VAT For Academy Schools
1. VAT Supplies – an overview
For VAT purposes a school can make 3 basic types of ‘supply’.
A supply is something you provide to others; for example, catering services, or the letting out of a sports facility:
- Non-business supplies
The free provision of education by an academy school is a ‘non- business’ supply, and is therefore ‘outside the scope’ of VAT.
Ordinarily, that fact would also preclude the recovery of any VAT on associated costs; however, VAT incurred by the school in providing education can be reclaimed by virtue of the ‘s33b refund scheme’ (see appendix for further detail) , which affords academies the same VAT advantages enjoyed by local authority schools.
Non-VAT registered schools make the s33b claim using form VAT 126.
VAT registered schools reclaim s33b VAT when completing their VAT returns.
Other supplies of goods and services that are closely related to the supply of free education may also be classed as ‘non- business ‘supplies if they are supplied at ‘break even’ or below cost (for example, school trips, accommodation, breakfast and after school clubs)).
- Taxable supplies
If a school makes taxable supplies in excess of the VAT registration threshold (currently £83000) it must register for Vat and account for VAT to HMRC on any future taxable supplies.
A taxable supply is a supply made for consideration that is not outside the scope of VAT.
Examples of taxable supplies that schools might make include catering sales (to non-pupils), sales of school clothing, and the leasing of car parking facilities.
Compulsory VAT registration is triggered when:
a) The value of taxable supplies in the last 12 months has exceeded the VAT threshold
b) There are reasons for believing that the taxable supplies in the next 30 days alone will exceed the VAT threshold
Once registered there are 3 different VAT rates you will need to consider when making taxable supplies:
- Standard rated – 20%
- Reduced rated – 5%
- Zero rated – 0%
Any VAT that is incurred as a cost by a VAT registered school when making these supplies can be recovered by offsetting against the VAT due on the supply.
Taxable supply value = £1000, and VAT is due @ 20%, so VAT due on the supply = £200
Cost incurred in making the supply was £300, and VAT was incurred @20%, so the VAT cost = £60
Net VAT due to HMRC = £140 (£200-£60)
It is possible for schools with taxable supplies below the threshold to register voluntarily for VAT.
This could be advantageous; for example, if the taxable supplies were zero rated, and associated costs were standard rated.
- Exempt supplies
A school may also make exempt supplies; for example, the sale of tickets to a school play, an art exhibition, or other cultural event can all be exempt from VAT in specific circumstances.
Exempt supplies are not vatable, so the school does not need to add VAT to the value of the supply it makes and it does not account to HMRC for any VAT, but the ‘partial exemption’ rules for the recovery of VAT costs when schools makes some exempt and some taxable supplies can be quite complicated (see appendix for further detail).
Briefly, partial exemption requires you to attribute the VAT incurred to the different types of supply made and you cannot reclaim any VAT which relates solely to an exempt activity, unless the total VAT on all exempt activities is below the ‘de-minimis’ limits.
To qualify for de-minimis treatment the total value of your exempt input tax must be less than £625p.m on average and less than half all input tax in the period.
You should also be aware that whilst there is a ‘standard partial exemption method’ for VAT attribution, it is also possible to agree various ‘special methods’ provided it can be demonstrated that the special method proposed is ‘fair and reasonable’.
3a. Exempt supplies and the Capital Goods Scheme
For most purchases once VAT has been recovered (or not) by reference to the issues discussed above that is an end of the matter.
However, for certain ‘capital items’ the initial recovery of VAT may need to be adjusted over a period of 5 or 10 years, depending on the type of capital item. The relevant capital items are:
a) the purchase, construction, alteration of refurbishment of land and buildings at a cost of £250,000 or more.
b) the purchase of a single computer or item of computer equipment for more than £50,000
The adjustment period for land and buildings is 10 years and for computer equipment it is 5 years
2. VAT supplies – some specific issues
There are many complications when trying to determine which type of supply a school is making and what the appropriate VAT treatment is, for example:
Land and buildings
Provision of accommodation to pupils in connection with their education, at or below cost, is a non-business activity, so no VAT is chargeable.
Letting out property on a business basis is exempt, unless you have opted to tax on the property (see appendix for further detail), in which case it is standard rated.
Where minor supplies of other goods or services are provided with the property (e.g. coffee & cake) the minor supplies have the same VAT status as the letting activity.
The same applies for other items chargeable under the terms of the lease (such as service charges or shared administration services), but only if they must be paid for by the tenant whether they are used or not, otherwise the additional charges are standard rated.
Goods and services supplied with the let that are substantial when compared to the letting supply could make the whole supply standard rated, even if the property is not opted to tax.
Licensing space to a vending machine operator who stocks the machine and keeps the takings is not regarded as a supply of land and is therefore standard rated.
In general, supplies of parking, sports facilities, and the storage of goods are also standard rated, but there are exceptions (see appendix for further detail)!
