Why do people buying things for UK universities have to pay VAT?

Question

In the UK, Value Added Tax (VAT) is added on to prices when things are bought by consumers / end users. However, VAT can normally be reclaimed by companies with a turnover of over approx £20k, and by charities (this is highly simplified; please do not quibble unless the details are important to the question).

Universities certainly have turnover of >£20k, and most of them are charities. Yet, when ordering things on behalf of the university, charging to university budgets, staff have to include VAT in the amounts.

Why is this?

Answer 1

As I understand it.

If the goods/services you produce (your "outputs") are liable for VAT then you charge VAT on your outputs and claim back VAT on your inputs. It is very much possible to reclaim more VAT than you charge either because you are losing money or because your outputs have a lower VAT rate than your inputs.

In particular, there is a critical difference between goods that are zero-rated for VAT and those that are exempt or outside the scope of VAT. Goods that are zero-rated still count as liable for VAT, so if the business you are in produces zero-rated goods (for example most food) then you can claim back VAT on your inputs and don't have to charge it on your outputs.

On the other hand, if the goods/services you produce are exempt or outside the scope of VAT then you do not have to charge VAT on your outputs but cannot claim it back on your inputs.

(there are also some special rules around international transactions which I won't get into here)

There does not seem to be a blanket VAT exception for charities. Charities obtaining supplies for use in the production of non-exempt goods and services can claim back VAT on those inputs and there are a bunch of special cases where charities can reclaim some or all of the VAT on some inputs for charitable purposes.

Most of the university's income is either outside the scope (research grants) or exempt (education services) of VAT. So in the absence of any specific exemptions, the university must pay VAT on inputs used to educate students and perform research under grants.

Answer 2

Its not technically true that companies can reclaim VAT. What they can do is offset the VAT they've collected from their customers that they would normally have to send to the government by the amount of VAT they have paid on goods they have bought.

Universities do not sell any VAT chargable goods or services, and so have nothing to offset.

From the HMRC (https://www.gov.uk/vat-businesses, my empahsis:

VAT-registered businesses:

must charge VAT on their goods or services may reclaim any VAT they’ve paid on business-related goods or services

If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.

You may want to appoint an agent to deal with HMRC on your behalf.

You must account for VAT on the full value of what you sell, even if you:

receive goods or services instead of money (for example if you take something in part-exchange) haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT

If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

As the amount of VAT "you've charged" is zero, no VAT money changes hands either way between government and universities.

There are exemptions for some, but not all charities. Genreally you have to be selling medical or medical reserach supplies, things related to charitable advertising, and goods/services for disabled people to be allowed to not charge VAT.