management letter & highlights memorandum – financial statements 2005/06

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Management Letter & Highlights Memorandum – Financial Statements 2005/06

University of Leicester

AUDIT

INFRASTRUCTURE AND GOVERNMENT – EDUCATION

2© 2006 KPMG LLP, a UK limited liability partnership and the UK member firm of KPMG International, a Swiss cooperative. All rights reserved.The KPMG logo and name are trademarks of KPMG International.

This report is made solely to Council of the University of Leicester, (“the University”), in accordance with the terms of our engagement. It has been released to the University on the basis that this report shall not be copied, referred to or disclosed, in whole (save for the University’s own internal purposes) or in part, without our prior written consent. We acknowledge that the University will disclose this report to the Higher Education Funding Council for England (“HEFCE”), to enable HEFCE to verify that a report to the University by way of management letter has been commissioned by the University and issued by the University's auditors, and to facilitate the discharge by HEFCE of its functions in respect of the University. Matters coming to our attention during our audit work have been considered so that we might state to the University those matters we are required to state to the University in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Council and the University, for our work referable to this report, for this report, or for the opinions we have formed.

Please note that that this report is confidential between the University and this firm and between HEFCE and this firm. Any disclosure of this report beyond what is permitted above will prejudice this firm’s commercial interests. A request for our consent to any such wider disclosure may result in our agreement to these disclosure restrictions being lifted in part. If the University or HEFCE (“you”) receive a request for disclosure of this report under the Freedom of Information Act 2000, having regard to these actionable disclosure restrictions you must let us know and you must not make a disclosure in response to any such request without our prior written consent.


Contents

Page number

1 Introduction 4

2 Financial highlights 6

3 Audit issues 2005/06 8

4 Observations arising from 2005/6 audit 11

5 Future sector developments 19

6 Follow up of 2004/5 management letter points 25


1.1 BackgroundThe purpose of this report is to set out certain matters which came to our attention during the course of our audit of the financial statements of the University of Leicester (the “University”) for the year ended 31 July 2006. We hope that these observations will be of assistance to the governors and management.

Our audit work is designed to consider whether:

the financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of affairs of the University and of the surplus of income over expenditure for the year;

the financial statements have been properly prepared in accordance with the Statement of Recommended Practice: Accounting for Further and Higher Education;

in all material respects, income from the Higher Education Funding Council for England and the Training and Development Agency for Schools, grants and income for specific purposes and from other restricted funds administered by the University have been applied for the purposes for which they were received; and

in all material respects, income has been applied in accordance with the University’s statutes and, where appropriate, with the financial memorandum with the Higher Education Funding Council for England and the funding agreement with the Training and Development Agency for Schools.

Our objective is to use our knowledge of the University gained during our routine audit work to make useful comments and suggestions for you to consider. However, you will appreciate that our routine audit work is designed to enable us to form the above audit opinions on the annual financial statements of University and should not be relied upon to disclose errors or irregularities which are not material in relation to those financial statements.

1 Introduction


1.2 Report structure

The report is set out in five further sections as follows:

Section 2 summarises the main features of the financial statements and key movements from the prior financial year;

Section 3 details a number of audit related issues;

Section 4 outlines the observations that we have made based upon this year’s audit;

Section 5 summarises the future accounting and auditing developments in the education sector; and

Section 6 outlines our performance in carrying out our work.

All issues raised in the report have been discussed with management and we have included responses where appropriate.

1.3 Independence matters

Under the Audit Code of Practice and ISA 260, we are required to report to the Audit Committee any fees we have derived from the University for services in addition to the external audit of the financial statements. For the year ended 31st July 2006 we also performed the following services with the associated fee:-

Grant audits - £29,622

1 Introduction (continued)

1.4 Acknowledgements

We would like to take this opportunity to thank the Director of Finance, Head of Financial Accounting, the Finance Department staff and all other staff we met during our audit for their co-operation and assistance.


