VAT on school fees update
As Budget day draws closer so does the imposition of VAT on school fees. There has been a lot of work going on behind the scenes, our team highlight some of the changes we expect to see.
Our expectations
- HMRC to confirm that the exemption can relate to ‘closely related’ supplies such as lunch, when separately identified on an invoice with no requirement for the supply to be optional.
- HMRC to confirm that no restriction of VAT on costs is required in relation to the free provision of education.
- HMRC to confirm that they will by concession allow pre-registration input tax to be recovered on goods with an appropriate restriction applied for previous exempt use. This seems to create a disparity with schools that are already registered for VAT but this might be addressed post Budget.
- We expect a lack of clear information in relation to special educational needs (SEN) provision and VAT – this does seem to be a particularly complex area and will take some time to be addressed.
Our hopes
- A change to the draft rules in relation to Teaching English as a Foreign Language (TEFL) provision to put independent schools in the same position as a profit making TEFL. Unfortunately, we expect this would mean other TEFL providers will need to apply VAT to their supplies but this would create a level playing field.
- A change to the current draft rules whereby one five-year-old student joining a reception class means that the whole class becomes subject to VAT. We hope that in these instances HMRC would seek only to tax the student that is above compulsory school age when joining the class.
Will independent schools need to register for VAT?
Many independent schools are not currently registered for VAT. The limit for VAT registration is £90,000 of taxable supplies over a rolling 12-month period, therefore it is highly likely schools will need to register for VAT shortly after the changes in legislation become effective.
The application process is online and should be straight forward, but we already experience delays in processing with HMRC and sometimes questions asked are not entirely clear. HMRC do apply penalties for taxpayers that notify them belatedly, so the key message is to ensure you are prepared and the application is sent promptly.
How / when do I account for VAT on income received?
For taxable supplies VAT generally falls due on the earlier of:
- the issue of a VAT invoice
- payment for the service.
Consequently, if a VAT invoice is raised and payment is not made promptly, the school may have to pay HMRC the VAT before it is received from the parents. This could potentially cause a cashflow issue, so it is important that schools manage this risk carefully.
(Please note that currently invoicing does not create a tax-point as the supplies are VAT exempt).
How do I recover VAT on costs?
Currently, even VAT-registered schools face heavy restrictions on the amounts of VAT that can be recovered on costs because supplies of education are exempt. Therefore, it is likely many VAT-registered schools often do not record VAT on purchases. In a world with VAT on school fees, these systems must be changed to ensure VAT is identified on costs that bear the tax, so this can be offset against the VAT due on the VAT return. It is equally important that invoices are retained to support the recovery of VAT on those costs.
Can I recover VAT on costs retrospectively?
The only opportunity for schools to retrospectively recover VAT is on ‘capital items’ that fall under the ‘Capital Goods Scheme’. For schools, these are usually VAT-bearing building projects that cost in excess of £300,000 (inclusive of VAT).
VAT can be recovered for such items that have been used in the past 10 years. However, please note that for each year of use under current rules, one-tenth of the VAT claim is lost. For more information on how the Capital Goods Scheme works, you can watch our webinar here. We would recommend that schools begin identifying any Capital Goods Scheme assets and retain invoices to support their claims.
The rules for newly VAT-registered businesses usually allow for recovery of VAT on goods ‘on hand’ going back four years, with services being recoverable six months prior to the effective date of VAT registration. However, in most instances, this will not be the case for schools, as the goods and services will have already been used to make exempt supplies.
How do I submit a VAT return?
VAT returns are usually submitted to HMRC on a quarterly basis, with returns falling due one month and seven days after the end of a particular quarter (e.g. the March VAT return would be due by submission by 7 May).
Under ‘Making Tax Digital’ (MTD), VAT returns must be submitted electronically using MTD compliant software to share the figures with HMRC. Independent schools need to ensure that systems are updated where necessary to accommodate this extra compliance task.
It is important to note that whilst your current system may be able to submit a VAT return under MTD, it might not be able to make the adjustments required (e.g. partial exemption and non-business restrictions). Therefore, other solutions may need to be looked into; there are many excel based offerings that offer a low cost and functional solution.
For more information you can watch our most recent webinar for independent schools and download our responses to frequently asked questions here. If you would like to discuss this further, please get in touch with Kieran Smith, Robert Warne or your usual Crowe contact.
