VAT guidelines

[VAT registration no. GB 629 5880 94]

INTRODUCTION

VAT is a broadly based tax on general consumer expenditure and is charged upon the sale of goods and services made in the course of business by taxable persons (VAT registered entities). The basic feature of the tax is that organisations must charge tax at the standard rate (currently 17.5%) on supplies of goods and services unless they are the subject of specific relief contained in the law. The VAT Act 1994 provides for two forms of relief, Zero rating e.g. books, children's clothes, and Exemption. There is also provision for a reduced rate of VAT at 5% on certain goods and services (principally fuel and power and specified construction services).

The majority of organisations supply goods and services which are either standard rated or zero-rated. Such supplies are called “taxable supplies” as the zero-rate qualifies as a positive rate in VAT law. In both cases they can recover the VAT that they have suffered on their business purchases, so that the result is that they are both buying and selling at prices that are net of VAT.

The majority of the supplies that the School makes are supplies of education, and research. These supplies are VAT exempt which means that the School cannot recover the VAT incurred on the majority of its expenditure on goods and services: the full cost including VAT will therefore, in most cases, represent a charge to the relevant School budget.

However, certain supplies e.g. vacation lettings, consultancy, bars and staff catering are standard rated and therefore subject to VAT at 17.5%. Other supplies e.g. academic journals and publications are zero-rated. These make up the main taxable taxable supplies made by the school. The VAT that is incurred on the purchase of goods and services directly related to these activities can be recovered from HM Revenue and Customs (HMRC) in full. (Aptos code R for recoverable).

When the VAT on a purchase invoice is recoverable, the budget holder must ensure that this is clearly indicated by writing “VAT Recoverable” along with the budget code and authorising signature on the invoice. The Aptos accounting system will post that VAT element to the VAT control account so that only the “net” figure is charged to the relevant budget.

The School can recover a small percentage of the VAT incurred on its overhead expenditure i.e. that which relates to both taxable and exempt supplies, through its VAT Partial Exemption Scheme, but the income from this accrues centrally and is included in School general income.

An oft-heard comment in relation to VAT is “Higher Education is exempt”. What this actually means is that the fees charged to students are not subject to the addition of VAT. It is very much in the interest of Universities that this situation does not change as the UK HE Sector’s international competitiveness would otherwise be weakened. However there is a downside to the exempt status of tuition fees, which is that the VAT suffered on the purchase of goods and services to enable the teaching and research to be performed cannot be recovered. The School is therefore paying VAT on certain items of expenditure e.g. premises, including refurbishments, heat, light, computer equipment, professional fees etc., with no way of recovering the cost.

We should therefore ensure that the reduced rate of VAT applicable to fuel and energy supplies is charged by suppliers where allowable. The reduced rate of VAT (5%) is applicable to heating and lighting when a building is used for qualifying Non-Business Charitable purposes for 60% of the time or more; (All Student Halls of Residence qualify).

Where the School receives the services of Consultants, Lawyers, Accountants, Data processing and other similar services from outside the UK, then under the Reverse Charge rules, the School has to charge itself VAT on these services. These rules are designed to stop UK businesses from avoiding VAT by obtaining all their legal and accounting services from abroad.

The reverse charge rules do not apply to services acquired which relate to the generation of non-business supplies.

When goods, e.g. computers or CDs are imported from another EU Member State, they may appear to be VAT free but under EU Legislation, the School has to charge itself VAT on those items. This VAT charged is then recoverable according to the rukles explained above. Any net VAT paid over to HMRC will then be charged to the relevant School budget.

There are additional VAT reliefs for registered charities. The school is a registered charity.

The main reliefs available through charitable status are:

1. No VAT is payable on advertising services procured by the School.
2. Training provided to overseas government employees engaged on the sovereign activities of that government.
3. Zero-rating of sales of donated goods.
4. A raft of construction services reliefs relating mainly to the new construction of a building which will be used for more than 90% non-business or residential use.

The Finance Division are responsible for submitting quarterly VAT returns to HMRC and liaising on all matters with which they are concerned.

New business areas opening up in the School may have VAT implications. VAT advice on new areas of activity should be obtained from Stephen Parsons, VAT Manager, Room AH300 (ext.5046) or email s.d.parsons@lse.ac.uk

For a more detailed guide to VAT, please click on General Guide to VAT Procedures manual (PDF).

VAT PARTIAL EXEMPTION IN A NUTSHELL

The basic principle of partial exemption is that businesses which make both taxable (supplies attracting VAT at 17.5%,5% or 0%) and exempt supplies are required to stream or allocate the VAT on their business purchases in the following ways:

Vat on purchases directly related to taxable outputs = 100% recoverable Aptos R code
Vat on purchases directly related to exempt outputs = Non recoverable Aptos S code
Vat on purchases which cannot be directly related to either taxable or exempt outputs (residual or “pot” Vat = partially recoverable) Aptos S code
(Where no VAT is charged on a supply to the LSE, Aptos code E is applied).

