2019 VAT planning for schools

The default position here is that where staff are provided from one entity to another, VAT at the standard rate falls due on the supply. This is particularly common in schools where staff time is recharged from the school to its trading subsidiary and is an area that is often over-looked. In many cases the VAT charged cannot be fully recovered by the recipient of the supply and so can be costly. 

Where the ‘sticking tax’ on these supplies is significant, schools should consider if it would be possible to use joint contracts of employment or VAT grouping as both succeed in VAT not having to be accounted for on recharges.

UK output VAT must be accounted for by schools on most supplies of services received from outside the UK using the ‘Reverse Charge’ procedure. Supplies from agents based overseas are usually the largest purchase that applies to schools (click here for more information). However, it should also be noted that other supplies such as consultancy, IT support, marketing etc. must also be accounted for using the reverse charge process.

It is important to note that schools that are not registered for VAT that acquire such services must count the payments made to overseas suppliers as turnover for the purposes of looking at whether or not the turnover limit for compulsory VAT registration has been breached. In our experience this is the most common reason for schools needing to be registered for VAT.

While schools can apply VAT exemption to the letting of sports pitches, courts etc. this is only possible where the person using the facilities is using the facility for sporting purposes. HMRC’s opinion is that the sports exemption cannot apply where sports coaches, swimming teachers etc. use the facilities for the purpose of generating income. Therefore, profit making coaches/teachers must be charged VAT on the facilities.

It is also important to note that for school’s trading subsidiaries to use the sports exemption it is necessary (following the Bradfield College case) to have a non-distribution clause.

Often the freehold or lease-hold sale of school property is VAT exempt. However, in some instances the school may have opted to tax the buildings or land and in these case VAT at the standard rate will need to be applied to the sale. Therefore, before transferring any land or buildings, even within the group, it is important to check if an option to tax applies. Options to Tax’ are binding for at least 20 years and so it is not always obvious that a building is subject to the option. Property transfers are often of a high value and VAT, penalties and interest charged by HMRC can be high if the wrong treatment is applied.

Over-charged VAT on building projects

Schools can obtain VAT relief on building projects in three main areas.

• Constructing new dwelling or boarding accommodation (0% VAT applies).
• Converting non-residential buildings into dwelling or boarding accommodation (reduced rated (5% VAT applies).
• Changing the number of individual living units within a building (5% VAT applies).

We often see building contractors overcharging VAT in these areas. These errors can be adjusted by credit note and repayment of the over-charged VAT within four years of the error being made.