VAT is often seen as a complex tax and in the education sector there are other issues to compound this.
Education and VAT
Supplies made by those in the education sector can include all the rates (0%, 5%, the brief 12.5%, and 20%) as well as being either exempt or outside the scope of VAT. So all the ingredients for errors are present.
Through many years (many, many years) of experience, there are a number of usual suspects which are highlighted here. However, the mantra is: 'the only daft question in VAT is the one you did not ask', so please get in touch if you want to confirm existing treatment, discuss new ventures, capital projects, etc.
Sports facilities hire
The letting of sports facilities can be subject to VAT or exempt. The latter is achieved by fulfilling several criteria when letting the pitches/courts. Some suppliers try to purposefully break the criteria to make the supplies subject to VAT to get VAT recovery on costs but run the risk of the user going elsewhere as they often cannot reclaim the VAT charged. Whichever liability suits you best you need to make sure you’re ticking all the boxes to charge at that liability.
Creating or updating facilities can see suppliers having to impose rules as to the use to which the facilities are put to prevent a 'clawback' of VAT by HMRC on the works. These rules may need to be in place for 10 years, so it’s important to understand why and when the rules were implemented.
Again, can be exempt or standard rated; but usually dependent on the degree of facilities provided.
As per sports facilities, exempt hire brings its own issues, but recently HMRC have sought to impose VAT on letting charges as they are seen to be beyond the 'passive activity' of letting. HMRC has lost some cases in its search for adding VAT where it previously wasn’t due, but it seems its approach is to look to treat most supplies as standard rated facilities. So, if HMRC is looking to impose VAT on room hire, it should be reviewed to see if it's pushing the envelope.
As the hire of courts and classrooms can be exempt, the business can be partially exempt which impacts on the VAT recovery for the academy. This restriction can affect not just costs related wholly and directly to exempt supplies, but also overhead VAT. It can vary from one VAT period to the next and needs an annual adjustment to smooth out the peaks and troughs. You need to make sure you can show HMRC that these calculations are being done.
Sports facilities construction
There are two forces at play here: the ability of the academy/school to reclaim the VAT on the build and the requirements of a funder to have the facilities available to the local community. As we’ve seen above, where the lettings are exempt this impacts on VAT recovery.
One academy had new changing rooms built as the existing ones were literally Victorian. However, owing to the Capital Goods Scheme, local sports clubs hiring the pitches were obliged to use the Victorian facilities otherwise there would have been a significant repayment of VAT back to HMRC. The danger is that the Capital Goods Scheme runs for up to 10 years so the reasoning for not providing the modern facilities could get forgotten and ignored long before the adjustment period actual runs out.
Costs from overseas
For private schools, the school fees are exempt from VAT (i.e. not taxable). Therefore, it’s not uncommon for them not to be registered for VAT as their taxable turnover is below the VAT threshold. But is it?
A lot of private schools source pupils from overseas and use overseas representatives to assist with this. When the overseas reps bill the school they do not (or should not) charge VAT. However, under UK VAT law this is a supply subject to the reverse charge and, as such, counts towards the taxable turnover of the school. Many private schools have been 'caught out' by the value of the reverse charge exceeding the VAT registration threshold and the school being liable to register for VAT. The other point with belated registration is that HMRC is not limited to looking back only four years and can, theoretically, be able to impose a VAT registration date going back five, 10, 15+ years.
The reverse charge requires the recipient of the supply accounting for VAT on that supply as if they had made it themselves (once VAT registered of course). Then, depending on their VAT status, reclaim up to 100% of this output VAT as input VAT on the same VAT return. However, as mentioned previously, the vast majority of income for private schools are exempt school fees, so the recovery rate is likely to be in single figures meaning that a reverse charge supply results in a significant amount of the VAT being payable by the recipient to HMRC.
This also means that private schools already registered for VAT but not accounting for VAT under the reverse charge mechanism are likely to have 'missed' paying VAT to HMRC. Where this is the case it’s always best to inform HMRC of the error immediately. The penalty rate for a disclosed error could be 10% or lower, but for an error discovered by HMRC it could be up to 40%+ of the VAT due, in addition to the VAT itself.
Most academies don’t set the price of trips with a view to make a profit and as such don’t need to consider the implications of TOMS (Tour Operators Margin Scheme). The fact that Great Britain has now left the EU brings a 'Brexit bonus' of trips outside Great Britain (I still get an involuntary shiver when I hear the words Le Touquet) are now zero-rated so profits on overseas trips won’t generate a VAT charge. (Currently there’s a technical discussion on whether the supply of only travel is provided this is enough for TOMS to apply).
This is a brief summary of some of the more common traps in VAT. Here at Rickard Luckin we have a dedicated team of VAT specialists to help you, from completing and submitting VAT returns to advising on the VAT implications for new income streams or capital projects.
This article is from the latest edition of our Education Bulletin. To receive future copies of any of our newsletters directly to your inbox, please visit our preference centre to register your interest.
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