Last week the Chancellor delivered his Autumn statement. There were a number of items of good news for universities but the one I was looking out for was on the possible VAT exemption for cost sharing services. The good news was that the exemption was included, the statement noting that “Following consultation after Budget 2011, the Government will introduce a VAT exemption for services shared between VAT exempt bodies, including charities and universities”. VAT has often been quoted as being the major barrier to the introduction of shared services – VAT is charged on services with the result that any shared service would have to deliver a minimum saving of 20% in order to deliver any saving at all. That is a significant deterrent given that many shared services only become cost effective after a number of years.
So it would appear that the exemption is good news for the sector. But the cynic in me wonders whether it will really make much difference. When I attended a BUFDG briefing with HMRC and Treasury officials, they advised that the Treasury had only budgeted £200 million as the cost of introducing the exemption. In the Autumn statement the cost was put at £25 million in the first year, rising by £25 million in each of the next four years. The exemption doesn’t just apply to the university sector – it includes other VAT exempt bodies such as charities, housing associations and a significant part of the financial sector. Once you start to spread the £25 million over all these sectors, the expected cost is rather less in the university sector. And the expected cost will be reflected in the application of the exemption.
The devil will be in the detail and much of that has still to be determined. The thinking outlined at the briefing noted that the exemption would only apply to cost sharing groups – separate legal entities established to deliver shared services. It would not apply to organisations buying services from other such as one university paying another to host a system. There was some concern at the briefing that the cost of setting up a CSG – employing staff on new contracts, TUPE arrangements etc. – would outweigh any benefit from the VAT exemption. So potentially there is a chance of one deterrent replacing another. It was also proposed that only organisations with taxable income below a threshold amount would be eligible for the exemption. The threshold proposed was less than 15% taxable income. This was seen as a barrier as the proportion of taxable income from third stream activities and commercial research at a number of universities is already greater than 15% and so they would not be eligible for the exemption. With universities being encouraged to diversify their income, it is likely that more and more will fall foul of this threshold.
Unless the rules relating to the exemption are radically different from those outlined in the BUFDG briefings, the exemption is unlikely to bring widespread benefit to the sector. So does this mean that the sector will continue to shy away from shared services? The signs are that it will not – a number of institutions are rising to David Willetts’ challenge to be bold and innovative and are partnering with others to develop new shared services. This is in addition to the services being developed as part of the Universities Modernisation Fund work. The hope is that a number of these will make it through to production services although it is important to recognise that not all will become sustainable services. So there are positive signs. It is important though that the sector actively promotes and publicises the work that is going on. If this work is not publicised it will be all too easy for the sector to be accused of failing to take advantage of the exemption, whether or not its practical implementation will benefit the sector. And that sort of negative publicity is something the sector can do without.