2. Financial highlights

2.1 Financial results

The financial results of the University for 2005/06 are shown in the summary income and expenditure account set out in the table below.

The University has made a deficit for the year ended 31 July 2006, although an overall surplus was budgeted. The main reason for the deficit is a significantly smaller profit on disposal of assets as the sale of some of the student residences was not completed as at the 31 July 2006. We understand that these land sales have now been completed in the new year, to the extent of £3.1m.

The other key factors identified as impacting on the results for the year are as follows.

£5.36m increase in HEFCE funding council grants, due to inflationary increases in funding and increased special initiatives funding from HEFCE together with the additional release of capital grants;

£0.27m decrease in TDA income, due to a drop in TDA funded students;

the £3.8m increase in staff costs was due to a combination of factors:

£1.9m impact of the framework agreement;

a 3% increase in pay levels;

FRS 17 pension adjustments of £0.7m;

the main increase in other operating expenses are pension and premature retirement costs following the betterment targets for departments, resulting in an increase in early retirements; an increase in scholarships awarded; a significant increase in gas and electricity prices; and a significant increase in computer equipment expenditure as a result of increased investment into the IT infrastructure at the University.

2005/06

£000’s

2004/05

£000’s

Change

Income

Funding council grants 57,432 52,349 +10%

Fees and support grants 40,451 40,485 0%

Research grants and contracts

35,856 34,969 +3%

Other operating income 38,809 38,561 +1%

Investment income 1,328 1,092 +22%

Operating income 173,876

167,456

Expenditure

Staff costs 106,116

102,268

+4%

Depreciation 4,891 4,942 -1%

Other operating expenses 63,949 59,052 +8%

Interest payable 1,631 1,611 +1%

Total expenditure 176,587

167,873

Deficit on Continuing Operations

(2,711)

(417)

Profit on disposal of assets 779 2193

Deficit (1,932)

1,776


2. Financial highlights (continued)

2.2 Going concern

The Council has stated that the financial statements have been drawn up on the basis that the University is a going concern and will continue to be in existence for the foreseeable future.

The University’s forward projection shows an improvement in its financial position. The table below summarises the trading performance and net current asset position of the University from its July 2006 financial forecast.

2.3 Net assets

The key features of the balance sheet as at 31 July 2006 are as follows:

The main additions to fixed assets and the associated funding base (capital grants and internally generated finance) are the investment in new student residences at the Villiers Hall redevelopment; and the extension and refurbishment of the Library.

In terms of working capital, as at 31 July 2006 the University had net current liabilities of £23.7m (2005: £3.4m), a net cash balance of £2m (2005:£1.2m) and investments of £18.7m (2005:£11.2m). The significant variance on the net liabilities position is a direct result of the University’s loan having to be classified as re-payable within one year as a result of the University identifying that it is in breach of one of the loan covenants as at 31 July 2006. The movement between investments reflects an increase in Bank and Building society deposits as a result of loan draw downs. The debtor component of working capital has not changed significantly between this and last year, the movement in creditors is as a result of increased deferred capital grants relating mainly to the Library extension.

Due to the introduction of the FRS 17 a new pension liability has been created this year, this amounts to £30.8m representing the deficit on the University of Leicester Pension and Assurance Pension Scheme.

Total net assets including the pension liability amounted to £73m as at 31 July 2006 (2005:£67.9m).

2005/06

Budget

£000’s

2005/06

Outturn

£000’s

2006/07

Forecast

£000’s

2007/08

Forecast

£000’s

Operating surplus/(deficit)

(6,955) (2,711) (2,694) 1,270

Net current assets/(liabilities)

(1,998) (23,697)

(306) 4276

Investments 13,195 18,722 12,793 17,806

Cash balance 1,230 1,957 1,230 1,230


3. Audit issues 2005/06

3.1 Audit progress and status

We have completed our audit of the draft financial statements that are due to be approved by the Council on 28 November 2006.

