If an academy generates income from trading activities that are not strictly in line with its educational objects (e.g. hire of facilities, secondment of staff, consultancy, sales), this income could potentially be subject to corporation tax. There are various other exemptions available, including a small-scale trading threshold of £80,000 (£50,000 before April 2019), but many academies could be subject to corporation tax.
Setting up a trading subsidiary company to carry out non-educational activities can protect the academy from commercial risk but also help to mitigate tax exposure. In all cases, the VAT treatment of these income streams should be closely examined as they relate to business income streams and would count towards the academy breaching the VAT registration threshold where they are taxable.
‘Pure’ lettings of indoor or outdoor space are usually exempt from corporation tax for academies. However, facilities hire, such as astro pitches, gyms, conference facilities and catering facilities, may be subject to tax. Lettings that fall in between, such as hire of classrooms with peripheral use of equipment, may also be at risk of exposure to tax. Suitable amendments to letting forms, which restrict or separate the use of facilities, can help to reduce this exposure.
Where academies receive funding from corporate entities and in return, the academies provide recognition to the corporate by way of displaying its name and logo on its website, or on the sports kit used by its students, this would attract a VAT charge and may also be subject to direct tax.
Most grants from local authorities to academies are for strictly educational purposes. However, sometimes the grants are made for other services such as family support or childcare facilities, which although intended for charitable purposes, could still fall outside of an academy’s exemption from tax. It is worth reviewing grant agreements carefully against the academy’s objects and taking action where the two are not clearly aligned.
With a trading subsidiary, profits chargeable to tax can be reduced by donating profits to the academy trust or another charitable entity. Academies with trading subsidiaries should be aware that the subsidiary cannot legally make a donation to the academy without available accounting reserves to do so, otherwise it would be deemed to be a distribution under company law. Mismatches between accounting and taxable profit in the subsidiary can therefore expose the subsidiary to corporation tax.
To help keep the accounting and taxable profits in line, academies should ensure that, where possible, tax-disallowable costs, such as capital costs, penalties and entertaining, are not incurred by the subsidiary.
Academies often use contractors to provide teaching support, teaching of extracurricular subjects (such as peripatetic music teachers) and office support, among other services. The academy is always responsible for reviewing each arrangement to determine whether tax needs to be deducted under PAYE – it is not sufficient to have the contractor simply sign a declaration stating that they are responsible for their own taxes.
HMRC regularly carry out payroll inspections and may seek to recover unpaid PAYE, plus penalties and interest from the academy, if they believe a worker has been treated incorrectly as self-employed. A careful review of each new contractor’s working arrangements can help to keep the academy’s employment tax position secure.
From 6 April 2017, academies are responsible for assessing the employment status not only of individual contractors but also those using intermediary companies, which is a ‘deemed’ employment status known as IR35.
Before 6 April 2017, IR35 was solely the responsibility of the intermediary company itself but that position has changed for all public authorities, including academies. Academies should therefore review the employment status of all new and existing off payroll workers. Updated IR35 regulations, to be introduced from April 2020, are set to introduce additional compliance requirements to this process.
An academy may make various business supplies that could be taxable supplies for VAT purposes, such as facilities hire, catering for staff and governors, advertising, staff secondments, sale of sports equipment and sale of school uniforms. Should taxable supplies exceed the VAT registration threshold (currently £85,000), the trust may be required to register for VAT or be liable for penalties and unpaid output tax if it registers late.
Monitoring total taxable supplies regularly can help to make sure that VAT registration can be actioned as soon as it falls due. A Multi-Academy Trust (MAT) with just a few schools may well find that it has breached the threshold for VAT registration with what could appear to be a small amount of business supplied in each school.
VAT 126 claims
Where academies are not VAT registered, they can recover the VAT incurred in relation to their non-business supplies on form VAT 126. However, this form cannot be used to recover the VAT incurred on the business supplies they make. If an academy or MAT enters 100% of the VAT it incurs on form VAT 126, without carrying out an apportionment, it will be over-claiming VAT and would be liable to return the over-claimed amount, plus potential interest and penalties. VAT 126 claims should therefore be reviewed carefully.
Academies or MATs with payroll costs above £3 million are generally required to pay a 0.5% levy on their payroll from 6 April 2017. This levy can be used to fund apprenticeship training for the academy’s staff by setting up a levy account.
Academies are charities for tax purposes and are eligible to claim gift aid on qualifying donations from individuals, increasing their value by 25%. In order to make a claim, the academy will need to register with HMRC Charities and obtain a gift aid declaration from the donor.
How we can help
We can advise on your academy’s exposure to the risks of various forms of tax and provide guidance on suitable ways to mitigate risks and explore opportunities. Our services include:
- A complete health check review of activities for corporation tax and VAT risks
- Advice on setting up and operating a trading subsidiary
- Support with VAT recovery and registration
- Advice on setting up and operating Gift Aid claims