Exchequer’s VAT windfall on commissions for non-EU students

09 February 2017

David Wilson

The latest figures from the Higher Education Statistics Agency highlight that there has been an increased number of students from China, Hong Kong, Singapore and Malaysia enrolling at UK universities and further education colleges.

This is not altogether surprising given the increased number of overseas agents engaged by the education sector to attract students. Their job is to assist students with the application process, and to give assistance and reassurance with practical issues such as immigration procedures, travel and accommodation.

What may be a surprise to many however is the VAT ‘windfall’ which accrues to the UK government as a result of the overseas agent’s commission charged to the universities and colleges.

In a lead VAT case relating to the provision of agents’ services in the recruitment of non-EU students, the tax tribunal last week determined that such overseas agents make a single supply of services to the universities and colleges, not to the students. As a result of VAT place-of-supply rules, the agents’ services are deemed to be made in the UK, with the commission charged being subject to VAT by way of the reverse charge mechanism. As VAT reverse-charge accounting shifts the liability for declaring VAT from the agent to the university, the university must charge itself VAT on the agents’ commission.

As there is no direct and immediate link between the commission paid to agents and any taxable output, or economic activity of the universities as a whole, universities and colleges must pay the VAT to HMRC, but are not entitled to any recovery of this VAT.

One other striking thing about VAT reverse-charge accounting is that the supplies count towards the recipient’s VAT registration threshold. Therefore, universities and colleges who are not currently registered for VAT may find themselves required to do so as a result of overseas agents’ commissions, even if they are not entitled to recover the VAT they charge themselves.

For more information please get in touch with David Wilson, or your usual RSM contact.