University finance directors admit the breakdown was not entirely the fault of tax officers; by setting simplified guidelines over the amount of VAT that universities could recover, the taxmen created winners and losers in higher education.

The losers - mainly large universities involved in more non-educational work - reckoned that they would be better off ignoring the understanding and claiming partial exemption over a wider range of activities. In this way, they could hope to recover more of the VAT paid out to suppliers even though, as in colleges, this might also lead to the tax being charged on more of the goods and services that they provided.

Paulina Lubacz, convener of a taxation working group run by the British Universities Finance Directors Group, admits the concordat was a compromise. “It didn’t provide institutions with maximum recovery.”

As their accounting systems became more complicated, uiversities found they were better off trying to make more sophisticated VAT calculations, she says. But this has not worked to everyone’s benefit. “Smaller institutions felt it was still useful to have some guidance. They felt rather cast adrift, but Customs and Excise made it clear they were not in the business of having any special arrangements.”

According to Ms Lubacz, higher education institutions are more likely to be able to recover VAT than colleges because of the amount of accommodation they provide, partly for residential training and conferences. But while university finance departments are generally larger than those in FE, this does not mean that staff have the necessary VAT expertise.

Many higher education institutions ask their auditors for guidance. “The more you are involved in VAT, the more worthwhile it is to seek professional advice,” she adds.

The universities’ finance group, like its sister group in further education, receives frequent complaints about VAT decisions. “Inevitably local inspectors vary in their interpretations of the rules,” says Ms Lubacz. “This is rather frustrating.”