VAT considerations for schools
VAT is a transaction-based tax. Therefore, schools must consider all of their transactions from a VAT perspective to ensure compliance with the VAT rules, avoid unwanted VAT assessments from HMRC and to make VAT savings where possible.
Do we need to be registered for VAT?
If your school is not VAT registered it is important to monitor income and expenditure from overseas suppliers, in order to ensure that VAT registration is applied for within the permitted time limits. This is usually within 30 days of exceeding the VAT registration threshold of £85,000.
School fee income, charges for boarding and student catering, do not count towards the limit for compulsory VAT registration. These services are exempt from VAT therefore it is only taxable supplies that count towards the £85,000 limit.
Common examples of income that is subject to VAT when provided by schools:
- recharges of staff and facilities (management recharges)
- letting of facilities to wedding parties and commercial organisations for their own business purposes
- sales of laptop computers (even if at or below cost)
- commission from photographers
- admission charges to school plays, concerts, dances
- sales of goods from school shops
- vending machine sales.
Services acquired from outside of the UK also count towards the threshold as if they were income. This is because the ‘reverse charge’ (whereby the recipient of the service accounts for the UK VAT) applies to most services acquired from abroad. For schools, usually the largest costs from overseas are those from overseas agents but the same rules apply to consultancy, marketing services e.g. Facebook and IT leasing.
Finally, it is important to note that the threshold looks at the past 12 months so monthly monitoring of taxable income and overseas expenditure is required.
Recovering VAT on Costs and COVID closures
VAT is only recoverable on costs that relate, at least in part to taxable supplies. VAT exemption will continue apply to the majority of a school’s income if it is VAT registered. Typically, a VAT registered school recovers only two to four percent of VAT on costs, based on an income-based apportionment known as the partial exemption standard method.
Some schools however are involved in significant taxable trading activities, e.g. theatre hire, wedding lets, letting commercial property with the ‘option to tax’ that increase the amount of recoverable VAT. In some instances, these schools will have seen a significant downturn in recovery as a result of the pandemic preventing these activities from taking place. For those instances where VAT recovery has been unfairly affected, it is possible to apply to HMRC for an alternative method to address any disparities. The alternative method can be backdated to apply from March 2020.
Building Projects
As schools charge fees for education they are considered to be in business and so the ‘Relevant Charitable Purpose’ relief is not available on the construction of new buildings. However, it is important to note that:
- VAT at the zero-rate applies to the construction of new dwellings or student accommodation;
- The zero-rate can be applied to the installation of ramps and toilets to facilitate use by disabled people; and
- The reduced rate of five percent can apply to conversion works that change the number of dwellings in a building, e.g. converting classrooms into boarding or converting a house into two flats.
To obtain relief often certification is required by the contractor so VAT should be considered at an early stage, ideally before the works are started. However, where VAT has been over-charged in some instances it is possible to take retrospective action within four years of the works being completed.
Further information
If you would like further information into this matter please get in touch with Kieran Smith or your usual Crowe contact.
