Treasury explores VAT relief

The Government's pre-election Budget could include measures designed to accelerate the university sector's slow uptake of its private finance initiative, a ministerial adviser has revealed.

Ahead of next week's annual PFI conference, where the Chancellor Kenneth Clarke will give the keynote speech, Philippa Roe, of the Treasurey's private finance panel, disclosed that Treasury ministers are exploring ways in which universities engaged in PFI deals could save thousands of pounds in VAT.

Under PFI, private contractors can design, construct and manage buildings which universities pay for over a long period. In a report earlier this year, vice chancellors questioned the "affordability" of PFI, which was launched in higher education 18 months ago, and cited as a "major constraint" the fact that management and maintenance agreements are subject to VAT.

Greenwich University's Pounds 12 million student village, which opened last week as the first completed higher education PFI project, faced annual VAT payments of Pounds 80,000, and the deal could have collapsed if financial advisers had not found a way around it.

According to John McWilliam, deputy vice chancellor of Greenwich, Greenwich paid an extra Pounds 250,000 in consultancy fees to eliminate the VAT problem. This was, he said, "money which could have been spent on our students".

Universities are concerned that, in contrast to hospitals and prisons and other comparable public service institutions, they cannot reclaim the VAT paid on contracted out services because they are ranked as private sector bodies.

Ms Roe said: "The VAT problem is something we are actively aware of, and ministers are looking at it with a view to solving it." She added that "inevitably there are links to Budgets because it's about money".