Good planning and preparation will help mitigate the impact of VAT on your school
The pandemic has seen a wide range of schools having to embrace significant changes in all areas of their operations and activities. A number of these changes could have a potential impact on their VAT position and schools need to consider taking action, both to manage potential risk and to take advantage of available opportunities to achieve efficiencies.
We have seen schools enter into arrangements, either formally or informally, to share staff and other resources. This could be a school providing back-office support to another school for its operational purposes or seconding a member of its staff for an agreed amount of time to cover a shortage or a need in the other school. The lending school may only be looking to make a straight cost recovery with no mark-up being applied, but even so, there could still be a liability to VAT on the arrangements.
A supply of staff is generally subject to VAT, unless it can be treated as a supply of ‘education’ or of goods/services closely related to education. Therefore, this could include the provision of teaching staff, or of certain resources which can clearly be seen as relating to the education of pupils. However, the provision of administrative staff or of general admin services are likely to fall within the scope of VAT. Of course, the use of joint employment contracts could remove the arrangements from the scope of VAT, but there are other points to consider before implementing these. It is therefore important that potential arrangements are properly scoped out at an early stage and the resultant VAT treatment is identified before anything is finalised.
Partial exemption and VAT recovery
VAT partial exemption recovery methods vary depending on the activities carried out and the costs incurred. Under self-assessment, it is the responsibility of the taxpayer to apply the rules correctly and undertake the necessary calculations. The overarching requirement in this area, regardless of the method in place, is that it gives a fair and reasonable outcome. This is a practical assessment and should focus on how activities that are carried out, and income generated, ‘use’ and ‘consume’ VAT bearing costs (i.e., effectively applying a “cost of sales” test).
The standard partial exemption method calculates input tax recovery based on a comparison of turnover and is the default position. It does not require obtaining the permission of HMRC. Alternative methods of calculation are termed “special methods” and need to be formally agreed with HMRC in writing.
Helpfully, in March last year, HMRC issued a Revenue and Customs Brief, reference 4 (2021), acknowledging that the impact of the pandemic may have resulted in taxable income declining for partially exempt businesses, for example, because the lettings of school facilities cannot take place, etc.
In this brief, HMRC invited those taxpayers who have been adversely affected in this way to apply for a temporary change in their partial exemption methods, using representative taxable income to calculate their VAT recovery and therefore reinstating the recovery rate that was in place prior to the pandemic. The application needs to be evidenced and supported, and a declaration provided to HMRC that the temporary amended partial exemption method gives a fair and reasonable result. That is, taking into account the pandemic has resulted in circumstances that are outside of the taxpayer’s control.
VAT can be a complex area and operates as a self-assessed tax. As the effects of Brexit continue, we expect changes to the VAT regime will start to filter through in the years to come, as the UK will be able to make its own VAT rules and not be bound by the overarching rules that are enacted by the EU. However, with timely planning and preparation, there are opportunities to mitigate the impact of VAT on schools.