When Local Authority (LA) owned state schools convert into independent state schools run by Academy Trusts (AT) in England, the VAT reporting obligations transfer from the LA to the AT.
The VAT rules are complex. Our blog answers some of the main questions and shows how Hallidays can help ease the headache!
Does the Academy Need to Register for VAT?
The first question to ask is – Is the Academy Trust’s income ‘Business’ or ‘Non-Business’?
- ‘Business’ income will either be taxable at the standard, lower or zero rate of VAT, or will be exempt.
- ‘Non-Business’ income will be outside the scope of VAT and will largely relate to the schools supply of free education.
An AT will have income from several different sources. Therefore, the first thing we need to do is identify each source of income generated by the AT and assign those income streams to the correct VAT category. This allows us to calculate the taxable turnover of the AT to measure against the VAT registration threshold (currently £85,000).
What constitutes ‘business’ income for an AT?
‘Business’ has a wide meaning for VAT purposes. Even though an activity may be performed with charitable/educational objectives in mind, it may still be deemed a business supply. The two main questions to ask when considering whether a supply is business related are:
- Does the activity principally involve the making of supplies for a charge?
- Is the activity comparable with, and/or made in competition with, the private sector?
Answering ‘yes’ to the above is a strong indication that the supply will be a business supply leading to VAT implications.
If, after analysing the various income streams, the taxable turnover of the AT is above the current VAT registration threshold of £85,000, then it must register for VAT.
Reclaiming VAT – Section 126 Claim
For ATs that aren’t required to become compulsory VAT registered, a VAT Form 126 can be submitted to reclaim any input VAT incurred in the provision of free education.
The VAT 126 doesn’t extend to business activities, so any input VAT relating to these activities needs to be apportioned. This includes any joint expenditure incurred with a trading subsidiary which provides both services to pupils under the curriculum (non-business) and non-pupils (business), such as the provision of sports facilities.
Here’s some of the common issues we’ve helped our Academy clients with:
- Provision of sports facilities – It is common for an AT to have a trading subsidiary. In our experience, this usually involves a trading subsidiary which contains a Sports/Leisure Centre. The Centre will be used both for the physical education needs of the pupils during school hours (non-business thus outside the scope of VAT) and also by non-pupils outside of school hours. The provision of such services to non-pupils is by and large standard rated. However, it can be exempt if certain criteria are met. Consideration must also be given to any options to tax in place.
- Admission to events - To qualify for VAT reliefs on fundraising events, an AT should have filed a CHA1 with HMRC, which is a form that recognises the AT as a charity. Provided certain detailed conditions are met, events that the AT puts on which are for the primary purpose of fundraising for the AT, are exempt from VAT.
- Provision of free school meals to supervisory staff - This is a relatively ‘grey area’ and to qualify for VAT exemption the meals must be “closely related to the supply of education”.
It’s important that ATs monitor their taxable turnover at the end of each month on an annual rolling basis to test against the £85,000 VAT registration threshold and ascertain if VAT registration is required.
Broadly speaking, from 1st April 2019, if an AT’s taxable income exceeds the current VAT registration threshold (£85,000) then it will be required to submit its VAT returns through the new Making Tax Digital regime.
How Hallidays can help
Our friendly VAT experts can support Academies with their VAT obligations, and we provide a free VAT health-check as part of the first year’s engagement. Please contact our team on 0161 476 8276 or email firstname.lastname@example.org for advice.