VAT as a barrier to equipment sharing

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Dr Nick Goldspink, of the N8 Research Partnership, examines the financial barriers universities face when attempting to share their resources.

Equipment and facilities sharing between universities is an opportunity to ensure optimal use of high-cost, often tax-payer funded, equipment.  This is vital to improving efficiency and productivity in the HE sector.

In 2012, Professor Luke Georghiou, of The University of Manchester, published a synthesis report on behalf of the N8 Research Partnership identifying some of the barriers to equipment sharing as well as potential solutions. In addition to significant issues relating to cultural change were some barriers with a more practical solution – VAT being one of them. Universities wishing to share equipment with other universities currently incur a VAT charge on the cost of services – a clear disincentive for sharing equipment. Organisations, including N8 and CaSE, have been key in highlighting the need for improved access to shared facilities.

In 2014, N8 Research Partnership published the N8 Equipment Sharing Toolkit, a set of guidelines on best practice relating to charging, training, health and safety in the context of what ‘equipment sharing’ means for universities.  The guidelines also outlined a potential solution to the VAT issue.

N8 Research Partnership has operated N8 HPC (High Performance Computing) for the last 4 years, a facility funded by EPSRC, hosted by the University of Leeds and maintained by the collaboration of the N8 universities.  The main costs are utility costs e.g. electricity and the cost of cooling, and when these costs are passed on from Leeds to the other 7 universities, they are subject to VAT.

The VAT Cost-Sharing Exemption allows organisations that provide VAT-exempt services (e.g. a university) to create Cost Sharing Groups to supply VAT-exempt services to other member organisations (e.g. other universities).  This seemed like the perfect model for use in equipment sharing.  N8, funded by HEFCE, embarked on a programme to deliver a Cost-Sharing Group using the model proposed and described in the N8 Equipment Sharing Toolkit.

Other organisations have used the Cost-Sharing Group model, with varying degrees of success.  For example JISC, have successfully implemented the model for subscription costs, however the West of Scotland College Partnership were defeated at Tribunal by HMRC for failing to precisely reimburse the CSG for their respective costs – instead costs were pooled and shared equally.

As the costs for the N8 HPC are currently treated in a similar manner e.g. pooled and shared, rather than based on exact usage, we proposed a number of models for reimbursement to HMRC for their prior approval:

  • payments adjusted for actual usage at year-end
  • an access fee to cover base costs and an utilisation fee to cover variable costs (the “Fridge-Freezer model” – in that you have to power a freezer regardless of what’s in it, but need additional power the more things you need to freeze).

However, for the N8 model to work the Cost-Sharing Group would need to exist within the VAT group of a university.  HMRC ruled that this would preclude provision of “qualifying services” to the hosting university (one of the conditions for using a CSG).  HMRC suggested directly funding a separate CSG company outside of each university’s VAT group.  As most funded capital equipment has to be owned by a university this would preclude the CSG from owning equipment and leasing equipment to a company outside of a VAT group incurs VAT!

Of course, all this was happening against the backdrop of Brexit;

  • the Cost-Sharing Exemption is an EU law – with all the uncertainty that involves – that was due to be reviewed: which may alter the UK’s interpretation in the longer term.
  • VAT law is also being reviewed, which may impact on VAT group regulations.

With all of these barriers there was unsurprisingly very little appetite from the universities to engage with this model.  The risk/reward ratio is stacked strongly towards risk so this is unlikely to change.

N8 has recently published the report on this project, ‘Implementation of Cost-Sharing Exemption in Universities’.

It is in everyone’s interest to ensure optimal usage of taxpayer funded equipment.  Our conclusions ask for the UK government to work with HE sector bodies to find a more imaginative approach to the situation: one which will allow universities to efficiently share equipment through an incentivising climate.