Recent tax developments in the higher education sector

In the beginning…

When value-added tax (VAT) was introduced in 1991, universities were predominantly state-funded institutions, and research activities were mostly funded by science councils and the Foundation for Research Development (FRD) with no specific outcome or deliverables. Legislation that specified the boundaries of primary, secondary and higher education was not in place at the time and it was difficult to distinguish between the various educational spheres.

As a result, the Value-Added Tax Committee (VATCOM) appointed by the Minister of Finance recommended at the time that the supply of educational services should be exempt from VAT, similar to the previous sales tax treatment. The exemption aimed to alleviate the financial burden on universities as well as additional risks and compliance costs associated with VAT accounting and compliance.

2012 onwards

Two decades later, the sector has progressed to the point where it is possible to divide the education sector into categories by means of legislation, namely: Basic education (schools), technical vocational education and training (colleges) and higher education (Universities).

Research is also a defined focus area in which universities are now contracted by private entities for various types of research and consulting services. Expenses such as cleaning and security services are often no longer performed in-house, but rather performed by third-party service providers.

From a VAT perspective, and with the emergence of various commercial research projects, and other income streams such as parking and gym facilities, most of the established institutions are now registered for VAT. As a result of institutions providing exempt and taxable supplies, they face extreme challenges in managing their VAT risk in a very complex environment.

Under current legislation universities’ tuition fees, accommodation fees and state-funded research have no VAT implications. However, certain contractual research and other membership fees are standard rated for VAT purposes. Thus, institutions have to calculate an apportionment ratio on an annual basis.

SARS issued a VAT Class Ruling (VCR) Binding Class Ruling to Higher Education South Africa (HESA) in August 2012 to assist universities in properly classifying their services and calculating the input tax deduction in respect of goods and services acquired for the purpose of making taxable supplies. However, managing VAT compliance in the sector and designating funds and expenses correctly for VAT purposes remains an area of concern for all institutions.

In terms of the VCR, the recovery rate on overhead expenses such as water and electricity is limited to 12.5%. As a result, the sector incurs significant VAT costs in respect of VAT incurred on expenses for the purpose of educational services.

The future…

The intention of South African VAT legislation is that the financial burden should eventually fall on the end consumer. However, because Government and the sector attempts to keep the cost of education as low as possible to encourage further education, institutions are funding the VAT cost associated with the supply of exempt educational services from internal resources.

In order to alleviate the financial and administration burden associated with VAT accounting, HESA on behalf of the sector was invited to give a presentation to the Davis Tax Committee on a possible VAT reform for the sector.

Following the presentation, a formal request was submitted requesting VAT reform for the sector, whereby the supply of educational services is made taxable at a reduced rate, similar to the current treatment of long-term commercial accommodation.

This would have the effect of placing the sector in a VAT-neutral position in which the output tax payable on tuition fees would be funded by the additional input tax deduction that would become available and not by increasing tuition fees. Not only would the VAT cost be reduced, but managing the VAT risk in the sector would become a much easier task.

In the 2015 National Budget Speech, the definition of educational services was raised as well as the VAT treatment of numerous expenditures, including the above-mentioned. It was reported that the Davis Tax Committee is currently revising these VAT implications and that its conclusions will aid possible changes.

In light of these developments, we foresee only positive outcomes that will result in a dramatic reduction in risk and compliance issues, as well as relieving universities of the financial and administrative constraints related to VAT.

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