individual formal written methods with the Commissioners. Often this position continued after the Guidelines were withdrawn in 1997. This meant that it was easy for de facto approval to be given (see PE44500 - De facto approval). De facto approval also occurred where HEIs which had approved partial exemption special methods made slight alterations to the way they accounted for tax, which was accepted by officers without formal approval being given for the change.

It is therefore essential that when officers visit HEIs or FECs they:

  • check the partial exemption special method in operation reflects the method which has been formally approved; or
  • obtain written confirmation of how the HEI accounts for tax, so that either formal approval can be given or the agreed understanding can be used by both parties in discussions for a fair and reasonable partial exemption special method.

The majority of HEIs and FECs use outputs-based methods. However if only outputs figures are used the resulting calculation will produce a distortive result as covered in ‘The standard method for HEIs and FECs’ above.

The question of how to value the supply of state supported education has long caused difficulties between HMRC and the education sector. In 2005 HMRC entered into discussions with BUFDG regarding the correct approach to valuing education. However the talks stalled, and to resolve the issue the funding councils of England, Scotland and Wales jointly commissioned an independent review of partial exemption in the education sector. The review which was published in June 2007 identified a number of acceptable methodologies and the findings have been endorsed by HMRC.

The review identified the following approaches:

  1. Include the teaching grant plus tuition fees (both variable and fixed) less OFFA related bursaries;
  2. use the TRAC costs for publicly funded teaching and non-publicly funded teaching;
  3. add a modified teaching grant to tuition fee income (less OFFA related bursaries); or
  4. use a TRAC based method.

HMRC is producing a framework document which offers guidance on when the methodologies suggested by the review are appropriate and how these should be incorporated into a partial exemption method. The full framework document will be available on the HMRC web site once it is finalised.

HMRC has published a framework document which offers guidance on when the methodologies suggested by the review are appropriate and how these should be incorporated into a partial exemption method. The full framework document can be found on the HMRC website at HM Revenue & Customs: Partial Exemption Frameworks 

Sectorised methods for HEIs and FECs

The partial exemption review and the framework document both cover the issue of sectorised methods for HEIs and FECs. This is a complex matter and the correct approach depends to a large extent upon the nature of the institution itself. More detailed guidance is given in the framework.