There are a number of common questions our clients ask us regarding VAT when considering academy school status.
Below, we have provided answers to some of the most common questions asked. Due to the individual nature of each academy, this list is not comprehensive, but designed to give you an insight into your potential VAT implementation.
Before we became an academy school we didn’t have to worry about VAT. What has changed?
Previously, most state schools came under local authority control which looked after all their VAT obligations. As academy schools are run outside local authority control, they must now deal with their own financial affairs. All academies and Multi-Academy Trusts now need the assistance of firms of accountants together with occasional specialist VAT advice to ensure they not only meet their obligations but reclaim the VAT they are entitled to.
Will we lose out by paying VAT?
No, the Government has introduced new rules to put academy schools in the same VAT position as state schools. Although the educational services are free of VAT, it will mean that academy schools will have to produce their own accounts and file their own VAT claims.
How can we be expected to know what to do?
In a sense, academy schools are now in the same position as every other small business, although the Government has endeavoured to simplify the VAT rules as far as the legislation allows. Many academies are now employing experienced accountants and accountancy firms can assist with the accounts and tax/ VAT obligations to whatever extent the school Governors want.
So how do we go about reclaiming the VAT on our costs?
There are two ways to do this and, depending on your circumstances, you can use either.
The education you provide is seen as an obligation under the State, funded by grants from the DfE, and the Government introduced special legislation to allow the recovery of VAT incurred on associated costs. All academy schools can therefore reclaim VAT on costs associated with the educational activities directly from HMRC by filing specific claims on Form VAT 126 for this purpose periodically.
This should cover most of your expenditure. However you will also need to consider other activities that may be regarded as ‘business’ activities for VAT purposes, but will not be eligible for the direct reclaim process. For these activities, you will have to formally register for VAT and file regular VAT returns, probably quarterly. Typical ‘business’ activities would include:
- sales of printed books, zero-rated (subject to VAT at 0%);
- sales of uniforms, zero-rated, broadly for under 14s, but standard-rated otherwise (subject to VAT at 20%);
- sales of sports equipment, standard-rated;
- sports tuition for payment, likely to be exempt from VAT; and
- letting of classrooms to external bodies, likely to be exempt from VAT.
Do we have to register for VAT?
If your taxable business activities (subject to VAT at 20% or 0%) exceed the VAT Registration threshold, then you would have to register for VAT. Below this level, you would be entitled to do so on a voluntary basis but it may not work to your advantage.
What are the pros and cons of registering for VAT?
If your taxable income is below the VAT registration and you do not register for VAT, you do not have to account for VAT to HMRC on any standard-rated sales. However, you also can not reclaim the VAT you incur on associated costs. If you do register for VAT then you can reclaim VAT on the costs of business activities, but have to account for VAT to HMRC.
For example, if you were registered for VAT and your business sales were entirely of printed books, you would be in the best position possible as all your sales would be zero-rated, but you would be entitled to reclaim all the VAT incurred on all related expenditure. Conversely, if all your business sales were for standard-rated sports equipment, you would have to account for 20% VAT out of the income. Some simple arithmetic shows that this is probably going to be more than the VAT incurred on the associated costs, so if the retail price is pretty much fixed by market forces you would lose out. If you could charge the same to parents irrespective of whether you were charging VAT or not, then you would be better off in that example by not registering for VAT.
Note that the ability to reclaim VAT on the educational activities is unaffected by any decision you make over VAT registration but one advantage for those academies that are registered for VAT is that they can claim back the VAT on their educational activities through their VAT return without having to file the separate statutory claims. This will save dealing with two separate claim procedures and should enable the VAT to be reclaimed faster than by the statutory claim method.
If some business activities are exempt from VAT, does this make it more complicated?
Yes, because exempt business activities do not allow VAT incurred on associated expenditure to be reclaimed. If you fall into this situation, you would have to carry out calculations for each of your VAT returns to apportion the VAT incurred on business expenditure between that which you can reclaim and that which you cannot. This is called partial exemption and you would need to identify the VAT you incur on costs associated with your educational activities, taxable business activities and exempt business activities separately in order to carry out the required calculations. There are some simplified ways of doing this but it will be an additional administrative burden you will have to comply with.
How does the ‘De Minimis’ test work for partial exemption?
If your exempt business activities are somewhat limited, the partial exemption calculations may allow you to recover all the VAT on associated expenditure anyway and not lose any. It is hard to predict in advance how the calculations will turn out, but the Government has again sought to help where possible by allowing a range of calculations to be used by partially exempt organisations to see if they pass the ‘de minimis’ test and avoid losing any input VAT.
Your advisers at UHY are experienced in the VAT requirements and are able to help you minimise any loss of VAT.
We are going to be expanding the school. Do we get any particular reliefs from VAT for building works?
Since most academy schools are expected to be registered charities, you should be able to get relief from VAT for the construction of buildings or self-contained annexes used for charitable (ie. non-business) educational purposes. A small amount of business activities are allowed and will not prejudice the VAT relief, provided the building is still used for at least 95% non-business purposes. Any reasonable basis can be used to test the 95% threshold, but care needs to be taken both at the time and in monitoring the use over the next 10 years to avoid an unpleasant VAT cost later.
We are providing support to other academies in our network. Does this affect our VAT position?
Yes it does since such activities are likely to be seen as carried on in the course of business for VAT purposes. Often, such support is treated as consultancy services or the provision of information and standards and subject to VAT, but it can be seen as training and possibly exempt from VAT. Unusually, since the other academy should be able to reclaim any VAT you charge them, there is no advantage here from VAT exemption and charging VAT will enable you to reclaim the VAT you incur on associated expenditure.
Our multi-academy trust has a single VAT registration. How does this work?
This is probably a VAT group registration where all the academies in the MAT are covered by a single VAT number and the MAT files a single VAT return to reclaim all the VAT incurred on expenditure for the educational side and the taxable business activities. Although this will simplify the VAT administration, the separate academies will still have to produce their own accounts for every other purpose. One advantage form a VAT group registration is that services provided between the academies in the VAT group are ignored for VAT purposes which again can simplify the VAT invoicing and administration.
How do we ensure we get the right advice?
The best way is to make sure that your accountants either have the necessary specialist VAT expertise or can recommend suitable advisers.
The next step
If you would like to discuss the VAT support that we can provide for your academy school, please contact one of our academy specialists at your nearest location.