Tuition fees and VAT
Tuition fees and VAT
Many higher education institutions use a partial exemption special method in which input tax on their overhead costs is apportioned by reference to the value of their taxable and exempt supplies. The introduction of variable tuition fees from 1 August 2006 increases the value of exempt education because fees are charged to students even if a third party subsequently pays them. However, often, institutions return part of the fees to students as bursaries rather than use them solely for additional expenditure. If this happens, a values-based method might misallocate overhead input tax to the detriment of the institution.
HMRC will approve any partial exemption method that is fair and reasonable. A values-based method works well provided that sensible adjustments are made to correct for subsidies and receipts that are disbursed rather than expended, reflecting the fact that a grant-subsidised institution will normally price its supplies so as to cover its costs. But, in order to be acceptable, an adjustment must be clearly justified, transparent and objectively determined; an arbitrary adjustment can never be accepted. Where part of the variable tuition fee is returned as a statutory bursary under its access agreement with the Office for Fair Access, this may provide a suitable basis for adjustment.
Institutions should contact their local VAT office if they consider that their partial exemption method is no longer fair and reasonable because of the introduction of variable tuition fees, with proposals for a new method. Alternatively, institutions may wish to serve a special method override notice on HMRC as an interim solution until a new method is approved.
Business Brief 11/06 dated 7 August 2006
