One of the most significant issues facing academy schools is VAT. Let us start with the good news: VAT on costs incurred by academy schools is eligible for a refund under a special scheme similar to that available for Local Authority Schools. The legal basis for the new scheme is Section 33B of the VAT Act 1994.
The scheme broadly allows VAT on costs to be recovered where it relates to the provision of non-business activities. Non-business activities in this context means providing education free of charge to pupils.
Unfortunately, anyone thinking that academy schools, or those converting to academy status, will need to do no more than bring their VAT accounting in-house will be sadly mistaken. There are many VAT issues to consider and while HMRC has published a helpful information sheet (09/11 June 2011) it only covers the basic rules.
So what are the main points that an academy should consider?
It is not compulsory to register for VAT in order to submit refunds under the special scheme. However, it should be remembered that if, in addition to non-business activities, an academy makes taxable business supplies in excess of £79,000 (the current registration threshold) it will be compulsorily obliged to register. The academy may choose to voluntarily register if its taxable business supplies are below this threshold but cannot register if it makes no taxable supplies.
If registered, VAT relating to taxable business supplies and VAT eligible under the new Refund Scheme is claimed via the normal online VAT return process. Those academies not required to be registered will be allowed to submit separate paper based claims, similar to those already completed by other local authority bodies.
Where an academy has the choice to register, it should first consider whether the level of potentially recoverable VAT on business activities warrants the additional administrative burden of submitting VAT returns (as well as having to pay VAT on taxable sales). Choosing not to register will avoid paying VAT on taxable sales (assuming this is below £79,000) and the timing of claims is more flexible than the normal online VAT return regime.
Most academies will therefore be obliged to register or will choose to register.
VAT liability of income received
Academy schools are likely to encounter a vast array of different VAT liability issues. While these may be familiar to local authority accounting and finance departments, they can be fairly daunting to the unwary.
For example, Government funding for non fee-paying education will be outside the scope of VAT. Most fees charged for education by non-profit making bodies will be exempt from VAT. Other income may be taxable at the 20% standard rate, 5% reduced rate or eligible for the zero rate. This article does not allow for a detailed summary of all the different types of supplies likely to be made by academy schools. However, it will be important to ensure that this is correctly dealt with to ensure compliance and to take advantage of the reliefs available.
Essentially there will be four categories of VAT incurred on expenditure.
- VAT relating to taxable business activities – which is recoverable under the normal rules if the academy is registered.
- VAT relating to non-business activities – recoverable under the new Section 33B Refund Scheme.
- VAT incurred on expenditure relating to exempt activities – not recoverable unless it falls below the de minimis limit (see partial exemption below).
- VAT not wholly attributable to either of the above three categories – in which case it is “residual” and requires an apportionment to determine the extent of recovery.
For those familiar with partial exemption it will come as no surprise that this area of VAT can be complex and time consuming. In brief, partial exemption arises where an academy has some element of exempt business activities requiring a method of determining VAT recovery to be adopted. This is normally based on the ratio of taxable to exempt income. A more complex calculation may be needed to incorporate the non-business funding income from central Government.
There are also de minimis limits which can result in no restriction if the amount of VAT wholly and partially attributable to the exempt activities falls below £625 per month on average. However, the academy will be required to demonstrate this to be the case on an ongoing basis.
Other VAT issues
A number of special VAT rules and requirements apply to areas that academy schools may be involved with. These are too numerous to cover in this article but could, for example, include:
- supplies of catering, room hire, lettings, etc.;
- the provision of sporting facilities under community use arrangements;
- fundraising events by non-profit making organisations;
- purchase, construction, refurbishment and disposal of buildings; and
- intra-EU and international transactions, particularly the purchase of services from overseas suppliers.
All the above can present particular VAT problems or opportunities to maximise the reliefs that are available.
It is clear that academy schools need to consider a number of complex VAT issues if they are to effectively manage their tax and accounting procedures.