Background to VAT
Value Added Tax is a turnover based business tax, which has a significant impact on academies finances.
Although the government initially indicated that the change to academy status would be tax neutral, the reality is that only the simplest of academies are unaffected by these complex tax rules.
It is therefore important to understand the basics of the VAT system.
There are four conditions that must be satisfied in order for an activity to be within the scope of UK VAT. These are:
1. it is a supply of goods or services;
2. the supply takes place in the UK;
3. it is made by a taxable person;
4. it is made in the course or furtherance of any business carried on or to be carried on by that person.
VAT Act 1994 Section 4(1)
So how does this apply to academy schools or colleges?
The first two points are fairly straightforward to grasp, as money received could indicate a supply has taken place and most academies are exclusively operating within the UK.
As far as the third point is concerned it is important to understand that an academy can be structured in a number of ways and each arrangement may be a separate “taxable person” for VAT purposes.
However, it is the question about business being carried on that often causes the most difficulty, as many activities within an academy that are often considered part of the delivery of core educational and community services may be treated as business operations by HMRC .
VAT may need to be accounted for where any business activity generates income for the academy.
VAT also has a big impact on the costs incurred by an academy as part of the school or colleges expenditure is often VAT. This overhead was initially funded by additional grant funding to compensate academies which were at a disadvantage to local authority schools.
However from 1 April 2011 academies were given a new law – VAT Act 1994 Section 33B – that enables recovery of all VAT on costs relating to non-business activities. This repayment can be obtained without the need for VAT registration.
This facility for reclaiming VAT means that before any school or college decides to register for VAT there are a number of factors to consider. For some schools VAT registration is compulsory, but many other academies choose to register voluntarily.
In addition to the main academy academies it may also be necessary to consider the VAT position for other related entities, such as the parent teacher association (PTA), trading subsidiaries and joint ventures.