Ferris Bueller’s day off

February 7, 2013

As Ferris Bueller observed, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”  Looks like the Treasury have taken him a bit literally and stopped altogether – no doubt to take a better look.  Yes, the Tax Updates and Consultations Tracker page still hasn’t been updated since 14th December 2012 which I make to be 56 days and counting.  If we’re moving to a world where a consultation doesn’t need to last three months, shouldn’t we know a bit more about whether there are any and when they might close?

As it happens, there are in fact now three open consultations, aside from the technical consultation on the Finance Bill package.  But you won’t find them on the Treasury page, they’re on the HMRC page instead.

So let’s look at the first one, which closes on 14 March.  Consultation on the withdrawal of the VAT exemption for research.  Who should read this?

All suppliers of business or non-business research and those that commission research.

(Pauses to wave to everyone she knows in any university anywhere.  Helloooooo!)

Although it’s possible some of them already know.  Because, once the EU decided that the UK exemption from VAT for “business supplies of research between eligible bodies” doesn’t comply with EU legislation, well…

HMRC have had confidential discussions with some representative bodies with a view to obtaining the information sought in this consultation. As the outcome of these discussions was inconclusive as to the impact, we have decided to undertake a full consultation.

which I read as meaning “we asked them, and they gave us different answers, and – help!”

Let’s see.

I suspect it’s because a Venn diagram of “people who know anything about VAT” and “people who know anything about how university research is funded” would have about twelve people in the overlap bit and those twelve people have better things to do than seek out and respond to government consultations.  But I’m not sanguine that the government has got it right, or that the impact will be as slight as they seem to think.

In the “background” part of the consultation they identify three different kinds of research, research that is block funded or grant funded and so is “non business” research – and so outside the scope of VAT.  Phew!  And then there’s business research, where a company pays a university to carry out some research for it, and expects to make a profit from exploiting the intellectual property so created.  And the third category, the one affected by the change, is where there’s a contract between two “eligible bodies”, where “eligible bodies” means a university or public body or similar.

So – taking a not random example – I once took part in some medical research, where the research was (as far as I knew) conducted by a university and funded (so far as I know) by part of the NHS. Those would both be “eligible bodies” if I understand the consultation document.  So their contract would, in future, have to include VAT in any payment.

OK then – does that affect anyone, and how are they affected?

Let’s look at the hypothetical examples.

1). A charity grant funds University A to carry out some research. The supply University A makes to the charity is outside the scope of VAT. However, University A needs to subcontract part of the research to University B. At present, the supply University B makes to University A is exempt from VAT but after the exemption is withdrawn it will be taxable (20% VAT). This will not affect the supply University A makes to the charity which will remain outside the scope of VAT.

In this scenario, University A’s costs increase by the VAT charged by University B. However, since University B can now deduct input tax on making this supply, this may allow, in some cases, for a lower net price to be charged to University A.

I do enjoy that “may” and “some” – in other words, because the university which has to charge VAT may also be able to deduct any VAT it suffers in carrying out the research, it might be able to charge less.  This is not a simplifying measure, and the consultation seems to me to grossly underestimate the amount of effort which goes into devising asymmetrical VAT schemes that seem to offer people the holy grail of being able to buy stuff without paying VAT but not to charge VAT on the stuff they sell.  I wouldn’t mind betting that one of the reasons the hypothetical twelve people who understand VAT and research funding aren’t responding to the consultation is because they are busy wondering how they can make sure that everything they buy goes into the non-exempt contract, and everything they sell winds up outside of it.

Then there’s the second example.

2). A commercial company provides funding to University Z to conduct research with the expectation that there will be intellectual property produced. The supply made by University Z to the commercial company is a standard-rated business supply. However, University Z needs to subcontract part of the research to University X. At present, the supply made by University X to University Z is exempt from VAT but after the exemption is withdrawn it will be taxable (20% VAT). This will not affect the supply made by University Z to the commercial company which will remain taxable at the standard rate.

In this scenario, University Z’s costs will be the same since they will be able to deduct the VAT charged by University X as directly attributable to their onward supply to the commercial company.

I know that VAT is theoretically meant to be a simple tax which is only charged once in any transaction, and that the VAT charged and paid theoretically cancels itself out in all the other steps in a supply chain, but do we really want our universities to be places where serious intellectual effort is diverted into understanding and operating VAT?  I mean, I’m not a VAT person myself, but doesn’t the same “la la la, they’ll be able to charge less” condition apply to University X in example 2 as to University B in example 1?  And isn’t the idea that they “may” charge less as a result as weaselly in example 2 as in example 1?

Incidentally, if you want a succinct summary of what government thinks of universities, look at their description of non-business, exempt research.

Typically, the research does not give rise to intellectual property that will be exploited

There’s no money there, so who cares.

Here’s my response.  Feel free to adopt or adapt if you want to add your own two-pennorth to the consultation response.

This is an individual’s response and will also be published, with commentary, on my website at http://tiintax.com.  I am a researcher into tax simplification and better regulation but responding in a private capacity.
1.  Your consultation questions do not seem to me to be designed to satisfy any of the “possible reasons to consult” listed in the Cabinet Office guidance.  They are not designed to garner views about the government’s proposed course of action nor to determine or evaluate options as to how to achieve a policy objective but are asking solely for factual information about how much research is commissioned or received in different VAT-able categories.  As such it does not seem to me that this is a “consultation” as it is generally understood.
2.  While I understand that you need factual information about what type and value of research exists in order to test whether there might be unintended consequences of the proposal to abolish the exempt category, a formal written consultation put out onto a website is not a useful way of eliciting this information and nor will it enable you to know whether you have the full picture or simply the responses of people who are sufficiently engaged with government policy-making to know of the existence of the website and spot the consultation.  An email to an appropriate person at each UK university might have been more effective as a simple call for evidence.
3.  You also mention in the consultation document that you are looking at whether there are options to mitigate the impact of the withdrawal, and to look at whether any transitional arrangements are necessary.  However you do not appear to have asked any questions designed to elicit responses on mitigation of the impact, and I cannot see that your questions 8 and 9 are capable of being answered by someone who is not a VAT specialist so will not give you any useful information on the need or otherwise for transitional arrangements.
4.  Your tenth question (as well as being hidden beyond the fold of the final page) also asks for comments about the “administration burdens” of the withdrawal.  I am assuming by this you mean the “administrative burden” as calculated using the standard cost model, ie the deadweight cost of administration of the tax system, but you neither mention nor explain this term elsewhere in the document so that respondents who are not specialists in the field might well fail to understand the question you are asking.  In my admittedly limited experience the administrative burden is likely to be a significant imposition, but I am a self-funded researcher so I can’t assist you in quantifying it.
5.  I am, however, astonished that your impact assessment makes no preliminary estimate, or gives even an overall ball park figure, of the administrative burden that will be imposed.  It is my understanding that you ought to be able to produce this figure by plugging in the legislation (quoted at the end of the consultation document) and the number of bodies affected (presumably all UK universities?) into the Standard Cost Model to give a preliminary estimate of what the burden is now and how you expect it will change as the number of bodies affected changes, so that respondents can see at a glance whether or not the impact is estimated to be significant.   My estimation is that it will have a significant impact on a relatively small number of civil society organisations and I am therefore surprised that you have not gone beyond “minimal but-” in the TIIN.

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