Upon approval by the Council and receipt of a letter of representation from the Council we will be able to issue our audit opinion.

Based upon our work carried out to date, and if no significant events occur up to the date of signing, we anticipate being able to issue an unqualified opinion.

3.2 Audit differences

ISA 260 requires us to report differences found during our audit which have been adjusted by management in arriving at the final results for the University. The adjusted differences found as part of our audit are included in the table below:

We are also required to present any unadjusted audit differences, other than those which are clearly trifling, to the Audit Committee. We are pleased to report that there were no such differences:

3.3 Loan covenants

The most significant adjustment is the re-classification of the outstanding loan balance as creditors due within one year. This is a direct result of the University identifying that it has unexpectedly defaulted on one of their loan covenants due to a slight delay in a land sale that crossed the year end. This treatment is in accordance with Financial Reporting Standard 25.

It will be important that the University continues to carefully monitor its compliance with its loan covenants

Difference

Effect on surplus for year

£000’s

Effect on net

assets for the

year

£000’s

Aim Higher income and expenditure included monies received on behalf of and paid across to partners (£257,000)

0 0

A number of debit balances held in the creditors ledger which required moving to debtors (£109,000)

0 0

Income carried forward within creditors that relates to 2005/06

+42 -42

Transfer of the loan balance from long term to current creditors

0 -22,101

Effect of adjusted differences +42 -22,143


3. Audit issues 2005/06 (continued)

3.4 Corporate governance and risk management

The University’s statement of corporate governance considers that it has fully complied with the provisions of the “Combined Code on Corporate Governance” and the CUC Governance Code of Practice and Statements of Primary Responsibilities throughout the year ended 31 July 2006.

Based upon our review of the corporate governance and risk management arrangements at the University, and reliance on the work of internal audit we are satisfied that the University is able to make a full compliance statement.

3.5 Reliance on internal audit work

In accordance with ISA 610 and the Audit Code of Practice, we have reviewed the work carried out by the internal auditors East Midlands Internal Audit Service during the year, including a review of:

the overall scope of their work as set out in their strategic and annual plan; and

the detailed work they have carried out in the areas identified within the annual plan.

We have placed reliance on the systems notes maintained by the internal auditors and have used them in our own limited walkthrough testing, thereby minimizing the costs of complying with the ISAs. The internal audit programme of work for year to 31 July 2006 as completed and reviewed by us, was as follows:

Area of work Area of work

Payroll TRAC

Budgetary Control and Management Capital Programme

Procurement Student Records

Debtors Tuition Fees & Charges

Creditors Stocks and Stores

Bank Account / Cashiering


3. Audit issues 2005/06 (continued)

3.6 Benchmarking reviews

We are in the process of carrying out a benchmarking exercise across our Higher Education client base in relation to the performance of Finance departments. We will be reporting the results of this review in the near future.

We also undertake financial statements benchmarking on an annual basis. The output of our 2004/05 exercise was issued to the University during the year and we will produce a 2005/06 benchmarking report and issue it to management early in 2007.


4. Observations arising from 2005/06 audit

4.1 Bank Suspense Account

Observation

The University has two finance suspense accounts included within creditors, at 31 July 2006 they were approximately £290,000 and £5,000.

The University has undertaken an analysis of around £120,000 of the £290,000 balance and has been able to identify to what the transactions relate. The analysis has identified the following:

£76,000 – This represents monies that are owed back to third parties;

£42,000 – This is income that relates to 2005/06;

Circa £60,000 – This dates back more than two years and has not been analysed at transaction level

Circa £110,000 – This balance has not been analysed at transaction level

Including the £5,000 account balance the balances above are almost three times the level as at 31 July 2005. These above balances have not been adjusted in the 2005/06 financial statements.

