Private Schools – The recovery of VAT on building works incurred over the last ten years

Private Schools have been aware for some time that VAT may be levied on their fees after the General Election. 

Certainly, the Labour manifesto released this week – suggests that the VAT will be used to raise funds for other educational initiatives.

However, those Private Schools that have engaged in building projects over the last ten years might find that the imposition of VAT on their fees can be mitigated.

This is because where certain building work can be classified as a ‘Capital Good’ (because it has cost £250,000 or more) then the extent to VAT incurred can be recovered or not is provisional. 

This means that if the VAT was irrecoverable because it related to ‘VAT Exempt’ fees when it was incurred, then the change in the VAT treatment of the fees means that some of this VAT could then be claimed back from HMRC.

For example, if a school built a new teaching block five years ago then it would not have been able to recover any VAT at the time of construction. However, after the imposition of VAT on fees it might be able to claim 50 per cent of the VAT incurred. 

This is on the basis that for the first 5 years of its life as a ‘Capital Good’ it was used for ‘VAT Exempt’ purposes whereas for the remainder of the 10 years of its life as a ‘Capital Good’ its use will relate to the ‘Taxable’ fees and a ‘Capital Goods Scheme’ can be claimed.

There may also be solutions to recover part of the VAT incurred on such buildings in the circumstances where they are owned by associated companies to the school.

The scheme also relates to Computer Systems and Boats and Yachts. 

Though here the cost has to be £50,000 or more and the life span of the ‘Capital Good’ is only 5 years. This is also less likely to be a benefit because the cost has to relate to a single item of equipment rather than say a computer network as a whole and is assumed that not many schools will have purchased a yacht even if they operate a sailing club.

The imposition of VAT on fees will also allow recovery of VAT on day-to-day running costs and on building works incurred after the change.

General VAT accounting for schools may be complicated – at present, we do not know how prepayments for fees will work or whether some element of the fees will remain exempt in respect of say nursery fees or fees for students with specific conditions.

If you have any queries on VAT, then get in touch with our specialist VAT team here.

Posted in Internal.