Tax reforms that would encourage universities to share services and potentially save millions of pounds are now crucial as the sector faces severe funding cuts, the director of a mission group has said.

Libby Aston, of the University Alliance, said that slow progress on a more "flexible framework" for VAT could hinder the potential for efficiency savings in the sector.

Currently, institutions that want to share activities such as payroll management must save at least the cost of VAT - 17.5 per cent - as although universities are classed as VAT-exempt, they cannot reclaim the tax paid on the services they buy.

The previous government said in the Budget statement in March that it would "consider options" for resolving the issue, but there is growing frustration that any change may not come in time to help tackle funding cuts.

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In its annual report, published last month, the Higher Education Funding Council for England says that the issue is hampering progress on achieving its efficiency goals.

Ms Aston, whose group represents "research-engaged, business-focused" universities, said the barrier on shared services needed to be raised "sooner rather than later".

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By implementing a more flexible VAT framework, "universities would be better able to outsource suitable services alongside other public bodies, reducing costs and making more effective use of limited public money", she said.

"At a time when the sector is experiencing financial pressures, it is crucial that barriers such as this are removed sooner rather than later. Opportunities for greater efficiencies should be encouraged, not hindered," she added.

A forthcoming report by the University Alliance into the efficient and effective use of public funds by universities will recommend that the government review its position on VAT.

According to a draft, it will call for a flexible tax framework that reflects universities' "dual role" as public and private institutions.

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It also points to other public bodies that have seen such disincentives removed. However, it is understood that some sections of the government believe that the sector is using the VAT issue as an excuse for the sluggish development of shared services, which they think could save more than 17.5 per cent.

A spokesman for the Department for Business, Innovation and Skills said: "This is certainly an issue of which we are aware, and discussions are continuing about the best way to proceed.

"We announced recently that the ?20 million shared-services pilot, set out as part of the University Modernisation Fund, is being protected, and would encourage universities to look at innovative ways in which they can share services in order to reduce running costs."

Meanwhile, Hefce's annual report warns that its role as an "effective broker" between universities and the government risks being "compromised". It says Hefce has added two new "strategic risks" to its work, one of which warns that "pressures facing higher education (could) lead to our role as an effective broker between the sector and government being compromised, reducing our effectiveness".

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Other areas it flags up as concerns include policies for student numbers and growth, and continued investment in infrastructure.

simon.baker@tsleducation.com.