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VAT impact on educational institutions

Prescribed education supplies are traditionally exempt from VAT and this may be the case in the GCC although some countries could be contemplating the application of a zero-rate. The exemption means that no VAT will be charged on the provision of such supplies and VAT incurred in relation to making these supplies can not be reclaimed.
Prescribed education supplies may include course fees (including any administrative fees which directly relate to the course), course materials, field trips and excursions as well as food and accommodation to students. Educational institutions have evolved to provide more than just education to their students; they are now often involved in business activities such as the sale of goods from campus shops, restaurants,
vending machines, admission to plays, concerts, dances and museums etc. They may also provide short-term courses to non-students/the general public, all of which are likely to be subject to VAT. The likelihood in the GCC context is that educational institutions will make supplies that would be considered as exempt as well as supplies that are subject to VAT. This will mean that VAT incurred on inputs that are directly attributable to the exempt educational supplies will not be claimable. To further complicate matters, VAT incurred on common overheads (such as marketing and promotional costs, utilities, purchases of office furniture and goods) will not be fully claimable and must be apportioned, meaning that only a portion of VAT incurred on such expenses is claimable in proportion to the number of taxable supplies made over total supplies.
Historically, experience in other VAT jurisdictions shows that educational institutions tend to recover only 5-10% of all VAT incurred based on a standard method of apportionment (i.e. turnover basis). Thus costs are expected to significantly increase for educational institutions as a result of VAT. These costs will be further compounded by the higher compliance costs faced by educational institutions to ensure correct tracking and attribution of all their inputs and VAT claims. The additional irrecoverable VAT costs will impact the pricing policy. An early assessment of the VAT bottom-line cost is required in order to rebalance prices in time for 1 January 2018 in order to maintain current levels of profitability. Educational institutions may wish to consider developing a special method of apportionment based on a ‘fair and reasonable apportionment method which can lead to higher recovery rates and reduce VAT costs (compared to the standard method of apportionment.

VAT on Higher Education Sector in the UAE

Higher education institutions making zero-rated and standard-rated supplies are required to register for VAT if the value of their taxable supplies and imports exceeded in the last 12 months or is expected to exceed in the next 30 days the mandatory registration threshold of AED 375,000.

A higher education institution may voluntarily register for VAT if the value of its taxable supplies and imports or taxable expenses incurred exceeded in the last 12 months or is anticipated to exceed in the next 30 days the voluntary registration threshold of AED 187,500.
Where a higher education institution only makes zero-rated supplies (i.e. does not make any supplies that are subject to VAT at the rate of 5%), an exception from VAT registration may be applied for via the registration application.

Are tax invoices required to be issued?

Yes, tax invoices are required for all standard-rated and zero-rated supplies. Simplified tax invoices may be issued where the supply is made to an unregistered recipient or where the consideration for the supply made to a registered recipient is AED 10,000 or less. However, as an exception, there is no need to issue a tax invoice where the supply qualifies to be wholly zero-rated and there are sufficient records to establish the particulars of the supply.

Are institutions in the Higher Education Sector permitted to recover input VAT?

Yes, a higher education institution making only zero-rated and/or standard-rated supplies are eligible for a full
recovery of input VAT, with the exception of blocked items such as:
– Certain entertainment services; and
– Purchased, leased or rented motor vehicles that are available for personal use.
However, where the higher education institution also renders exempt transportation services, only a portion
of input VAT is recoverable.

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