ADDING VALUE AND DEALING WITH VAT RISK FOR ACADEMIES

With all the financial challenges facing academy schools it’s very easy to overlook how VAT can strongly impact an academy’s financial position. Here we take a look at how we worked an academy client to de-risk their position and add real value.

WHAT WE DID

This academy client hadn’t considered its VAT position in any detail for a number of years. So, we carried out a detailed review of its VAT accounting position, including how it used its trading subsidiary.

Our scope was to both identify any risk areas where the client’s VAT treatment was defective or incorrect. And to identify opportunities for cash saving or enhancements to the VAT position.

Following the review, we rectified the errors identified. Making certain changes to how the academy operated in order to maximise their opportunities for VAT relief and input VAT recovery.

What did we find?

Through our work, we identified the following issues and opportunities:

• Catering was being operated by a subsidiary. An agency relationship was not set up properly between the academy and the subsidiary. This meant there was a risk VAT relief on sales of meals to students wasn’t available.
• Construction new drama theatre construction. The theatre was intended to be used for both student and community use, jeopardising VAT recovery.
• Sale of surplus land. The sale of land was intended to fund the theatre construction. There was a risk an exempt supply of land would have a detrimental impact on the partial exemption position.
• Cash donations. The academy was in receipt of a cash donation from a local business. It was unclear whether this was a grant and outside scope of VAT, or whether it was a taxable supply of sponsorship services on which VAT was due

What were our solutions?

Having identified these issues of concern, we worked collaboratively with the client to:

• Re-model the contractual arrangements for the catering to ensure VAT relief on student meals was permissible.
• Design a new partial exemption special method. Advising them to opt to tax the new building. This ensured VAT was recoverable in full on the construction of the drama theatre with no VAT leakage.
• Ensure the partial exemption method enabled recovery of fees associated with the sale of the land.
• Provide guidance on how to identify the difference between donations that are outside the scope of VAT, and taxable sponsorship.
• Revisit the commercial terms of the cash donation to remove the risk of this being seen as a taxable sponsorship payment, allowing the school to retain the full benefit of the payment.

Our dedicated VAT advisory team has considerable experience of helping clients in the education and not-for-profit sector. Get in touch if you’d like to chat to someone about VAT is affecting your business model.