VAT for schools

Aside from changes to emergency VAT legislation following the pandemic, such as allowing deferral of VAT payments and applying a 5% VAT rate to hospitality services (which has now risen to 12.5%), the VAT legislation for schools has remained unchanged.

However, schools are still being faced with new challenges in relation to VAT. This article summarises these issues and provides details on an approach that is commonplace when HMRC undertake VAT inspections.

Remote Learning

In response to the pandemic, schools moved to remote learning. The supplies of remote learning largely remained a VAT exempt supply. However, there were limited instances of countries seeking to apply domestic sales taxes where information was streamed into their jurisdiction. Some schools have dealt with this matter by contractually passing the responsibility to pay any such tax charges on to parents. 

The enforced use of remote learning developed a potential new product for some schools to market. This does bring potential VAT implications, for instance, if a school sells pre-recorded content to students based in Europe, this could lead to a requirement to account for VAT in the country in which the content is downloaded.

For a variety of non-VAT related reasons (e.g. direct tax and risk) some schools are using trading subsidiaries as the vehicle for online learning. In these instances, it is important to note that most school trading subsidiaries would not be treated as ‘eligible bodies’ for the education exemption. This means that the service would be subject to UK VAT when provided to UK based students and so this would need to be considered when pricing.

Building Works

As the sector returns to its new normal we are beginning to see building projects being undertaken and planning for new buildings. Whilst most independent schools are charities, the ‘Relevant Charitable Purpose’ it is worth noting that zero-rating cannot apply to schools because the provision of tuition for a fee is considered a ‘business activity’. Therefore, zero-rate relief is only available in relation to the construction of new buildings used for residential purposes, e.g. student accommodation and staff accommodation. 

It should be noted that this relief does not apply to extensions to existing buildings nor to professional fees in relation to buildings projects, however, one opportunity may be to consider the use of a design and build contract to mitigate the VAT in connection with professional fees.

One relief that is often missed by contractors arises where the reduced rate of five per cent can be applied to works that result in a changed number of dwellings. For example, if a single house is turned into two flats, the contractor can apply the reduced rate of VAT. Any VAT overcharged on these projects should be credited by the contractor and claims can be made going back four years.

VAT Inspections

HMRC continue to undertake remote VAT inspections for the sector. The most common error that results in HMRC assessing schools remains undeclared reverse charges on services received from abroad. HMRC often use information from tax authorities in other countries in order to identify the services that have been provided; HMRC then simply send a list of the services to the school requesting evidence that the relevant transactions have been reported in the VAT return. The most common example of services received from abroad are those provided by overseas agents. However, it should be noted that the reverse charge applies to the majority of services received from overseas and so schools should ensure that systems are in place to identify where a supplier is based outside the UK so VAT is declared on the transactions correctly.

Finally, HMRC has confirmed its view that services provided by companies like Facebook and Google do not qualify as zero-rated advertising and so these would also be subject to reverse charge VAT as they are based overseas.