Top five VAT topics for academy trusts

Academy school trusts can reclaim VAT incurred on goods and services used for non-business activities through a special refund scheme under Section 33B of the VAT Act 1994.

The academy trust makes the VAT reclaim either through a VAT126 claim or, if it is VAT-registered, through its VAT return. However a claim is made, the academy trust needs to remember that it cannot recover input tax that relates to a business activity which is exempt from VAT, the most common for academy trusts being the letting of its buildings and/or sports facilities.

Therefore, it is important to distinguish which activities of the academy trust are non-business and which are made by way of business. In general, activities for which academy trusts can recover VAT under Section 33B include: 

• Provision of free education to pupils up to age 19.
• The following closely related supplies, provided at or below cost:
  • catering and boarding
  • breakfast and after-school clubs provided to the academy's own pupils
  • classroom supplies sold to pupils for use in the classroom
  • musical instruments sold to pupils for use in school music lessons
  • educational school trips.

Below are our top five key areas for academy trusts to consider for VAT.

1. Letting income: room hire or facilities?

The VAT rules can often be complex to navigate, especially regarding letting activities. If the academy trust is VAT-registered, this is vital as classification of the income often drives the VAT recovery position under the partial exemption rules. Where the academy trust is not VAT-registered, the activities will result in a Section 33 input tax recovery restriction.Additional complications arise for schools when the supply involves sports facilities or purpose-built buildings, such as theatres. Care should be taken in this area, especially when additional services are offered along with the room hire.

For more insight on the issues around the supply of land, building and sports facilities, see our Lettings of buildings and sports facilities on-demand webinar.

We have also produced a flow chart tool to help academy trusts determine the correct VAT treatment of letting income.

2. Input tax restriction for business activities

An academy trust can recover input tax only where it is used to make taxable supplies (if registered for VAT) or S33 educational activities, as described above. As such, the income generated from letting school buildings and facilities (or any other exempt business activity) will result in an input tax restriction, whether or not the academy trust is VAT-registered.

There is no legal requirement for a particular methodology to be used in relation to Section 33 activities; restrictions should be fair and reasonable and use a use-based methodology.

If your academy trust generates income from business or VAT-exempt business activities and does not restrict input tax recovery, or if your restriction method has not been reviewed recently, we recommend this be considered as soon as possible.

3. HMRC delaying reviews of VAT126 claims

We understand that several academy trusts that submit VAT126 claims for VAT recovery have faced issues, with HMRC raising enquiries and delaying repayments.  In many of these cases, HMRC have been withholding payments on the entire claims whilst raising enquiries, resulting in delayed repayments and subsequent cash flow impacts.

Generally, VAT126 claims are treated less formally by HMRC, with fewer legal requirements associated. For example, under VAT registration, HMRC must raise enquiries or repay a return within 30 days. The deadlines for VAT126 claims are less time-sensitive and therefore offer more flexibility than for trusts registered for VAT, where stricter time limits and an associated penalty regime apply.

4. Building projects

These are often expensive projects, and the VAT rules can be complex, so it is important to seek VAT advice early when undertaking building projects.

Zero-rate VAT relief may be available for the construction of new buildings, which can assist cash flow and often reduces the total VAT cost of a project.  Where VAT is applicable, there are often complications around how much can be recovered by the academy trust (detailed above), so when budgeting, it should not be assumed that the VAT can simply be recovered in full.

It should also be noted that changes in the use of a building can affect the amount of VAT recoverable in the ten years after first use.  Furthermore, a change of use can also create VAT charges where the zero rate applies.

Where the cost of any capital building projects exceeds the Capital Goods Scheme (currently £250,000 plus VAT, increasing to £600,000 under proposed changes), the use of the building needs to be monitored over a ten-year period. Where there is a change in use (such as higher external lettings) during this period, the academy trust must make an adjustment to the initial VAT reclaim.

If you are interested in more information on the VAT treatment of building projects, please register your interest in our VAT treatment of building projects webinar.

5. Trading subsidiaries

We are often asked about the VAT benefits if the academy trust forms a trading subsidiary to operate commercial activities, such as lettings.  In most cases, the main issue affecting the use of trading companies is not VAT but, instead, the corporation tax requirements of breaching the charity non-purpose trading limits.

That said, there can often be an additional VAT burden from having a trading subsidiary on recharges between the two entities, especially if either entity cannot recover input tax in full.  Although the academy trust and its trading subsidiary can form a VAT group to alleviate additional VAT costs, this can also help reduce administration and complexity.

If your academy trust is considering using a trading subsidiary, or if you have one in place and would like to discuss this further, we would be happy to do so.

How can we help?

Our VAT team has extensive knowledge of HMRC and works with a wide range of organisations, with in‑depth expertise in the application of VAT within the education sector.

For further information on any of the above, please contact our VAT team or your usual Crowe contact.