Getting the breaks

Non-charitable independent schools face different financial challenges to their charitable counterparts. Henry Briggs shows how these proprietor-operated schools can improve their margins by judicious savings in tax

Although 80 per cent of schools are registered charities, it is also the case that there are still many schools that are run privately, for profit. Most of these are in the pre-prep and preparatory school sectors, with a high proportion of them in the wealthier catchment areas of large cities.

While many of the oldest schools in the country were founded on charitable principles, the role they now perform is some way from the founders’ intentions. The ethos adopted by the commercially run organisations can give them an edge over their charitable competitors.

The recent changes in charity law could result in more schools becoming based on the profit-making model. But not having charitable status does have one distinct disadvantage – the requirement to pay taxes. But like all profit-motivated businesses, net margins can be improved by ensuring that taxes, as with other costs, are as low as possible.

The set-up
Proprietor-operated schools’ structures will often be determined by factors other than tax considerations, such as the ability to raise funds. Those that are owner-managed for historical reasons will have inherited structures, and it will be worth examining these. They will ultimately have effects on any capital taxes paid on exit or succession. In the shorter term, they will also determine how taxes on the school’s profits are raised.

There are, of course, many ways in which tax on profits can be legitimately reduced. For schools operating as limited companies, the simple method of rewarding owner-managers by way of dividend, rather than salary or bonus, produces significant savings in both national insurance and in overall tax. Other shareholders’ dividends can be waived, or share classes varied.

Greatest assets
In considering structure, it is important that the vehicle owning the school’s largest asset – probably the buildings – is reviewed. Pension funds set up for the benefit of owner-managers, which are extremely efficient for tax avoidance, can also be used to own commercial property. Contributions into such schemes are tax-deductible.

The treatment of the property is likely to have a significant effect on tax bills; particularly when work needs to be done on it – as it often does. Most schools will be aware of the VAT pitfalls in repairs and new builds; but income or corporation taxes can be significantly reduced by careful management and recording of the work being done on such projects. Maximising what is tax-deductible as repairs, rather than disallowable as improvements, will have a big impact on the tax bill.

Recent changes to capital allowances mean that schools can benefit by careful planning of their timing of projects or replacement of equipment.

Staff targets
As well as paying tax on profits, the taxman has a huge take in staff salaries under the PAYE regulations. This is an area where HMRC is actively seeking to increase collections. Penalties for errors have escalated in recent years and are part of HMRC’s target culture.

Schools often use peripatetic teachers and part-time self-employed coaches. Staff benefits can also reduce costs such as provision of accommodation, remission of fees, coverage of expenses on appointment, and compromise agreements.

Recent additions to the list are home computers, use of homes as offices, low CO2 emission cars and provision of nursery places. With the right contracts in place, such arrangements can withstand attack and reduce employers’ costs; but HMRC practice is now a long way from some taxpayers’ perceptions.

There is little doubt that proprietor-operated schools gain by their profit motive in operating efficiency over their charitable competitors. This is, of course, at the expense of paying tax on surpluses. Minimising this cost, by legitimate planning, can help them to have the best of both worlds.

Henry Briggs is senior partner of HW, chartered accountants in Birmingham and is also a governor of RGS Worcester and The Alice Ottley School.

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