Impact of changes
The introduction of VAT on school fees does not necessarily mean an increase in fees charged to parents of 20%. Any VAT registered organisation which accounts for VAT on standard rated income is entitled to offset VAT incurred on costs associated with that revenue and therefore this cost reduction is usually factored into the pricing structure. Indeed, it is possible that some schools may have already suspended major costs such as capital projects, where substantial VAT costs are likely, until after the next election, in the knowledge that if VAT is registration is required, the overall cost of such projects could be reduced because there would be entitlement to VAT recovery. The extent of any recovery would need to be further considered, but there is no doubt that deferring such costs would likely be advantageous.
Another point to note for any school that becomes VAT registered because of the change is the requirement to identify all supplies that are liable to VAT. This is where some complexities might arise with regards to accommodation, and welfare services, each of which have their own rules for determining the VAT liability and could result in continued exemption for such supplies if schools retain their charitable status. Another common area of income for Schools is rental income which ordinarily is exempt, albeit there is a specific mechanism to convert these services to taxable supplies.
Schools already VAT registered by virtue of other activities should already have accounting records and processes that cope with VAT. However, those who are not VAT registered will need to consider their accounting software.
In addition, for those who are already VAT registered, there may be an opportunity to apply the ‘capital goods scheme’ (‘CGS’) to recover VAT incurred on earlier capital projects. Broadly the CGS is a scheme that requires an organisation to adjust the VAT incurred on such costs (‘capital items’) over a 10-year period. Capital items include building projects costs or property acquisition costs where these are liable to VAT and have cost more than £250k. So, if a VAT registered organisation undertook a capital project for £1m plus £200k VAT to refurbish classrooms that were used solely to provide exempt education, none of that VAT could be recovered and would represent a cost to the school. However, if 3 years later, those classrooms were used solely to provided standard rated education, the CGS would allow for VAT recovery. As the CGS has a 10-year adjustment period it would be necessary to undertake adjustments for each of the remaining 7 years. This would result in an annual repayment of £20k per annum assuming the classrooms were used solely for taxable purposes throughout the remaining period. i.e., £200k/ 10yrs x 0% -100% = £20K x 7yrs = overall refund of £140k.