VAT for Schools – The reality of VAT on school fees

As the clock ticks down to the likely introduction of VAT on school fees, high on the priority list has to be the question, “what do we do?”

By that, I mean the nitty gritty questions such as:

• How do we become VAT registered if the School is not registered?
• How do we fill in a VAT return if the School has never had to do one before?
• Can our accounts package submit a VAT return now that they have to be submitted electronically under the Making Tax Digital (MTD) regime?
• Can our staff record costs on a net plus VAT basis instead of just posting them gross because there was no prior need to identify VAT?
• Last but not least, do they know what to charge VAT on and is the system set up to charge VAT where appropriate?

Drawing breath and remembering the immortal words a former client of mine (now sadly no longer with us) wrote, “Don’t Panic”, let us see if we can break this down into more manageable chunks.

Many independent schools are not VAT registered, so the prospect of registration is daunting. But most schools will have subsidiary companies which will be VAT registered, so the experience will not be entirely unfamiliar.

By way of a refresher, VAT registration is mandatory when the value of taxable turnover exceeds £90,000 on a rolling 12-month basis. But, even £1 of taxable turnover gives an entitlement to register for VAT. HMRC has had severe issues with service delivery over the last several years and at the time of writing, they are currently taking six to eight weeks to process an application to register a stand-alone entity, and four- weeks to process an application for a group VAT registration.

If all the unregistered schools submit an application to register immediately after an announcement of the introduction of VAT, there could be delays in the applications being processed. Depending on what the polls are showing at the time the date of the General Election is announced, schools might want to consider submitting an application for a voluntary registration at that point, or possibly even earlier.

Doing so would mean that any taxable sales which are in an unregistered school would become subject to VAT earlier than they have to, but it is likely the amounts involved would be minimal.

Schools should also consider applying for a group registration with their subsidiary. Traditionally schools have tended to route taxable sales through a subsidiary simply to avoid having to register the school and carry out partial exemption calculations to recover tiny amounts of VAT.

However, subsidiaries will still remain relevant after VAT is introduced because they can be used to carry out any non-primary purpose trading which could give rise to a tax liability in the charity. Group registering the school and its subsidiaries will avoid the potential for errors in failing to add VAT to cross charges, or in reclaiming VAT on invoices addressed to the school which are proper to the subsidiary, or vice versa. In addition, they will reduce the administrative burden, though not necessarily massively so.

Schools will need to ensure that any software they are using is Making Tax Digital (MTD) compatible and capable of submitting a return without manual intervention from the point of input. Therefore, now is a good time to review your software and ensure it can do this, rather than waiting until the first return is due.

If the existing software is MTD compatible, then great, but the next question is are you capable of changing the tax codes from recording things like school fees as exempt to recording them as taxable? If you cannot do this internally, how long a lead time would your software suppliers need to be able to help you do this?

Whilst it will not be possible to definitively know the revised VAT liabilities which will apply until after any change in law has been made, you should be able to work out the likely new draft chart of accounts setting out the likely new VAT liabilities which could then be finalised when the legislation is published.

Almost certainly, the biggest change in mindset will be the need to ensure costs are posted on a net and VAT basis, instead of simply recording them gross.

In addition, it is likely that schools will still make a mix of taxable and exempt supplies and are likely to have to carry out partial exemption and/or business/non-business VAT apportionment calculations. As such, it is likely that costs will need to be recorded to allow such calculations to be carried out, i.e., by being able to:

• Identify VAT on costs which are used solely in making taxable supplies;
• Those which are used solely in making any remaining exempt supplies and/or non-business activities; and
• Those which are used in making both taxable and exempt supplies like overhead costs.

I would suggest that schools ensure their staff are comfortable with coding costs accordingly, are able to carry out these calculations and ensure any necessary training is undertaken sooner rather than later.

Looking further ahead, it might be sensible to consider some sort of post-implementation VAT review a year or so after any change is introduced to ensure that the changes have been correctly implemented, rather than leaving things and then facing a VAT inspection in a few years’ time where HMRC uncovers an error and can go back four years to assess.

For further advice, contact Phil Salmon directly or a member of the VAT team.