HMRC VAT checks on private schools

HMRC has established a specialist team to review VAT compliance in the independent school sector, and compliance checks are already underway.

Schools have had to deal with significant VAT changes in a relatively short period. While much of the initial focus was understandably on implementing the new rules, HMRC is now looking more closely at the decisions, calculations and evidence behind them.

Reviewing your VAT position now could help identify potential issues before HMRC does.

Have all income streams been considered?

Tuition fees may have attracted most of the attention, but HMRC is also looking at the VAT treatment of schools’ other sources of income.

These can include lettings of school buildings and sports facilities, after-school and holiday clubs, catering, educational trips and additional charges made to parents.

In some cases, VAT treatments that have been in place for some time may simply have continued without being revisited. But activities change, and an approach that was appropriate previously may no longer reflect what the school is doing today.

It is therefore worth checking that all income streams have been reviewed and that there is evidence to support the VAT treatment being applied.

Advance fees remain under the spotlight

Advance fees continue to be an area of HMRC interest, particularly where schools received significant payments before VAT was introduced on private school fees.

HMRC may look closely at when the tax point arose, the contractual arrangements in place at the time and the documentation supporting the treatment adopted. It may also check that invoices and receipts are consistent with that treatment.

Given the amounts that can be involved, schools should make sure they are comfortable with the position they have taken and have the supporting evidence available.

Is your partial exemption methodology robust?

For many schools, partial exemption is one of the more complex parts of their VAT position.

Schools may now have a mixture of taxable, exempt and non-business activities, making VAT recovery far from straightforward. HMRC is looking at how costs have been allocated, whether direct attribution has been applied appropriately, how residual costs have been identified and whether the methodology produces a fair and reasonable result.

Some methodologies were developed relatively quickly as schools prepared for the VAT changes. That does not mean they are wrong, but now is a sensible time to revisit the assumptions behind them and consider whether they still stand up to scrutiny.

Have you considered the standard method override?

Closely linked to partial exemption is the standard method override (SMO).

Applying the standard partial exemption method is only part of the picture. Schools also need to consider whether the result properly reflects how costs are actually used.

Where there is a significant difference, a SMO may be required. This can be particularly relevant for schools with substantial property expenditure or capital projects, boarding facilities, significant advance fee income, trading activities or community use of school facilities.

Importantly, HMRC may want to know not only whether an override was applied, but whether the school considered if one was needed in the first place.

Educational trips and tour operators margin scheme

Educational and enrichment trips are another area attracting HMRC’s attention.

Where a school buys in accommodation, transport or other travel services, it should consider whether the tour operators margin scheme (TOMS) applies.

The answer will depend on the circumstances, including whether the school is acting as principal or agent and the nature of the services supplied to pupils. Schools should also consider whether they have carried out the appropriate TOMS calculations where required.

This can be a technical area and one that may not previously have received much attention, so it is worth including as part of a wider review.

What should schools be doing now?

With HMRC actively reviewing VAT compliance across the sector, this is a good time to take stock.

A VAT health check can help identify areas of risk, test whether existing approaches are still appropriate and make sure the supporting evidence is in place should HMRC ask to see it.

We are already helping independent schools review their VAT position and respond to HMRC compliance checks. This includes looking at partial exemption and business/non-business apportionments, the SMO, capital goods scheme calculations, advance fees, the VAT treatment of different income streams and educational trips.

If you have received notification of an HMRC compliance check, or would like to review your position before HMRC contacts you, please get in touch with our VAT team. Addressing a potential issue early is generally easier than doing so once an HMRC enquiry is underway.