Introduction
According to the most recent Higher Education Statistics Agency data, Chinese, Hong Kong, Singapore, and Malaysian students are increasingly enrolling in UK universities and FE institutions.
This is to be expected given the increased use of overseas recruiters. The advisor’s purpose is to guide students through the application process. To provide assurance and direction on practical issues such as immigration, transportation, and housing.
Yet, many people are unaware that the commission paid to overseas brokers by universities and colleges results in a “windfall” for the UK government in the form of VAT.
In a major VAT decision issued (the University of Newcastle Upon Tyne v HMRC [2017] UKFTT 0145 . Scenario briefed below), the tax tribunal determined that overseas agents who assist in the recruitment of non-EU students make a single supply of services to the universities and institutions themselves. Rather than to the students themselves. Because of VAT place-of-supply legislation, the agents’ services are treated as if they were done in the United Kingdom. The commission is subject to VAT using the reverse charge technique. Because the agent is now responsible for declaring VAT. VAT reverse-charge accounting requires the institution to charge itself VAT on the agent’s commission.
There is no direct link between the commission paid to agents and the taxable output or economic activity of the universities as a whole, universities, and colleges must pay VAT to HMRC but are not entitled to any VAT recovery.
The application of VAT reverse-charge accounting stands out, as it hinges on the recipient’s VAT registration threshold. Commissions from international brokers may necessitate that American universities and colleges register for VAT, despite being unable to reclaim the VAT they charge their students.
The scenario in brief:
Background
Newcastle, like many other UK universities, worked hard to attract international students. In other words, this is a significant source of revenue for the organization. Foreign agents were hired to recruit individuals as students. Among them, approximately 40% were first-year college students, another 40% were students in their second year, and the remaining 20% were graduate research students pursuing their PhDs in their third or fourth year. The University had over a hundred deals with agents from all over the world in 2014. Agents used their own money and time searching for students for schools all throughout the world, including the United Kingdom. The school promised to pay the agents money through contracts and commissions. Agent commissions totaled £1.034 million in 2008 and £2.214 million in 2012.
The Tribunal had to evaluate whether the agents bundled their services for the University or if each student had a separate agreement with each agent. If the University, which has partial VAT exemption, received the entire supply, the Reverse Charge would apply. Yet, distributing the supplies to both students and the University would reduce both the Reverse Charge and VAT. Changes in the Location of Supply rule influenced the overall picture throughout the period under consideration, although this essay remains focused on their impact.
According to the school, the brokers aided both the school and the pupils in several ways. First, the brokers assisted the institution in recruiting new students. The University should split the commission payment to account for both the direct payment made by the University for services provided to it and the payment made by students for services provided to them by a third party. Since the items given to students wouldn’t be produced in the UK, they wouldn’t be subjected to UK VAT.
Decision
After reviewing all of the evidence, the judge concluded that the agents only worked for the University and did not help the students. Consequently, the University became subject to the Reverse Charge from 2010 onwards, mandating VAT payment on the entire value of the services acquired (despite the different rules on the place of supply before 2010). Additionally, it was determined that the University couldn’t reclaim VAT as an input tax under the Reverse Charge mechanism. Agent commissions had no bearing on the University’s taxable income or the economy as a whole.
Commentary
Universities in the United Kingdom frequently utilise brokers in other countries to attract students, therefore this decision will have an impact on the majority of the country’s schools. It wasn’t a major surprise, but it demonstrates that all businesses should consider how the Reverse Charge may affect them. The Reverse Charge will result in a genuine VAT fee for a company only if it is partially exempt or engages in non-business activities. Applying the Reverse Charge affects the registration cost for VAT. Consequently, a corporation not obligated to pay VAT but availing Reverse Charge services from external sources might need to register for VAT, contingent upon the value involved. Typically, this means that the VAT fee will rise. This situation could jeopardize a non-governmental organization (NGO).
Likewise, the case highlights the importance of contracts, paperwork, and website language (in case further reminders are necessary). When negotiating conditions like these, make sure to include any applicable VAT. If you do it at the correct time, you may also be able to avoid or reduce VAT charges.
(The above information is not a piece of advice, please seek advice from your accountants or contact us at info@taxsteins.co.uk or 02071559545)
