Like most private businesses, colleges effectively act as tax collectors. Not only must they pay VAT on everything other than staffing costs, they also charge it on a limited number of the goods and services that they supply.
Most college activities are directly linked to education and therefore exempt from VAT.However, colleges may stillsuccessfully argue that some of the VAT they pay out is related to non-educational work and try to claim it back from Customs and Excise.
The taxmen may well retort that, if colleges are involved in so much business-type activity, they should be charging VAT to more of their customers. Any VAT collected by colleges is subtracted from money they are attempting to reclaim so, as the amount of VAT charged goes up, the sums colleges recover from Customs decrease.
Complex calculations of this sort are based upon a "partial exemption" formula that individual colleges negotiate with their local Customs and Excise office. Thisformula is based on the amount of business activity that tax officials consider is going on within each college alongside the delivery of education and training.
According to Touraj Darbandi, chairman of the taxation sub-committee of the College FinanceDirectors Group and director of finance at Rother Valley College in Sheffield, some colleges have shown that up to 12 or 13 per cent of the VAT they pay out is for non-educational activities. In othercases, it is as low as 1 per cent.
A small minority of colleges not involved in any substantial business activity do not register for VAT at all. This means they do not need to charge the tax to any customers, regardless of whether they are students, but nor can they recover from Customs and Excise any VAT they have paid out tosuppliers.
A new guide was published by the Further Educationl Development Agency last month on behalf of the group. It aims to simplify the process by which acollege determines with Customs whether transactions are for trading purposes or whether they are solely for the delivery of education and therefore outside the VAT equation.
The guide sets out the best way of dealing with VAT on everything, from vending machines and raffle tickets to car parking charges and hiring out premises for a conference or community function.
"Colleges don't want to pay VAT unnecessarily," says Mick Fletcher, the group's secretary and the agency's head of funding institutions. "It's a question of navigating what is exempt and what is not."
As charities, colleges avoid paying VAT on advertisements aimed at fund-raising. Until 1996, this concession extended to recruitment advertising, so long as adverts carried a strapline stressing the college's charitable objectives.
However, colleges must now pay VAT on all adverts for staff and governor vacancies, as well as works contracts, in the same way as private firms. But, unlike private companies, they cannot automatically recover in full the VAT they have paid.
In the case of canteen meals, where colleges should in theory charge VAT to everyone exceptstudents, they have a choice. Colleges can operate a two-tierpricing structure or, more likely, charge all customers the same price and pass on a portion of canteen income to Customs and Excise based on estimates of the number of meals eaten by non-students.
Mr Darbandi says most colleges go for this second option as it issimpler for canteen staff - if not for the accountants. "The problem is the administration and paperwork it creates," he says.
'VAT and FE:A Reference Guide', pound;99 from FEDA publications, Citadel Place, Tinworth Street, London SE11 5EH