Recommendation 1

We appreciated that given the diverse nature of the University's activities it will be the case that funds will be received for whom the source is not immediately known. However, the University should ensure that the account balances are kept to a minimum by identifying to what the transactions included relate and writing off relevant parts where applicable.

Thereafter management should ensure that the monthly bank reconciliation process is enhanced to prevent similar balances building up in the future.

Priority

High

Management Response

Agreed. This has been partly actioned already, but it will be given more priority in future as part of monthly procedures.

Officer responsible:

Income Accountant

Date of action by:

Starting immediately.


4. Observations arising from 2005/06 audit (continued)

4.2 Library schemes

Observation

HMRC have challenged many Universities arrangements where library services have been outsourced to subsidiary companies, known as library schemes. HMRC were successful in a recent VAT tribunal in their challenge to a library scheme implemented by the University of Ulster. HMRC successfully argued that there was one single overarching supply to the University of Ulster of a learning resource service and that this was standard rated. The result is that the University now has a significant VAT cost, resulting in VAT being borne on the cost of staff plus books and periodicals which if acquired by the University would not be subject to VAT.

Feedback from HMRC anti-avoidance is that they are seeking to use the recent tribunal decision to challenge many of the library schemes that have been implemented.

Recommendation 2

We recommend that the University undertakes a risk analysis of the library scheme. As part of the risk analysis the University should consider the potential implications of the library scheme company now making a single taxable supply to the University, what is the potential additional VAT cost?

The University should also consider the benefit of continuing with the library scheme and assess the cost of terminating the arrangement including any Capital Goods Scheme adjustments. We also recommend that the University review the various contracts in place, the basis of valuation for the various supplies and also the terms of any agreements or correspondence with HMRC.

Priority

High

Management Response

This is already being actioned through Senior Tax Counsel advice. The options will be considered by FGPC shortly.

Officer responsible:Finance Director

Date of action by:Already being pursued.



4.3 Management of third party interests

Observation

In the course of our audit we are required to identify and disclose third party interests in the accounts.

We noted two instances where such an interest was omitted from the accounts. These related to:

EMIN Limited – in which the University has a 16.67% interest; and

NTI Limited – in which the University has a 3.03% interest.

These are not companies with shares in issue, but the University interest has been held for several years and omitted from the accounts throughout this time.

Recommendation 3

The University should ensure that mechanisms are in place to capture and communicate details of all third party interests to the relevant parties to facilitate monitoring, control and ensure that all of these are disclosed in the accounts.

Priority

Medium

Management Response

Agreed


Finance Director

Date of action by:

Full review during 2006/07 for next year’s accounts



4.4 Internal Audit engagement letter

Observation

As part of our review of internal audit, we sought to review the Internal Audit engagement letter to ensure it complies with the requirements of HEFCE Audit Code of Practice, The Auditing Practices Committee guideline 'Guidance for Internal Auditors' and is in accordance with the Government Internal Audit Manual.

However, we found that the University do not have an engagement letter in place with the Internal Auditors.

We note that the East Midlands Internal Audit Consortium tender proposal does incorporate some of these elements, and that the University confirmed their appointment in writing.

Recommendation 4

The University should ensure that an engagement letter is sent to them signed and returned to the internal auditors as soon as possible. The University should ensure that the engagement letter complies with the relevant guidance as described above.

Priority

High

Management Response

The arrangements with Internal Audit are well understood and have not been affected by this issue. The proper letter will be actioned.


Deputy Finance Director

Date of action by:

December 2006



4.5 Management of Intellectual Property

Observation

From our review of the terms and conditions of employment for academic staff and academic support staff we noted that the terms do not stipulate that ownership of any IP generated by employees is reserved to the University.

In addition, we noted from discussions that there was also no provision in place to ensure that ownership of any IP generated by students is reserved to the University.

Recommendation 5

The University should ensure that the terms and conditions of employment for staff, and the terms and conditions of study for students stipulate that IP generated during the course of employees’ work or students’ research is reserved to the University.

