Despite this, they must still comply with the various VAT and corporation tax compliance requirements that apply to charities generally. With the experience we have accumulated through working with over 100 academies, we have identified some regular tax pitfalls, risks and opportunities in the sector that you should be aware of.
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 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 and also help to mitigate any inadvertent tax exposure. In all cases, the VAT treatment of these activities should be closely examined as they would count towards the VAT registration threshold where they are taxable. Consideration should also be given to forming a VAT group registration with the subsidiary to avoid multiple VAT registrations and remove VAT on any transactions between the academy and the subsidiary.
‘Pure’ lettings of indoor or outdoor spaces 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.
For VAT purposes, such income will likely be exempt from VAT with the consequence that this could affect the academies VAT recovery position. However, it is worth considering exercising the option to tax making such services liable to VAT and thus giving entitlement to VAT recovery.
Cause-related marketing/Sponsorship income
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 their website or on the sports kit used by its students, this would attract a VAT charge and may also be subject to direct tax. Careful restructuring of such arrangements can reduce the sum on which VAT might be due and the exposure to corporation 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 objects and therefore outside it’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. This is also important for VAT purposes as funding referred to as grant income can sometime be consideration for services provided.Trading subsidiaries
Often, commercial activity is run through a separate trading subsidiary, consequently profits chargeable to tax can be reduced by donating them 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. As set out above, consideration should be given to VAT Grouping.
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.
As of 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 2021, are set to introduce additional compliance requirements to this process.
An academy might 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. If the level of taxable supplies exceed the VAT registration threshold (currently £85,000), the academy will be required to register for VAT. If it fails to register at the correct time it will be liable for penalties as well as the VAT due on the supplies made. Monitoring the turnover from taxable supplies on a rolling monthly basis will ensure that any obligation to register for VAT is identified at the correct time.
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 taxable business supplies in each school.
VAT 126 claims
Where academies are not VAT registered, they can recover the VAT incurred in relation to their non-business activities 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 any apportionment, it will be over-claiming VAT and would be liable to potential interest and penalties in respect of the incorrect claim. VAT 126 claims should therefore be reviewed carefully.
Partial exemptionIf an academy makes both taxable and exempt supplies there will be an element of overhead VAT which relates to both supplies. The default position in such circumstances is to use the standard partial exemption method to calculate the extent of VAT recovery. This is not always the most fair and reasonable method and consideration should be given to whether to apply for a special method.
Most building work will be standard rated, but there are specific zero rate reliefs for new buildings or charity annexes that are used solely for a relevant charitable purpose. Whilst in most instances academies should be able to reclaim VAT incurred on such projects, that will not always be the case and therefore advice should be sought on the optimum structure, particularly as projects of this nature may involve potentially significant VAT costs.
Academies involved with such projects must also consider the application of the capital goods scheme.
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 risk and the potential for opportunities to mitigate VAT and Tax where possible. For instance:
- If your academy is recovering all the VAT it incurs (including those relating to trading activities) and it is VAT registered, speak to your VAT advisers to confirm whether full recovery is correct
- If the academy generates income from non-education trading activities with a total value of £80,000 or more, speak to your tax adviser to ensure exposure to corporation tax can be minimised
- If your academy supplies sports facilities to the local community in return for a fee, speak to your VAT advisers about the VAT implications
- If there is a capital project, consider the most efficient structure for both VAT and tax.
Buzzacott are experts at advising academy’s and MATs on all aspects of their tax and compliance needs. The services we provide 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 Capital projects
- The implications of VAT Group registration
- Consideration of partial exemption methods and representation to HMRC as required
- Advice on setting up and operating Gift Aid claims.
Speak to an expert