VAT shift could open back door to mergers

By Simon Baker, THES 

But as tax rules ease, institutional unions still face cultural hurdles, say experts. Simon Baker writes

Credit: Kobal

Want to do business? A VAT reprieve for institutions and their shared-service providers will encourage joint ventures

Mergers between universities may become more likely once they see the benefits of sharing services under new rules that remove a crucial tax barrier, it has been suggested.
It follows the announcement by chancellor George Osborne in his Autumn Statement that institutions will be able to work together to provide services without incurring a VAT cost.
University leaders have long argued that current rules deter them from sharing "back office" provision because they must save at least 20 per cent to make the project worthwhile.
But under the new proposals, which could come into effect next year, higher education institutions can provide a service together without imposing a tax burden.
Under the detailed plans set out in draft legislation by the Treasury last week, universities would run services via separate "entities" that are wholly owned by the institutions involved.
Although there had been some concern that this in itself could create a large administrative burden, the British Universities Finance Directors Group (BUFDG) has said that the proposed rules appear to be a user-friendly solution that would keep such costs down.
Andrew McConnell, finance director at the University of Huddersfield and chair of the BUFDG, said that even before the announcement had been made, there had been "active" discussions between institutions about potential sharing of services, particularly in the area of ICT.

But he added that it remains to be seen whether the Treasury's announcement would finally lead to an explosion in shared services or "whether it's just that people have been using the VAT obstacle as an excuse".
Jon Wakeford, director of strategy and communications at University Partnerships Programme, a firm that has long argued that the sector could save billions through sharing services even with the VAT barrier, said long-standing cultural barriers had always been a "key hurdle".
"The stumbling block tends to be the notion that somehow institutions will lose what is essential about them, that they will lose part of their character," he said.
He added that he did not see the sense of this argument with respect to sharing purely non-core services such as day-to-day procurement, accommodation and facilities management.
Meanwhile, Damian Shirley, partner and head of indirect tax at legal firm Eversheds, said that once institutions went down the road of clubbing together in certain areas, it could open the door to more full mergers as leaders came to realise the potential to make savings by working together.
"If universities begin to find efficiencies in sharing some of their back-office services, it could raise the question, 'Why aren't we going further and merging our core operations?'" he said. "One can already see those kinds of conclusions starting to emerge."
Mr Shirley also suggested that other factors, such as the threat to jobs among middle management, could come to the fore.
"It will be an interesting time to see if what were seen as incidental issues in the background are now thrown into the foreground and become the reasons why universities are not sharing services," he said.
simon.baker@tsleducation.com.

Removal of VAT barrier to encourage shared services

29 November 2011

By Simon Baker

A major barrier to universities saving money by sharing services is set to be removed by the government.

In his autumn statement today, the chancellor George Osborne said that the government would introduce a VAT exemption for services shared between organisations that are already exempt from the tax, such as universities.
In the past, universities have been deterred from saving money by sharing services such as payroll and procurement because any new operation would have to charge VAT back to the partner institutions.
This would mean that a shared operation would need to save at least the cost of VAT – currently 20 per cent – to be worthwhile.
However, the new arrangements – which had already been consulted on following the 2011 Budget – suggest universities could set up a new joint organisation to run services without facing an extra tax bill.
Nicola Dandridge, chief executive of Universities UK, said the move was “good news” for the sector and met a key recommendation from the recent Diamond Review of efficiency in higher education.

“Universities have wanted to develop more cost-effective operating models, and more creative collaborations with external partners.
“But to date, the VAT rules have acted to block this. We hope today's announcement will address this issue,” she said.
Meanwhile, the chancellor announced the launch of an online portal called HE Global to provide information and advice to universities on expanding overseas and also a vehicle to help the sector, government and business work together in selling “education offers” abroad.
Paul Marshall, executive director of the 1994 Group of smaller research-intensive universities, said: “Having ready access to insight and advice through a resource like HE Global will help institutions implement their own international strategies.
“We’ve also called for a collaborative approach to promoting cross-sector opportunities overseas. The new vehicle proposed in today’s statement will no doubt play a big part in making this a reality. We look forward to helping to take this forward.”
simon.baker@tsleducation.com