Value Added Tax (VAT)
Academies have two ways of reclaiming VAT on costs incurred in running the School.
a. The Academy may voluntarily apply to be VAT registered, and then submit monthly or quarterly VAT returns to HM Revenue and Customs.
As a VAT registered organisation, the Academy must charge and account for output VAT on goods and services it supplies as well as reclaiming VAT incurred.
b. Alternatively, it can reclaim VAT on costs incurred in the running of the school by means of a ‘Section 33 claim’ (also known as a VAT126), but this limits the Academy to the recovery of VAT on purchases made wholly and exclusively for the provision of education.
NB. Academies will be obliged to register for VAT if their ‘taxable supplies’ exceed the VAT registration threshold, and it is very likely that Multi Academy Trusts will exceed the threshold.
If an Academy is VAT registered, a ‘partial exemption calculation’ will be necessary in order to calculate the amount of VAT that can be recovered.
Pay As You Earn (PAYE)
The Trust will need to register for a PAYE scheme in order to account for tax and national insurance deducted from staff pay to HMRC. For a Multi Academy Trust it is usually recommended that one PAYE scheme is set up and the payroll function is centralised.
Academies are not liable to Corporation Tax on the income received from central government, but they can become liable if they undertake a significant level of trading activities in order to generate some additional income.
For example, activities such as letting school buildings or provision of catering services may be classed as trading activities by HMRC.
If income from trading activities exceeds £50,000, the Academy may need to set up a subsidiary company to manage the trading activities, but any tax liability can be mitigated by donating profits to the Academy.
For more information on the tax advice services provided by Sutton McGrath Hartley in Sheffield, Chesterfield and Rotherham, see Chartered Tax Advisers.