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Powers for academies in VAT recovery

28 July 2011

What’s the position?

Since April 2011 academy schools have broadly speaking been in a similar position to local authority schools in terms of VAT recovery. So academy schools can recover VAT from HM Revenue & Customs which they incur on incoming supplies of goods and services that are directly used for non-business purposes.

Most of the education which academies provide to their pupils free of charge is likely to be treated as non-business in VAT terms, so this has a significant positive impact for academies and their finances.

This doesn’t mean that an academy can always recover any and all VAT it incurs on incoming goods and services, but does significantly extend an academy’s VAT recovery powers.

What was the problem with academies and VAT recovery?

Local authority schools are largely able to recover VAT that they incur on incoming goods and services which are used in providing education in a non-business capacity. This is because of the wider statutory powers that local authorities have had for some time, allowing them to recover VAT in relation to non‑business supplies.

When academies are established, and so move outside of local authority control, they are no longer part of the local authority’s VAT registration, and so cannot recover VAT via the local authority. Without the legislation  introduced in 2011, academies would have fallen within the normal VAT recovery position for private sector businesses. That would not have allowed academies to recover VAT which they incurred on incoming goods and services, where they used those goods and services in the course of making non‑business supplies, such as providing free education to their pupils. As that is likely to be the majority of what academies do, this was leaving academies at a significant disadvantage in terms of VAT recovery, as compared to local authority schools.

Do academies have to be VAT registered to recover VAT?

HM Revenue & Customs have said that academies do not necessarily have to be VAT registered in order to recover VAT in connection with non‑business activities under these new rules. However, academies may want to think about VAT registration (if they qualify) if they want to recover any VAT incurred on incoming goods and services which are used for making business supplies. In that case, the normal rules on VAT registration and recovery would apply, as for any private sector business. If an academy is VAT registered it would recover VAT in the usual way via its VAT returns. If an academy isn’t VAT registered, it can use VAT Form 126 (available on the HMRC website), and referring to the guidance in that.

There are detailed rules on voluntary and compulsory VAT registration, and academies should take their own appropriate advice on these areas.

Can academies recover all their input VAT?

Not necessarily. An academy can’t recover VAT incurred on incoming goods or services which the academy uses and which are directly attributable to outgoing VAT exempt supplies made by the academy, and which are business supplies in VAT terms. This may not affect many academies, but it’s a point to be aware of. 

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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