In theory, VAT for academies and free schools is relatively straightforward as a special VAT regime allows all VAT incurred on the school’s “non-business activities” to be reclaimed, including the core activity of providing grant-funded education.
This means that all the VAT incurred on supply teachers, teaching equipment and materials, as well as the upkeep of the educational facilities, can be reclaimed. Schools can reclaim the VAT either on a normal VAT return, if registered for VAT, or using a VAT 126 form if they are not.
However, VAT is a complicated tax and it is easy to make mistakes. The complications usually arise where schools make individual charges for goods or services they provide, for example charging for fee-paying evening courses, or letting out the premises and/or making charges to pupils for various activities.
The VAT types of activity
The key to understanding VAT is that it makes a distinction between three types of activity:
1, Non-business activities – for an academy or free school these are primarily the core educational activities funded by the Education Funding Agency grant. There is no VAT on non-business income but schools can reclaim the VAT they are charged on goods and services used wholly in the core education activities. This includes VAT incurred on non-business activities funded out of what would previously have been regarded as “private funds” – for example, the VAT incurred on school trips. For an academy there is no longer a distinction between devolved and private funds – the same rules apply to both.
2, Exempt activities – these are particular types of activity that are within the scope of VAT (“business”) but specifically exempted by the VAT legislation. You do not charge VAT to the customer, but VAT on the costs of making the supply cannot (normally) be claimed or recovered.
For an academy, potential exempt income includes income from letting out land and buildings, fundraising events and lotteries, after-school clubs, holiday and evening courses and play schemes. In addition if you have exempt income, VAT recovery on general costs, such as organisational overheads, is restricted as part of this VAT is seen as being related to the exempt activities. There are special rules that must be followed for calculating this apportionment.
3, Taxable activities – these are the sales on which schools must charge VAT if they are VAT-registered (unless they happen to be zero-rated) or which count towards their VAT registration threshold if they aren’t registered. Some examples here would be charges for staff and visitor meals, school photos and some charges to pupils (see later).
If the school is not registered for VAT it must monitor the turnover on taxable sales (including zero-rated sales). If the total turnover in any 12-month period exceeds the VAT registration threshold (currently £79,000) they need to register for VAT and start charging VAT on standard-rated sales. Then, the VAT paid through such sales can be recovered in the VAT return, together with the VAT incurred on non-business activities.
HMRC accepts that most fees and charges made to pupils are non-business if made at or below cost. This means that breakfast clubs, school lunches, food from tuck shops and vending machines, sales of stationery, calculators, photocopying and charges for pupil trips, outings and holidays are all considered non-business. The special local authority scheme for musical instruments also extends to academies.
However, HMRC does not accept that the following attract this treatment.
Sales to staff and visitors
These attract their “normal” VAT treatment, so for example sales of lunches to staff and visitors are VAT standard rated
Sales of uniforms/sports clothes
The sale of bought-in children’s sized clothes (broadly under age 14 sizes) attracts zero-rating, but adult sizes are standard rated. However, the move to academy status presents an opportunity for selling donated clothes (and indeed any other donated goods such as sports equipment). The sale by a charity of any type of goods is zero-rated if the goods are donated to the charity for sale. So asking parents to donate unwanted items of uniform and sports equipment is a VAT-efficient way to raise funds
Most schools converting to academy status will be familiar with the school photo issue. The issue is the same for an academy. The VAT treatment depends on who is supplying the photo – the school or the photographer. If the school sells the photo the school’s income is VAT standard rated. If the photographer sells the photos and the school receives a commission, the commission is VAT standard rated income for the school.
Supplies of fee-paying education and/or care services by an academy will normally be VAT-exempt, for example after-school clubs, youth clubs, evening classes, holiday courses, and adult education.
If school meals are made by a catering contractor the VAT position depends on who is making the supply of catering – if it is the academy (or another academy or local authority school) then supplies to pupils at or below cost can be treated as non-business, but if it is a commercial contractor then the contractor may have to charge standard rated VAT.
Letting out premises
The VAT rules here are particularly complicated. The default position is that letting fees are VAT-exempt although a school can choose to make it VAT standard rated by “opting to tax”. Different rules apply to letting out sports premises where schools then have to consider the status of the hirer. Lets of some other special types of premises are standard rated including parking facilities, storage, letting a hall with catering for a party and letting out a recording studio. As always with VAT there are further exceptions and complications.
VAT advantages of being an academy
Academy status does offer a few VAT advantages that are not available to local authority schools. For example:
Sales of donated goods attract a special zero-rating only applicable to sales by charities (and persons who will donate all proceeds to a charity). As noted above, this will apply to sales of donated uniforms and sports clothing and equipment.
There is a special VAT exemption for supplies at charity fundraising events. To qualify the primary purpose of the event must be the raising of money, it must be promoted as such and there must not be more than 15 events of the same kind at the same location in the charity’s financial year, though small scale events that generate income of under £1,000 per week can be ignored in considering the 15 limit. Fundraising events where accommodation is provided (for example multi-day challenge events) are excluded from the exemption.
Supplies of advertising to a charity are zero-rated, for example supplies in newspapers, magazines and broadcast media. This will not normally matter for an academy (as for example VAT on adverts for teaching staff would be reclaimable), however, it means irrecoverable VAT can be avoided when the advertising is for a VAT-exempt activity such as a fundraising event or holiday club.
Local authority schools are to a large extent shielded from the uncertainties of VAT. Most local authorities provide comprehensive guidance and have expert staff available in the case of queries and to make sure the VAT returns are completed accurately and on time.
However, as an academy you are on your own. It is your responsibility to make sure you get it right and submit accurate and timely VAT claims.
Helen Elliott is a partner at Sayer Vincent, auditors and advisors to charities including academies and free schools. She is one of the authors of a free VAT guide for academies and free schools which can be downloaded via http://bit.ly/1h4INhy