Priority

Medium

Management Response

The University’s position is that IP arising during the course of a staff’s employment belongs to the University by law. The inclusion of a specific statement in the terms and conditions of employment is the subject of unresolved negotiations with the trades unions. The matter will be pursued again.


1. Director of Personnel

2. Academic Registrar

Date of action by:

Policies to be formalised in 2007/08



4.6 Tax Return

Observation

The tax return for the y/e 31.7.04 for the University was prepared and submitted to HMRC in July 2005. The tax return for the y/e 31.7.05 is currently being prepared but will be submitted late.

Our review identified a number of trading activities undertaken by the University which fall outside the charitable tax exemptions. These did not give rise to a taxable profit for the University as a whole due to losses incurred on certain activities. However, a number of other activities were identified which did give rise to a taxable profit. The tax arising on these activities would have been due at 30% if no losses were available to offset the taxable profit.

The penalties for submission of a tax return later than the 12 month deadline increase when 3 months late and also increase on the third occurrence of a late return

We understand that the University are currently in the process of recruiting for two new tax posts.

Recommendation 6

We recommend that the University considers whether any of the taxable activities identified should be transferred to subsidiary companies.

This would reduce the risk of a taxable profit arising in the University, and also of HMRC looking in further detail at the activities of the University.

We recommend that the 31.7.05 return is submitted as soon as possible and that the 31.7.06 return is submitted before the 31.7.07 deadline in order to reduce / avoid potential penalties.

Priority

High

Management Response

Agreed. The priority of tax work is being raised.

Officer responsible:Finance Director.




4.7 Exploitation of Intellectual Property

Observation

We recommended in last year’s management letter that the University develops detailed procedures and guidance with regard to IP to ensure that the overall tax implications of engaging in this activity are properly managed. We understand that this has not yet been done.

There is potential for transactions in respect of the exploitation of IP to give rise to taxation liabilities, and reporting obligations for the University.

Recommendation 7

We recommend that the University develops detailed procedures and guidance to ensure that the tax implications of IP activity are properly managed. Priority

Medium

Management Response

The work has been done, and FGPC approved new policies and procedures in November 2006.


Head of RBDO.

Date of action by:

Completed.



4.8 Non Charitable Expenditure

Observation

New legislation has been introduced to make the restriction of charitable exemptions as a consequence of non-charitable expenditure much easier to implement. HMRC have explained that it will be their intention to target loss making trading activities as potential non-charitable expenditure.

We have obtained further interim guidance from HMRC, which indicates that the loss will not be regarded as non-charitable expenditure, provided that:

there is a surplus after deduction of direct costs, and

the fixed costs would have been incurred by the charity in any event

Some of the trading activities identified in previous years computations, such as the Bookshops, could be seen as making a loss after direct costs, which would suggest that this may be an issue to be addressed

Where non-charitable expenditure is made by a University then corporation tax will be charged at 30% on each £1 of non charitable expenditure.

Recommendation 8

The cost allocation method should be considered further and identify what costs are truly direct, and those which would be incurred with or without the activity.

We recommend that a more considered analysis of direct and indirect costs should be included in the computations for the year to 31 July 2006, so that the position can be clarified ahead of the implementation of the rules.

Where there are still considered to be activities that may be caught by the new provisions, then these activities should be considered in further detail.

Priority

Medium

Management Response

This is being dealt with through the changes in tax administration – see section 4.6, Close attention will be paid to new national guidance expected from UUK.

Officer responsible:Finance Director.



5. Future sector developments

5.1 Managing the impact of the variable fees regime

Observation

The introduction of variable fees and bursaries from 2006/07 makes the production of timely and accurate student number and associated financial data critical in managing the business in the context of the new market environment. The resultant change in debt profile and bursary take up is likely to have a significant impact on both internal debt management processes and the University’s cash flow.

