VAT is not the only form of taxation that can be a headache for colleges - but it is the one area where there is least help from government.
Many colleges set up private trading companies for commercial reasons as well as to assist with VAT recovery. As charities, colleges that trade under their own name are not eligible to pay corporation tax on profits gained from selling books, stationery and food to staff or students.
Subsidiary companies that make profits on behalf of a college or school must pay corporation tax in the same way as any private firm but, once these profits are passed back to the educational institution as a deed of covenant, any tax paid by the company can be reclaimed by the college because it is registered as a charity.
Unlike VAT, which goes to ustoms and Excise, corporation tax is paid to the Inland Revenue. The problem for colleges and other institutions was that the deed of covenant originally had be paid before the end of the year in which profits were made. In many cases, colleges do not know how large their trading company's profits will be untila later date.
"We had to overpay and then pay some of the money back later," says Peter Lennard of the College Finance Directors Group. The Inland Revenue came to the colleges' rescue by saying the deed of covenant could be delayed by up to six months, by which time the precise profits should be known.
This was in sharp contrast to Customs and Excise. "The Inland Revenue was very helpful because they knew it was a problem for charities," says Mr Lennard.