Accounting for VAT on extended schools activities
This guidance assumes that you have some knowledge of VAT. If you have any difficulties, you should contact the HM Revenue and Customs' National Advice Service on 0845 010 9000. You may also find it useful to read the following public notices on the HM Revenue and Customs website:
- Notice 700, The VAT Guide
- Notice 700/34, Staff
- Notice 701/1, Charities
- Notice 701/19, Fuel and Power
- Notice 708, Construction
VAT recovery
Under the normal VAT rules, local authorities are unable to recover VAT they
incur in delivering non-business activities. Non-business activities generally
include those carried out to meet their statutory responsibilities and
requirements, such as statutory education, whether or not they are made for a
charge. However, it also includes certain other activities including
non-charged-for, non-statutory services. A special mechanism exists which
refunds this VAT.
Local authorities also recover VAT incurred on exempt activities, provided that the VAT is no more than 5 per cent of the total VAT incurred in any one year. Where that limit is exceeded, the authority may lose its ability to recover all exempt VAT incurred during the course of the year.
Under current VAT rules the provision of most childcare and some extended-school activities are treated as exempt business activities for VAT purposes, and so any VAT incurred in the process of delivering the service cannot be passed to the end user.
If the governing body of an LEA-maintained school engages in extended schools activities in its own right, and the income generated is retained by the governing body, input VAT is not recoverable.
If the LEA generates and retains the income, it may be able to recover VAT incurred through the 5 per cent VAT recovery route. Additionally, if the extended service is childcare-based, the local authority may treat the service as a non-business activity for VAT purposes (as announced by the Chancellor of the Exchequer in his 2005 budget CE11/05 VAT: Local Authorities).
VAT on the supply of staff used for extended schools
services
Information on the VAT status of staff provided by LEAs to those
governing bodies which are engaged in the provision of extended schools:
- In the case of foundation and voluntary-aided (VA) schools, the governing
bodies will generally employ their own staff, including those required for
extended-schools purposes. If the schools require additional staff and the LEA
provides them, that is a supply for VAT purposes. The liability of that supply
will depend on what is being supplied.
- In the case of voluntary-controlled (VC) and community schools the position
is different. The law requires all staff for those schools to be employed by
the LEA and does not allow governing bodies to employ the staff, even though
they have appointed them. Where VC and community schools operate extended
schools, additional staff will be needed to run them, and either existing staff
or new staff will be used. The issue is whether the payment by the governing
body to the LEA for the use of those staff is a supply for VAT purposes.
- It has been agreed with HM Revenue and Customs that because of the legal position, which requires the LEA to employ the staff and forbids the governing body to act as employer, that any payments from the governing body is non-business income for VAT purposes, i.e. not subject to VAT.
All other goods and services provided to the governing bodies of VA, VC, foundation and community schools by LEAs are subject to VAT at the appropriate rate.
Futhermore it is recognised that in some schools, extended services may be provided by third-party contractors. In such cases the contractors will be providing services, the VAT liability of which will depend on the nature of the services being provided. Usually the contractors would employ their own staff, in which case VAT would not be an issue.
If, however, the contractors charge the LEA or governing body for their services, which would include overhead costs such as staff wages, these payments would be subject to VAT at the appropriate rate and liability.
It is also possible that LEA-employed staff may be seconded to work for the extended services provided by a contractor, so the staffing costs may be liable to VAT. Alternatively the contractor may be charged rent for the use of the school's buildings. This charge may also be subject to VAT, depending on the nature of the agreement.
Other employment issues
(i) Joint employment
HM Revenue and Customs advise that in cases of joint employment, there is no
supply of staff for VAT purposes between the joint employers. Staff are
regarded as jointly employed if their contracts of employment, or letters of
appointment make it clear that they have more than one employer. The contract
must specify who the employers are, e.g. 'Company A, Company B and Company
C', or 'Company A and its subsidiaries'.
Staff are not jointly employed if their contract is with a single company or person, even if it requires them to work for other companies. Paragraphs 2-4 above therefore apply. It is not accepted that there is joint employment where there is a contract with one company:
- Which lays down that the employee's duties include assisting other companies; or
- Which lays down that the employee will work full-time for another company; or
- Where the job title shows that the employee works for a group of associated companies, e.g. group accountant
(ii) Paymaster services for associated
companies
Paymaster services commonly arise in two situations:
- Where employees are jointly employed by two or more companies and one
company undertakes to pay all salaries, National Insurance and pension
contributions, which are then recovered from the other employers; or.
- Where each of a number of associated companies employs its own staff, but one (paymaster) company pays all salaries, National Insurance and pension contributions on behalf of the others. Each associate then pays its share of the costs to the paymaster.
Recovery of monies paid out by the paymaster in either of these situations is not subject to VAT as it is a disbursement, Notice 700 The VAT Guide. If a charge is made for the paymaster's services to the other companies over and above the reimbursement of the costs paid out on their behalf, the paymaster must account for VAT on this charge. However, such supplies are disregarded where they are made between companies within the same VAT group registration.