Recommendation 9

Whilst the University is assessing the impact of the new fees regime on its cash flow, financial position, and wider market position, on an on-going basis, it is important that the University has assurance over the effective operations of these new systems which are operating for the first time in the current year. We recommend that the University considers reviewing, through the use of internal audit or through alternative means, the operation of key systems and controls in terms of student data, bursary and fee/cash allocation systems to ensure any refinements are made well in advance of the following year.

Priority

Medium

Management Response

Agreed. The Bursaries Working Group will be analysing the experience of 2006 entry.


Academic Registrar, with Finance Director.

Date of action by:

End of 2006/07 (so that the profile of fee and bursary payments and resulting cash flow can be properly monitored).


5. Future sector developments (continued)

5.2 Changes to the model financial memorandum

In July 2006, HEFCE issued a revised model Financial Memorandum effective from 1 August 2006. There are two main changes of note:

(i) A new system for exchequer interests

The new system for exchequer interests is to be introduced in 2006/07. Each institution will need to sign a brief agreement with HEFCE by 31 July 2007 to enable the retrospective changes to take effect.

In summary the system involves estimating the total exchequer interest value per institution as at 31 July 2006, using a methodology based on nominating specific assets and applying a discounted insurance value, and de-linking that value from individual assets so that it attaches to the institution. The exchequer interest is to be tracked through a register to which new exchequer interest funds are added and which is written off over a period of time. The exchequer interest will only crystallise for repayment in unusual circumstances such as insolvency of the institution or significant downsizing (by at least 50 per cent).

The new system means that individual asset disposals and reinvestments will no longer need to be reported to HEFCE, and the exchequer interest will be extinguished over time. Under the new system HEFCE will write off the existing and historical exchequer interest as at 31 July 2006 over 10 years, and the exchequer interest on all future grants from 1 August 2006 onwards over 15 years.

We will keep the University informed of developments and discuss any potential financial statement disclosure requirements over the coming months.

(ii) Impact of FRS 17 “Retirement Benefits”

The inclusion of the pension scheme surplus or deficit on the balance sheet on implementation of FRS 17 has meant that for most institutions there is a negative impact on discretionary reserves.

The Financial Memorandum previously required negative discretionary reserves to be “cleared by the end of the third accounting period after the year in which the deficit began to accumulate”. The implementation of FRS 17 means that some institutions will be unable to meet this requirement and therefore the revised Financial Memorandum allows pension scheme deficits to be excluded for the purposes of this calculation, although it is still expected that institutions will work towards improving any pension scheme deficits over time.

We will keep the University informed of developments in this area over the coming year.



5.3 The 'Single Conversation': pilot study and sector-wide implementation

As we noted in last year’s management report, in July 2005 HEFCE set out proposals to change the accountability process, reducing the level of information that is required from institutions and requiring such information to be submitted by 30 November each year (i.e. one month earlier than in the past). The results of the consultation, published as HEFCE 2006/07, indicated that most institutions did not foresee major difficulties implementing the new process and HEFCE are currently running a pilot study, with a submission date of 30 November, to test practical issues and assess costs and benefits, before making a decision on sector-wide implementation in early 2007. Notwithstanding the outcome of this pilot, HEFCE have asked all institutions to start preparing for the single conversation process in the expectation that it will be implemented across the sector next year.

The University brought forward the audit and approval of financial statements in 2005/6 in anticipation of these changes. There were a number of improvements which the University management identified themselves that could bemplementated in order to meet the new reporting deadline in a more effective manner 2006/07.

Recommendation 10

The University should consider whether processes and resources are in place to ensure student data returns, financial forecasts and financial statements are prepared and approved in accordance with the new timescale.

The University should review the accounts preparation and audit preparation process that took place this year and identify specific areas for improvement to reduce the risk of missing the revised deadline.

Priority

Low

Management Response

Agreed. The review will include external auditor’s views.

Officer responsible:Head of Financial Accounting.

