Lumbering state offers VAT-free space, but lean for-profits get there first

HM Revenue and Customs published on 12 September its consultation on the government's proposed VAT exemption for higher education provided by for-profit firms. The plan was first announced in this year's Budget.

Universities benefit from a VAT exemption, meaning that they do not have to add VAT, currently at 20 per cent, to the tuition fees charged to students. The government wants to end what it sees as a competitive disadvantage for for-profit providers on VAT and fees.

"The UK government wishes to facilitate a more diverse and competitive HE sector that offers greater student choice and is responsive to student demand," HMRC's consultation says.

The VAT plans raise the prospect of firms such as the FTSE-100 company Pearson, which has a turnover of nearly £6 billion, gaining tax advantages to allow them to compete more strongly with universities.

However, some for-profit providers have already shown that it is possible to avoid VAT by changing to non-profit status.

Former for-profit providers such as BPP and the New College of the Humanities have changed their corporate status to become non-profit subsidiaries of for-profit owners, meaning that they are exempt from charging VAT on fees.

BPP changed its status in the formation of BPP University College in July 2010, while NCH switched in March this year.

Ted Powell, a partner at law firm Mills & Reeve and a specialist in VAT, said: "The commercial providers are a bit ahead of the government. [They are] already using their ingenuity to get round the problem while the government is lumbering on behind."

BPP also benefits from an exemption thanks to its university college title, the institution said.

Making the switch to non-profit status technically precludes BPP and NCH from distributing profits to their parent companies, although the parent companies may derive some profit by charging for a range of services such as accommodation or marketing.

The HMRC consultation proposes that for-profit providers must establish "a separate entity to exclusively provide HE courses" if they wish to benefit from the VAT exemption. The plans would offer them the exemption alongside greater freedom to distribute profits.

Mr Powell said: "No doubt the private providers will welcome the...flexibility that gives them."

Under the changes to NCH's corporate form undertaken in March - detailed by higher education researcher Andrew McGettigan on his blog Critical Education - the college switched from its original for-profit status to non-profit and became a subsidiary of for-profit Tertiary Education Services.

An NCH spokeswoman said: "This model will enable our services company to expand and maybe give us the opportunity to offer services to other education institutions further down the line."

There could also potentially be government funding benefits from non-profit status.

The higher education White Paper said that "not-for-profit providers would be able to apply for [Higher Education Funding Council for England] grants in the same way as higher education institutions and further education colleges", although the legislation required for this change has yet to materialise.

john.morgan@tsleducation.com.