VAT refund scheme confirmed for academies
Academies and similar educational bodies may now recover VAT under a new refund scheme. Make sure your school hits the ground running and claims the VAT it is entitled to.
 A new VAT refund scheme has recently been introduced to allow publicly funded schools operating outside local authority control to recover VAT paid on the goods and services used in the course of providing education. The scheme, which applies to academies, Free Schools, 16 to 19 academies, alternative provision academies and University Technology Colleges for 14 to 19 year olds, aims to put these bodies in broadly the same VAT position as schools under local authority control. The Finance Act 2011 introduced section 33B to the VAT Act 1994 to create the scheme which took effect, and permitted VAT recovery, from 1 April 2011.
HOW WILL THE SCHEME WORK?
Before the scheme was introduced, the school’s VAT would have been recovered by the local authority. The new scheme means a school must deal with VAT recovery and other VAT obligations itself. Schools must either register for VAT (if they make supplies that are subject to VAT) or make their VAT
refund claims by writing to HMRC. HMRC says a form will be introduced for this purpose. Non VAT registered schools will normally make annual claims unless they agree a more frequent claim period with HMRC. VAT registered schools will claim on their VAT return, normally on a quarterly basis, although
monthly returns can be requested. Going forward, claims will subject to a four year time limit but VAT on purchases that took place before 1 April 2011 cannot be claimed at all.
HMRC has issued Information Sheet 09/2011 (available at http://digbig.com/5bepeg ) to provide guidance for schools using the new scheme.
WHAT ARE THE MAIN ISSUES FOR VAT LIABILITY, REGISTRATION AND RECOVERY?
A school must first consider whether it should register for VAT, either because its income will exceed the VAT registration threshold (currently £73,000), or if it would be beneficial to register voluntarily. DfE grant funding and charitable donations do not count towards the threshold as they are deemed non business income for VAT purposes. Other income, where goods or services are provided in exchange for a payment, usually constitutes business income, so the school must determine its precise VAT position. As well as the various rates of VAT (standard rate, zero rate, reduced rate) business income can also be exempt from VAT. Exempt income does not count towards the VAT registration threshold but will have an effect on VAT recovery.
WHAT IS THE EFFECT OF EXEMPT INCOME?
For schools, exempt income typically arises from some types of lettings or sports services, but there are other potential sources. Although exempt income is not subject to VAT, it can create difficulties as it is not necessarily possible to reclaim VAT on related expenditure, either through the refund scheme or as a
normal VAT registered business. There is a low level de minimis limit which allows VAT relating to an exempt business activity to be recovered - this applies if it amounts to less than £625 per month on average and less than half the school’s business related VAT. This is a key area where a school could find itself worse off than when it was under local authority control. Local authorities have their own, less restrictive de minimis test which HMRC does not appear to allow schools operating the new scheme to use.
HOW MUCH VAT CAN YOUR SCHOOL RECLAIM?
Once a school has considered the VAT liability of its income, it will need to carry out various calculations to determine the amount of VAT it can recover on costs. This is because much of the VAT incurred will be on overheads rather than specifically related to education. Only if the VAT incurred relates wholly to
education, or goods and services closely related to education, for the direct use of the pupil (e.g. catering) will the VAT incurred be refundable in full under the refund scheme. Any VAT that relates to exempt income may not be recoverable at all, subject to the de minimis limits described above. This means that any VAT incurred on costs which relate to both non-business and business income will need to be apportioned. The school must apply a fair and reasonable. method of apportionment depending on the use of the VAT that has been incurred. If there is exempt income, a further .partial exemption apportionment will be necessary too. Methods can vary, according to the unique circumstances of each school, and do not always need agreement from HMRC, although it is normally advisable to seek HMRC’s approval in some form.
PROPERTY MAINTENANCE AND CAPITAL PROJECTS
A newly converted school may be able to recover VAT on ongoing capital work, provided the contract has been formally transferred to it from the local authority and the expenditure was incurred after 1 April 2011. The precise level of recovery will depend on the use to which the building is put. It may also be possible to obtain zero rating (i.e. not to pay VAT at all) on a new building or one transferred to the school if the building is not to be used for business purposes or has a business use that does not exceed 5%. VAT treatment in this area is heavily dependent on individual circumstances. Due to the high value of capital projects, VAT related mistakes can be extremely costly, so it is vital to seek specialist advice on land and property matters as early as possible.
WHAT SHOULD AN ACADEMY DO NOW?
Coping with the new scheme will create a steep learning curve for newly converted schools but, the quicker they can climb it, the quicker they can begin to benefit from VAT recovery. A newly converted school now needs to:
- Determine the VAT liability of its income and work out if it is required to register for VAT or will benefit from registering voluntarily.
- Keep records of the VAT it incurs on costs and decide on how frequently it wants to submit claims to HMRC.
- Create business/non-business and partial exemption methods for calculating the amount of
- VAT it is entitled to recover.
- Consider the VAT implications of any capital projects it inherits from the local authority or plans
Please click here to read our 'LACSEG – Does it add up?' article.
 For more information please contact Andrew Payne.
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