Date of action by:March 2007.



5.4 Accounting developments

There are a number of on-going accounting developments which will impact on the University and the financial statements audit moving forward:

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) were implemented by listed companies for accounting periods beginning on or after 1 January 2005. However, in line with Treasury requirements, the sector’s financial statements will align to International Standards as UK Financial Reporting Standards harmonize with IFRS over the next few years. There are a number of differences between IFRS and UK standards which will need to be considered by the Accounting Standards Board and FE/HE SORP Board and these will inevitably be considered in the revised SORP which is anticipated for 2007/08.

Statement of Principles for Financial Reporting – Public Benefit Entities

In August 2005, the ASB issued an Exposure Draft on the Statement of Principles for Financial Reporting for Public Benefit Entities. The consultation phase for this document was completed in November 2005, and a final document is anticipated towards the end of 2006. The FE/HE SORP Board will need to consider and consult upon the impact on the revised SORP for the sector. There are a number of potential impacts for HEI’s, including the recognition of capital grants to income once their conditions have been met and the treatment of financial commitments as liabilities.

We will keep the University informed of relevant developments in each of these areas over the coming

5.5 Employment tax issues

HM Revenue & Customs (HMRC) have recently indicated that they intend to target the education sector in relation to employment tax compliance. They will be looking to carry out aspect reviews in three key areas:

Termination payments

We have seen an increase in these types of aspect reviews over the last few years, with HMRC paying close attention to Pay In Lieu Of Notice payments (PILON’s) and seeking to tax the whole termination payment even when the employment contract is silent in this regard.

Recommendation 11

We recommend early advice is taken on the most tax/NIC efficient way of managing any termination payment, particularly when the assessments involved are substantial and/or the number of employees involved is significant e.g. restructuring an entire department.

Management response

The University makes very few payments of this nature and when it does they are initiated by Personnel staff with the relevant specialist knowledge who also obtain external professional legal advice on best practice where necessary. The Payroll Office staff monitor all such payments to ensure full compliance with HMRC legislation.


Director of Personnel and Payroll Manager

Date of action by:

Already being pursued.



Employment status

With many institutions engaging self-employed consultants, HMRC have increased their focus on this area. Typical examples include consultants engaged on a long term basis (i.e. IT consultants), ex-employees who have been re-engaged as consultants and part-time lecturers.

Recommendation 12

Clear guidelines should be available to all departments responsible for engaging self-employed workers. Any self-employed lecturers should be reviewed to ensure that NIC is being correctly treated in line with the Categorisation of Earnings Legislation.

Management response

Payments to self-employed individuals are reviewed by the Payroll Manager to ensure full compliance with HMRC legislation. New guidelines will be provided to departments engaging self-employed individuals.

Officer responsible

Payroll Manager

Date of action by

June 2007

5.6 VAT issuesPartial Exemption

Observation

The issue of partial exemption has had a high profile over the last few years as HMRC have challenged more aggressively many HEIs who use partial exemption methods that HMRC consider is not fair and gives too high a recovery rate. To try to resolve the partial exemption issue HEFCE, SHEFC and HEFCW have sponsored with HMRC and BUFDG a partial exemption study to establish partial exemption methodologies or frameworks that are acceptable to HMRC and BUFDG. The study should be concluded in the next few months. Please note that if an HEI currently has a partial exemption method agreed with HMRC but believe the methodologies that arise from the HEFCE study is more beneficial HMRC are prepared to allow a HEI to agree and apply the more favourable method from 1 August 2006.

The introduction of variable fees is likely to lead to increased VAT costs under a HEI’s partial exemption method. HMRC have stated that they are prepared to consider variations to the existing method to adjust for the introduction of variable fees and HEIs are encouraged to consider their options.

