Managing VAT
Understanding VAT for academies and free schools S
Helen Elliott, Partner, Sayer Vincent
ince 2010 more than 3,444 schools – including more than half of secondary schools – have taken on academy or free school status. From a finance perspective, these schools have to provide their own audits and manage their own budgets, rather than rely on local authorities. They can also face investigation by policing body, the Education Funding Agency, if suspected of financial mismanagement.
Good financial management is crucial to the success of free schools and academies and for this to happen, the schools need to have an understanding of the most up to date VAT rules. In theory, VAT for academies and free schools is relatively straightforward as a special VAT regime allows all VAT incurred on the school’s ‘non-business activities’ to be reclaimed including the core activity of providing grant funded education. This means that all the VAT incurred on supply teachers, teaching equipment and materials, as well as the upkeep of the educational facilities can be reclaimed. Schools can reclaim the VAT either on a normal VAT return, if registered for VAT, or using a VAT 126 form if they are not. However, VAT is a complicated tax and it is easy to make mistakes. The complications usually arise where schools make individual charges for goods or services they provide, for example, charging for fee paying evening courses, letting out the premises or making charges to pupils for various activities.
The VAT types of activity
The key to understanding VAT is that it makes a distinction between three types of activity:
• Non-business activities – for an academy or free school these are primarily the core educational activities funded by the Education Funding Agency grant. There is no VAT on non-business income but schools can reclaim the VAT they are charged on goods and services used wholly in the core education activities. This includes VAT incurred on non-business activities funded out of what would previously have been regarded as ‘private funds’, for example, the VAT incurred on school trips. For an academy, there is no longer a distinction between devolved and private funds – the same rules apply to both.
• Exempt activities – these are particular types of activity that are within the scope of VAT (‘business’) but specifically exempted by the VAT legislation. You do not charge VAT to the customer, but VAT on the costs of making the supply cannot (normally) be claimed or recovered. For an academy, potentially exempt income includes income from letting out land and buildings, fundraising events and lotteries, holiday and evening courses and playschemes. In addition if you have exempt income, VAT recovery on general costs, such as organisational overheads, is restricted as part of this VAT is seen as being related to the exempt activities. There are special rules that must be followed for calculating this apportionment.
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www.education-today.co.uk April 2014
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