An independent catering contractor who is acting as ‘principal’ must charge VAT on catering to all customers (including pupils).
However, if the contractor is acting as ‘agent’ for the school, supplies to pupils can be ‘non-business’ and VAT free.
Catering supplies to non-pupils are always standard rated if the school is VAT registered.
The rent charged to the contractor by the school could be exempt or standard rated, depending on whether or not the property has been ‘opted to tax’.
The sale of donated goods
A sale of donated goods that are made available to the general public is zero rated when made by an academy.
This extends to goods sold by a trading subsidiary if the trading subsidiary has agreed to donate the profits to the school.
Sales of education
Business supplies of education and closely related supplies can be exempt from VAT if made by an eligible body, rather being outside the scope of VAT (as is the case with non-business supplies).
The VAT status of the sale of certain printed matter (but not electronic publications) is zero rated – e.g. books, brochures, and leaflets.
Other printed matter is standard rated – e.g. posters, calendars, stationery.
Supplies to pupils which are closely related to the provision of education will be ‘non-business’ supplies.
Fund raising events
An ‘event’ could be a fete, an exhibition, a quiz, a concert, a play etc. and is VAT exempt, unless it would otherwise be zero rated, in which case zero rating takes preference (thus enabling recovery of VAT on associated costs).
An event cannot be continuous or even semi-regular in nature – e.g. the operation of shop cannot be an ‘event’.
There must be no more than 15 events of the same kind in any one year, but ‘small events’ with gross takings of less than £1000 can be ignored for the purposes of the count.
If ‘small events’ are carried out with sufficient frequency this could amount to trading and exempt status will not apply if that is the case.
Holiday and activity clubs
If clubs are wholly grant funded they are non- business supplies.
If parents pay for the clubs, the supply is likely to be VAT exempt if (as is generally the case) it involves a course, or sports activity, or its primary purposes is the care and protection of children (e.g. whilst parents are working)
Sale of uniforms is a business supply and therefore subject to VAT.
Sale of uniforms to young children (broadly under 14 sizes) and sales of donated uniforms are zero rated.
Other sales should be standard rated.
Supplies by an eligible body of services closely linked with sport or physical education are exempt (see appendix for further detail).
3. VAT costs – an overview
Schools will incur various costs when making supplies and some of those costs will carry VAT which can deplete a schools resources if you are not familiar with the detailed rules.
- VAT on costs related to non- business activity can be recovered by any eligible school on form VAT 126,
- a VAT registered school can reclaim VAT on all costs that are related to taxable supplies or non- business supplies
- VAT on costs related to exempt supplies cannot generally be recovered
4. VAT costs - some specific issues
There are many specific VAT issues that need close attention and the following is an outline of some of them:
Supplies of advertising usually carry VAT at the standard rated (20%), but the supply of advertising and closely related costs from a 3rd party (e.g. a magazine, or broadcast media) to an eligible school is zero rated.
If you have been charged VAT by mistake the supplier should provide a refund if requested to do so.
Where the school has been charged VAT, recovery will depend on the purpose of the expenditure, for example:
- VAT solely associated with non-business activity can be recovered under s33b.
- VAT solely associated with taxable activities can only be recovered only if the academy is VAT registered.
- VAT solely associated with exempt activity cannot be recovered.
- VAT incurred for partially exempt purposes may be recovered in part.
Energy saving materials
Supplies of services made in the course of installing energy saving materials in residential property for pupils and staff are reduced rated for VAT purposes.
The materials installed can also be reduced rated if they are supplied by the installer, otherwise the materials are standard rated.
Fuel and power
Fuel and power supplied for non-domestic purposes is normally standard rated, but when supplied for a ‘qualifying use’ it should be charged at the reduced rate of 5%.
If 60% or more of the fuel and power provided is re non-business activity the whole of the supply benefits from the reduced rate, otherwise VAT is charged at standard rate on the business element.
Further useful material
VAT Notice 701/3-: education and vocational training https://www.gov.uk/government/publications/vat-notice-70130-education-and-vocational-training/vat-notice-70130-education-and-vocational-training
VAT Notice 742: land and property
VAT Notice 742A: opting to tax land and buildings
VAT Notice 701/45: sport
VAT guidance on fundraising events: exemption for charities and other qualifying bodies
VAT Notice 706: partial exemption
VAT Refund scheme for academies:
- VAT on Residential Property Projects
- Writing a Will – Don’t Forget about your Digital Assets!
- Key points and changes from the Autumn 2017 Budget
- Top Five Often Forgotten Business Tax Deductions
- Date changes for ‘Making Tax Digital’
- VAT on property – The Capital Goods Scheme
- Property developers – Extracting profits as capital
- Buy to let investors – don’t pay too much stamp duty land tax!
- Tax free reimbursement of directors and employees expense claims
- The impact of VAT and Income Tax on a Landlord’s profits