In addition to the above HMRC is introducing legislation with effect from 1 April 2007 that will require a VAT registered person to declare that their special partial exemption method results in a fair recovery of input VAT. If a HEI uses a special partial exemption that has not been agreed with HMRC after 1 April 2007 and it is a method that HMRC is not fair they can assess for the VAT that they consider has been over recovered.

Recommendation 13

The University should review their existing partial exemption method and the terms of any agreement with HMRC. If the partial exemption method is not agreed with HMRC then the risk of assessments for over claimed VAT for periods from April 2007 onwards is greater. They should consider the options available including making adjustment for variable tuition fess, the ease of operation and the likelihood of acceptance to HMRC.

Priority

Medium

Management Response

The partial exemption method is being reviewed by Ellis Chapman Associates.

Officer responsible

VAT Manager.

Date of action by

Already started, and hoped to be concluded by July 2007 subject to HMRC response.



5.7 Impact of Carousel Fraud measuresObservation

HMRC have recently announced that they are introducing with effect from 1 December 2006 measures that will result in HEIs being responsible for VAT accounting on the purchase of certain goods. The measures being introduced are intended to stop the leakage arising from Carousel Fraud or as it is also known Missing Trader fraud. The effect is that for certain transactions the supplier will no longer charge the purchaser VAT on the sale of certain categories of goods. The VAT due on the sale will have to be accounted for by the purchaser by applying the reverse charge provisions.

The category of goods includes mobile telephones, computer chips, microprocessors, central processing units, electronic storage mediums for mobile telephones, handheld computers, etc. The University will now have the compliance obligation to account for output VAT to HMRC on their VAT return and in most circumstances will only be able to recover a small element of this VAT. If a HEI does not apply the reverse charge they will be liable to an assessment plus interest but it is unlikely that penalties will be incurred unless the purchase of these goods is significant.

Recommendation 14

The University should review the level of purchases of the current specified categories of goods, and establish the capability of their systems to capture this information, recognise where VAT has not been charged and where a liability to account for VAT arises.

Priority

Medium

Management Response

Agreed

Officer responsible

VAT Manager

Date of action by

December 2006


6. Follow up of 2004/5 management letter points

6.1 Preparation of tax returns

This recommendation is still relevant and as such is restated in section 4.

6.2 Exploitation of Intellectual Property


6.3 Spin outs, joint ventures and interests in other companies

Observation

In our 2004/5 management letter we reiterated the need to obtain management accounts, preferably at 31 July for, all spin out holdings.

We also recommended that new loans to spin out companies bear interest at market rate.

Follow-up

The University have continued their efforts to obtain management accounts for all spin out holdings, and where possible this has been achieved. There has been some delay in receiving these, in some cases, however the University have made all reasonable effort to obtain them on a timely basis.

The University have made no new loans to spin out companies in the year to 31 July 2006.

6.4 Value for money strategies and consideration

Observation

In our 2004/5 management letter we recommended full consideration of value for money in order to provide comprehensive assurance on VFM activities.

Follow up

A Value for Money committee has been established and the review and reporting process in this area has improved. The University has more of a focus on VFM in all its activities.

6.5 HEFCE circular – The Single Conversation


6.6 Student data and potential changes to assurance arrangements

Observation

In our 2004/5 management letter we recommended that the University reviewed its student records system and associated business processes in preparation for the introduction of variable top up fees and in particular should consider linkages to the finance system.


6. Follow up of 2004/5 management letter points (continued)

Follow up

We have noted that the University MIS and Academic Registry liaise closely, and have met regularly throughout the year in order to prepare and manage the impact of top up fees.

6.7 Payroll

In 2004/5 we followed up a previous recommendation that the University should circulate a list of staff by department as shown on the payroll and obtain confirmation that this list is accurate from Heads of Department.

Follow up

We note that the University are yet to circularise departments. However, we understand that the University has prepared all the necessary data and reports for the exercise which is intended to be completed during January and February 2007.

management letter & highlights memorandum – financial statements 2005/06

Documents