VAT Returns - a fiscal theme park where nothing is certain

“Beyond the everyday world lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted”. -Lord Justice Sedley in the Court of Appeal case of Royal & Sun Alliance.

Generalised advice on VAT fails to address the idiosyncrasies of VAT law and the unique aspects of school life.

Establishing the appropriate VAT treatment for the wide-ranging and peculiar aspects of school life is a nuanced process. VAT treatment will always depend on the specific circumstances of that school and an expert application of complex VAT law.

HMRC’s requirement to produce guidance quickly has resulted in confusion, ambiguity and a lack of references to established law and case precedents. This has left schools navigating uncertain terrain, with critical issues still unresolved.

The first VAT return

Schools must account for VAT on their expenditure, requiring a minimum of three VAT account treatments: recoverable, irrecoverable, and partially recoverable. Most input VAT will be partially recoverable, as it is attributable to both taxable and exempt sales.

Opportunities for reclaim - newly registered schools

The first VAT return presents an opportunity for newly-registered schools to reclaim VAT on their pre-registration goods and services.

While HMRC has provided some guidance on pre-registration VAT, the position on services remains unclear and arguably contradicts earlier case law. For instance, substantial pre-registration costs for property improvements (services) related to future taxable income may face uncertainty. This is an area that continues to evolve from week to week, with different schools receiving different answers from HMRC.

Opportunities for reclaim - schools with an existing VAT registration

For those schools who already had a registration prior to this policy, there is now an opportunity for reclaim that did not exist before. These schools will be used to making a modest VAT reclaim as their VATable income had previously been so low. However, from the start of the current tax year, they can make an adjustment to account for the increased taxable income, and therefore recovery can be adjusted accordingly.

This has the potential for significant upside for those schools with an existing registration.

Year-end

For schools, the choice of VAT year-end is significant.

Changing the year-end to align with the financial year (e.g. 31 August) may initially increase VAT recovery due to a longer taxable period. However, this approach is only mandatory if there are "substantial" differences in VAT recovery. Smaller schools may not need to apply the override, but larger schools could face unbudgeted paybacks of input VAT if over-recovery occurs in prior periods.

To achieve certainty, schools should forecast their VAT position for both 31 May 2025 and 31 August 2025 when deciding on their VAT year end date. Complicating matters further, schools with existing VAT recovery methods cannot retrospectively change them without HMRC’s agreement.

Fees in advance

One potential and unforeseen consequence of the rush to pay fees in advance is the likely restriction on VAT recovery. Current expenditure must in part be apportioned to exempt education delivered from 1 January 2025 but paid for prior to 29 July 2024. Compounding this, fees paid in advance do not necessarily feature in the turnover calculation for current VAT returns. Instead, they may only be considered if the partial exemption override is applied at the VAT year-end leading to a potential cash-flow timing issue.

Other complications

Additional uncertainties remain:

• The VAT treatment of bursaries and whether they constitute non-business activity
• Defining “closely related” extras exempt from VAT
• The ongoing exemption for sports services provided to individuals and whether schools should adhere to HMRC guidance or rely on direct legal interpretation.

Check out our latest podcast on the first VAT Return

Narrow Quay Solutions' Steve Hodgetts and Susie Luckman recently sat down to discuss the potential upsides to VAT reclaim in this first VAT return - such as reclaim for schools within an existing registration; pre-registration expenses for newly registered schools; and the capital goods scheme.

The introduction of VAT on school fees has created a complex and uncertain environment for independent schools. To navigate this 'fiscal theme park', schools should carefully assess their individual circumstances, seek expert advice, and stay informed about evolving HMRC guidance and case law developments.

For more information, please contact Narrow Quay Solutions' Steve Hodgetts or Susie Luckman on 07468 698 972. Alternatively, please complete the form below.