A portion of the residual input tax or “pot” is reclaimable using a Partial Exemption Special Method. This has to be agreed by HMRC and be fair and reasonable in accurately allowing a reclaim of VAT on overhead costs.

The portion of VAT on general university overheads which is recoverable is determined at the LSE by calculating what proportion its taxable outputs represent of its total outputs.

The general rule is that Vat should wherever possible be directly attributed to either exempt or taxable supplies.

However, special treatment for certain sectors and tunnels have been negotiated with HMRC which are allowed to operate a generic method of apportionment. Input tax is allocated to such sectors and the sector-generic recovery rate method agreed with HMRC. Examples of where VAT suffered on costs is treated as a separate sector are:

a) A capital project, such as construction costs relating to 24 Kingsway,
or
b) Overhead costs incurred at individual Halls of Residence.

The School’s representatives are currently in negotiation with HMRC to secure agreement over a new PESM (partial exemption special method).

STUDENT RESIDENCES

LSE is a University and is therefore deemed to be an 'eligible body' by Customs & Excise.

When we supply education to our students because we are an 'eligible body' our closely related supplies of goods and services, e.g. catering and accommodation to our students, are VAT exempt. This means that there is no VAT on our supplies of catering and accommodation to our students, including Summer School students so long as the invoices are in the name of LSE (and not LSE LETS), and go through the LSE accounting records.

Vacation lettings

As we are not providing education to our vacation visitors, these supplies will be Vatable at the standard rate of VAT of 17.5%. For corporation tax reasons these supplies should be routed through LSE LETS.

The VAT raised on the invoices should be disclosed on the monthly returns that are sent to the Finance Division to be included on the quarterly VAT returns to HMRC, or processed to PAMS, where applicable.

On an exception basis some vacation supplies can be treated as being VAT exempt. When a supply is made by one 'eligible body' (LSE) to another 'eligible body' (e.g. another UK educational establishment) for the direct use of the customer's students then the supply can be treated as being VAT exempt but must be routed through LSE and not LSE LETS as LSE LETS is not an 'eligible body'. If a customer claims to be an 'eligible body' and asks for their accommodation and catering to be VAT exempt then permission must be obtained from s.d.parsons@lse.ac.uk in the Finance Division before exemption is agreed as there as penalties for making an incorrect judgement.

NB: Summer School students are receiving education from LSE and therefore will be VAT exempt and should be routed through LSE and not LSE LETS.

Conferences

It is important when quoting and accounting for conferences to ensure the correct VAT element of the supply is identified as this affects bottom line profits and can represent the difference between a prospective client using our facilities or those of an alternative provider.

Conference invoices should be split to show how much is charged for Room Hire, Accommodation, Equipment Hire, Refreshments, and Meals. VAT should then only be charged on those elements attracting VAT, described below:

• The Room Hire element of the invoice is exempt from VAT
• The Equipment Hire element is VATable (standard rated)
• Incidental refreshments such as tea and coffee with biscuits may also be exempted from VAT when charged at an inclusive rate.
• Accommodation element is VATable (standard rated).
• Meals are VATable (standard rated)

N.B. If there is an “option to tax” (election to waive exemption) which is binding on the property (We do not have this situation applying to any Halls of Residence at present, with the exception of the small area occupied by a retail unit at Holborn, but we do have this applying to Mobil Towers 1,2 and 3), then Room Hire and incidental refreshments would be standard rated also, because the option “bites” on those areas we have elected to waive exemption (we have opted to tax) and overrides the exemption.

Hall bars

All hall bar income is Vatable (standard rated) and the VAT element of 7/47 (ie17.50/117.50) should be declared as output VAT.

Miscellaneous income

The following income is Vatable (standard rated):
Car parking
Vending machines
Laundry
Telephone
Fax
Photocopying

The VAT element of 7/47 (ie17.5/117.5) should be declared as output VAT.

Fuel and power

Supplies of fuel and power to a building that is used primarily for student residential accommodation qualifies for the reduced rate of VAT of 5%. If the building is used as student accommodation for more than 60% of the year then its primary use is deemed to be residential.

Input tax

Where Vatable supplies are being made, eg vacation lettings, hall bars, miscellaneous income etc the School is allowed to recover all of the input VAT on the purchase of goods and services used in making those supplies.

When the VAT on the purchase invoice is recoverable, the budget holder must ensure that this is clearly indicated by writing 'VAT Recoverable' along with the budget code and authorising signature on the invoice. The Aptos accounting system will post the VAT element (£17.5) to the VAT control account so that only the net figure (£100) is charged to the relevant budget.

Budget reports should be checked to ensure that the VAT element has been correctly treated.

