Despite all of the above, VAT is the one issue that can often be neglected by academies. The reason for this could be because, prior to conversion, academies simply passed on the burden of VAT on to their Local Authorities. Following conversion, as a result of VAT regulation which was created with effect from 1 April 2011 (i.e. Section 33B, VAT Act 1994), academies are guaranteed the ability to recover the VAT incurred in relation to their provision of grant maintained education. That being the case, why then should an academy register for VAT? This question is explored at length in this article, with the case for and against VAT registration put under the spotlight.
Although able to recover VAT incurred in respect of the non-business grant maintained education they provide; in general, most academies that seek VAT registration, tend to do so as a direct result of the level of taxable business income that they have. In other words, where an academy generates taxable income exceeding the compulsory VAT registration threshold (currently £83,000) it would apply for VAT registration. In addition, some academies might incorporate subsidiary trading companies where VAT registration is perhaps not compulsory for them, but might prove to be advantageous.
Compulsory VAT registration
There are two tests that an academy is required to carry out in order to determine whether it is liable to register for VAT on a compulsory basis.
Historical test - VAT regulations require that at the end of any month, an academy that generates taxable income carries out this test to determine if the taxable income received in the previous 12 months is greater than the compulsory VAT registration threshold (currently £83,000). If it is, the academy is required to notify HMRC within 30 days that it needs to register for VAT purposes. Registration would then be effective from the first day of the month following that 30-day period.
Future test – In addition, an academy that generates taxable income is required to carry out a second test. This test entails HMRC being notified of a requirement to register, at any time when there is a reasonable expectation that the taxable income to be generated by the academy within the next 30 days would exceed the VAT registration threshold. For instance, this situation may arise where an agreement for a commission /royalty, or similar is signed by the academy and payment in respect of this, exceeding the VAT registration threshold is expected within 30 days of signing the agreement.
Taxable income would for this purpose, be any payment received in respect of any supplies of goods and/or services where the VAT legislation treats these as liable to VAT (regardless of whether this is at the standard, reduced, or zero rate).
Voluntary VAT registration
Where the taxable income generated by an academy does not exceed the compulsory registration threshold, it can still seek voluntary registration. Provided it generates some taxable income, irrespective of how low, the VAT regulations provide an opportunity for the academy to effect a voluntary registration.
Clearly the principal incentive in this circumstance would be a financial benefit where it is projected that the academy would be in a position to recover a material level of VAT.
However, because it has mixed liability income streams, the academy has to adopt a VAT recovery methodology in order to be able to recover a proportion of the residual VAT incurred on its expenditure, relative to its taxable income. In general, where the taxable income is absolutely minimal, it is unlikely that a reasonable level of VAT recovery would be achieved, thus potentially making voluntary registration unattractive. However, this general principle is untrue for academies generally. This is because VAT legislation specifically allows academies to recover the VAT incurred in respect of their provision of grant maintained education.
Intending VAT registration
It is also possible for an academy to seek VAT registration even where it is not currently generating any taxable income, but intends to do so at some point in the future. The benefit of seeking an ‘intending registration’ would be the ability to commence recovery of VAT incurred on related costs, rather than waiting until after taxable income has started to be received.
For example, if an academy forms the intention to ‘opt to tax’ and lets out its opted building; an intending VAT registration could be sought as soon as the option to tax the building is effected, even if this is before it starts to incur any expenditure on the building.
Exception from VAT registration
HMRC has the discretion to permit an entity to be excepted from the requirement to register for VAT; even where the value of its taxable (standard, zero and reduced rate supplies) income exceeds the VAT registration threshold.
The exception from VAT registration can be sought for instance, where the value of a small proportion of the taxable supplies are standard rated, providing that (if VAT registered) input tax to be reclaimed would normally exceed output tax due year on year.
If exception from VAT registration is granted, the academy would be required to notify HMRC in any year when the value of output tax that would have been due, exceeds the value of input tax that would have been recoverable in any 12-month period.
Although exception from VAT registration will save the academy the administration time that would have been spent quantifying and submitting VAT returns; and the requirement to satisfy another regulatory body, it however, means the academy will be financially disadvantaged in that, it would not be able to recover any VAT it incurs on costs and expenses that do not relate to its provision of grant funded education. Considering the beneficial VAT recovery rules afforded to academies, it is highly unlikely that exception from VAT registration will be beneficial in any way.
That being the case, academies are encouraged to carefully review their situation before seeking exception from VAT registration. Once obtained, it would be extremely difficult to persuade HMRC to allow an academy to retrospectively register for VAT for any period during which the exception from VAT registration applied.
VAT group registration
Under what is known as a VAT group registration, being a ‘body corporate’ (e.g. a company limited by guarantee), an academy is able to jointly register for VAT purposes with its subsidiary trading company, or with a number of other academies where they, for instance, are under separate entities within a multi-academy trust.
In addition to the obvious administrative advantages such as only being required to complete and submit one VAT return, the main benefits of creating a VAT group registration are:
a) An ability to collate the activities of the entities that form the VAT group together in order to improve the overall level of VAT recovery for the academy; and
b) An ability to disregard intra-group supplies between the members of the VAT group (i.e. an academy and its trading subsidiaries). In other words, treating them as VAT free recharges for VAT purposes, in order to prevent the charging of irrecoverable VAT between the VAT group members.
In summary, the reality is that being a tax on business transactions, VAT does not sit comfortably with the activities of organisations such as academies. This is particularly the case since their activities are mainly grant funded, and therefore non-business. In principle, academies are no different from other charitable organisations; however, because the UK government with effect from 1 April 2011, took the decision, to afford them the distinct advantage of being able to recover the VAT incurred in carrying out their core activity of providing education to pupils free of charge, they are able to recover a significant proportion of the VAT that they incur.
However, where an academy undertakes other activities which by their very nature, would be considered to be business activities, its ability to recover any of the VAT incurred in carrying on those business activities would be expected to follow the normal VAT rules. That being the case, any VAT incurred that cannot be directly attributed to either business, or non-business activities, would potentially fall into a category to be apportioned based on the academy’s business /non-business and partial exemption recovery methodology.
Without being VAT registered, the opportunity to recover the VAT relating to its business activities (i.e. not the grant-maintained education) would not exist. It is for this reason that academies that generate taxable business income to any appreciable level, would be advised to register for VAT.
How we can help
For further guidance and advice on VAT and tax tailored to your situation, please speak to your usual Buzzacott contact in the first instance or:
Charity Tax Partner
T | +44 (0)20 7556 1460
E | email@example.com
Charity VAT Senior Manager
T | +44 (0)20 7556 1320
E | firstname.lastname@example.org