To help academies begin to familiarise themselves with the type of technical matters that will be increasingly important for them to get to grips with, we will be issuing a series of briefings to support better understanding in these areas.
In this briefing we have focused on VAT. For many academies, VAT is an issue of concern and so we have provided a short introduction to this complex subject, with a focus on the key issues at present.
Download this briefing as a two page PDF (1.2mb)
For more information please phone or email your local Baker Tilly Charities and Education contact:
London - Sudhir Singh
North region - Roger Davies
South region - Heather Wheelhouse
South region - Nick Sladden
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In the past VAT has not been a significant issue for academies. However, recent changes mean that for both existing phase one academies as well as new converters, this has become an area that requires much greater attention.
All academies now have to deal with VAT head on as opposed to leaving this to the Local Authority or applying for grants to mitigate this charge. To address this issue, academies will now have to look very closely at all their income producing activities for the year ahead and determine which of these are non-business activities (largely grants, donations and those directly related to the delivery of education) and those of which are business activities (fundamentally anything else). Please see diagram 1 opposite for further information on what is deemed by HM Revenue & Customs (HMRC) as being non-business activities and business activities for suppliers of education.
Once the potential income from business activities has been identified, the next question is: will it accrue towards the VAT registration threshold (currently £73,000 per annum)? This is important to know because if this is the case, then it is likely you will have to register with HMRC for VAT. In most circumstances it is anticipated that academies will not in fact exceed this threshold and therefore will not be required to register for VAT. In which case you would simply submit VAT refund claims to HMRC for non-business expenditure.
It is important to note, however, that every academy retains the option to register even if they do not exceed the VAT registration threshold. The reason why those below the threshold may want to consider this is because VAT registration could enhance VAT recovery on business expenditure. It could also produce a more tax efficient result than merely submitting VAT refund claims for non-business expenditure. This is all due to current HMRC partial exemption rules.
In the end, the question of registering or not can only be determined by the individual circumstances of the academy. As such, the decision to register for VAT or submit periodic claims to reclaim VAT on non-business expenditure will require the academy (or its advisors) to undertake a review of the VAT liability of activities and income streams.
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In cases where a non-VAT registered academy elects to reclaim VAT, claims can be submitted either as:
- written declarations
- a claim on a Form VAT 126
There is no indication that an analysis of the claim needs to be submitted but it is likely that HMRC will require to undertake some initial checks.
To support refund claims, non-registered academies will be required to retain VAT invoices and records for six years in order to identify:
- Non-business VAT
- Business VAT
- Overhead VAT
Claims for non-VAT registered academies can be submitted on a monthly/quarterly/ annual basis as required but must be for at least one calendar month and should ensure that the period chosen ends on the last day of a calendar month.
It is good to note that a repayment supplement will be payable where HMRC is late in making a refund (subject to any ‘reasonable enquiries’ to verify the claim).
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Academies which are already VAT registered or which choose to register for VAT on a voluntary basis will be required to comply with normal VAT procedures. This means that it will be important for academies to quickly get up to speed with what these procedures are or get appropriate advice if needed. The general principle, ignorance of the law is no defence, applies here as well.
To give you an idea what these procedures include, the key areas are noted below:
- Maintaining sufficient records to identify:
- Non business income / expenditure
- Exempt business income / expenditure
- Taxable business income / expenditure
- General overhead expenditure
- Accounting for VAT on taxable business income and, as such, will have to decide if income is VAT inclusive or exclusive (e.g. catering to non students, photographs etc)
- VAT invoices for purchases
- Issue of VAT invoices to VAT registered businesses
- Submit VAT reclaims via online filing of normally monthly or quarterly periodic VAT returns.
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Although details are not currently known of the extent to any penalties that may be applicable, or indeed if a ‘light touch’ approach will be adopted by HMRC, it is understood that there will likely be some form of penalty regime similar to that for VAT registered businesses where there has been a failure by the Academy to take reasonable care in the calculations which may lead to inaccurate refund claims.
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The fiscal affairs of academies can potentially be complex and as well as VAT it will be necessary for each to consider their corporation tax and business rates status. Some of the business activities noted above could result in tax charges or the loss of tax exemptions, so it is vital that VAT is not considered in isolation.
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VAT registration will depend on individual circumstances and Academies should consider undertaking healthchecks / reviews to determine the suitability of VAT registration and any exposure to direct tax as a result of non-primary trading income.
Academies are encouraged to submit VAT claims as soon as possible based on actual non-business VAT incurred from 1 April 2011 (or the relevant date it converts to Academy status if later) thereby securing a cashflow advantage before the current year VAT grant is deducted from the 2011-12 grant. The grant already received is not based on ‘actual’ VAT costs, and as the claim will be calculated on VAT invoices received, there will be a difference between the two figures.