LIBRARY

Originally based on a Meeting with Arthur Andersen and Val Straw in 1999. Updated following meeting with Library staff in March 2004 updated May 2008.

Library Photocopying Income
About £200k per year via coin machines. Mainly students photocopying books. Treat as vat exempt as it relates to education/students.

Photocopying for UK customers should be VATable.

Photocopying for overseas customers should be zero-rated if the photocopies are to be exported.

Phonecards/Pens/Bags
Treat as VATable. Split out the vat element of 7/47 when the cash is banked and declare as output VAT.

Course Packs- Bound
These are zero-rated publications.

Fines/Lost Books
These are Outside the Scope of VAT as compensation payments.

Library Admission Fees
This is use of library facilities rather than book hire and is treated as VATable.
Split out the vat element of 7/47 to the vat control account (1-ZAU-X808-76002).

Royalties
UK Royalties are VATable (standard rated).
Overseas Royalties are zero-rated as the place of supply is deemed to be in the overseas country.

Donations
Donations with 'no strings attached' are non-business, and outside the scope of VAT.

Room Hire
Treat as vat exempt but equipment hire will be VATable.

Reverse Charges on Provision of Information from Overseas

Services of consultants, lawyers, accountants, and other similar services e.g. data processing and provision of information from overseas are subject to the reverse charge. We must charge ourselves vat on these services. This legislation is designed to stop UK companies from avoiding vat on legal/accountancy advice etc by buying all these services from abroad.

Copies of purchase invoices from overseas suppliers for data processing/provision of information etc should be sent to Stephen Parsons in the Finance Division so that the relevant library budget code can be charged with vat at the end of the vat quarter.

Books

The purchase of books is zero-rated.

CD's

CD's bought from UK suppliers will be standard rated.
CD's bought from outside the EU will be subject to normal import duties.
CD's bought from within the EU will not be subject to vat at the port of entry but VAT will have to be accounted for on the quarterly vat return in a similar manner to reverse charges. This is known as 'acquisition tax'. Copies of purchase invoices from EU suppliers for CD's should be sent to Stephen Parsons in the Finance Division so that the relevant library budget code can be charged with vat at the end of the vat quarter.

Catering

Supplies of catering to students will be vat exempt but supplies to non students will be vatable (standard rated). However where vat is charged it will be possible to recover the input vat on any related purchases.

Consultancy
Miscellaneous items of consultancy to external bodies should be vatable. Examples include cataloguing services, advice, library services, IT support etc.

IBSS PROJECT

Editorial Fees
LSE raises a sales invoice which is vatable.

UK Royalties
Suppliers, e.g. Taylor & Francis tend to use the VAT self- billing arrangements. This income is vatable. A cheque and a statement splitting out the vat element is sent to the LSE. The vat element needs to be banked declaring it as output tax to the VAT control account (1-ZAU-X808-76002)

Overseas Royalties
This is a supply of intellectual property rights and the place of supply is deemed to be the overseas country. This supply is effectively zero-rated.

Overseas Sales of CD Rom
Treat as zero-rated as income from USA, retain proof of export.

On-Line Service
Provision of on-line information services.
UK Universities and other UK customers are vatable (standard rated).
Customers outside the EU e.g Australia, USA are zero-rated.
Customers within the EU apply the 'business test' - if the customer has a vat number treat as zero-rated, if not e.g. private individual, Public Library then treat as vatable (standard rated).

ESRC Grant
Outside the scope of vat - effectively vat exempt.

Expenditure
Purchase invoices relating to the ESRC grant cannot recover input vat as the grant income is effectively vat exempt.
IBSS project income is a combination of vatable (standard rated) income charged at 17.5% or 0% and therefore all of the vat on purchase invoices can be recovered.

INTER VAT GROUP SUPPLIES AND IDN’s
The LSE VAT GROUP consists of:
1. THE LONDON SCHOOL of ECONOMICS
2. ENTERPRISE LSE LTD
3. LSE LETS LTD
4. LSE ASIA LTD

Any interdepartmental supplies or supplies from one VAT GROUP Member to another are outside the scope of VAT, and no VAT is chargeable.

For input VAT purposes, the ultimate use of the goods determines the deductibility.

“Looking Through The VAT Group”

If a telephone bill is invoiced to central admin, and an IDN is raised to ELSE Ltd for its portion of the bill, the correct treatment is to reclaim the VAT in full on the value of the supply which relates to ELSE Ltd. This is because the VAT incurred on the purchase is directly related to the taxable onward supplies which ELSE Ltd makes. (Else Ltd is a fully taxable entity and enjoys 100% recovery of VAT it suffers on purchases, whereas the School is a partially exempt entity for VAT purposes.) In this way we are allowed to look through the group when determining deductibility of VAT suffered by the School’s VAT Group.

List of supplies across the School and their liabilities for VAT purposes.

S.D.Parsons, VAT Manager, LSE. May 2008.
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