The percentage game

The recent change in the VAT rate will affect many operational aspects of independent schools. Steve Hodgetts provides this Q&A to illustrate the key issues that all bursars should review immediately

Q: What does the VAT rate change mean for my school?
A: Independent schools mainly make exempt supplies of education. Therefore it might seem that the
VAT rate change will not have too great an impact. However, as schools cannot recover a large proportion of the VAT they incur on purchases, the decrease in the standard rate of VAT from 1 December 2008 is good news. The 2.5 per cent decrease will mean that the cost of overheads will drop proportionately.

For supplies that span the VAT rate change, there are even opportunities for schools to go back to their suppliers and ask for a refund of overpaid VAT. For example, if the school receives and pays a telephone bill in November that covers advance line rental fees for December and January, a partial VAT refund may be possible. This is because the school has paid for services (of a continuous nature) that it will not receive until after the date of the VAT
rate change.

This is also the case where construction services are concerned. The school will be charged VAT on the construction of any non-residential buildings eg classrooms. If, prior to 1 December, the school has received a VAT invoice or payment under a stage payment construction contract and that invoice or payment covers work performed after
1 December, the VAT on that element of the work can be recalculated at 15 per cent.

The same applies to single-payment construction contracts, even where an invoice was received or payment made by the school pre-1 December. If the construction work was actually completed on or after 1 December, the
supplier can recalculate the VAT on the full contract price at 15 per cent. Check whether any VAT is recoverable from your suppliers, particularly where high-value contracts are concerned.

Q:We make our sports centre available for use by the public in the school holidays. How should this income be treated for VAT purposes?
A: The provision of sporting services is a complicated area. Where an eligible body, such as a school with charitable status, supplies sporting services to individuals, the income is exempt from VAT.

Frequently, the services are provided by a trading subsidiary of the school, which does not qualify as an eligible body. This would mean income from the provision of sporting services is taxable when provided by the trading company. However, very frequently there is no written agreement between the school and the company for the right to use facilities. Therefore it is arguable that the company is acting as an agent for the school.

It is important that schools undertake a review to establish the purpose behind setting up the trading company and examine whether what is happening actually reflects the original intention. This is important where input tax recovery is concerned.

Q:I am confused about the VAT treatment of income from our fee refund scheme. How should this be treated?
A: Following the High Court decision in Birkdale School in 2008, income from this type of scheme should be treated as exempt from VAT. Birkdale operated a scheme where fees could be refunded if pupils were unable to attend classes because of illness or accident. It charged parents for joining the scheme. HM Revenue and Customs was of the view that this income should be subject to VAT, but the High Court has ruled that this is incorrect. Consequently,
VAT-registered schools may be entitled to a refund of overpaid VAT covering the last three years, although any claim would need to take into account related VAT that has been claimed as input tax, which will now be irrecoverable.

Steve Hodgetts is a partner at Baker Tilly in the Charities and Education group, central region.

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