Trust Schools: Does The Change In VAT Recovery By Local Authorities In Respect Of Voluntary Aided Schools Effect Trust Or Foundation Schools?

Revenue & Customs have produced a Brief, issued on the 18th August 2009, indicating that it intends to change its treatment on VAT recovery by local authorities on expenditure relating to capital works at voluntary aided schools.

Local authorities are entitled to recover VAT incurred on supplies made to them which relate to their non-business activities. The provision of free education in state maintained schools qualifies and where the local authority has a duty to ‘defray’ the expenses of maintaining such a school VAT is recoverable under Tax legislation.

The Revenue had previously accepted that local authorities could recover VAT on expenditure that the authority funds but which is the responsibility of the governing body.

However, it is now decided that this will no longer apply where goods and services are purchased by another legal entity other than the authority. Thus, where the governing body retains statutory responsibility for certain capital expenditure, the supply will be made to the governing body regardless of whether payment is made from a delegated budget or not. The range of capital expenditure for which the governing body is responsible includes amongst other things:

• The existing buildings (internal and external)
• Furniture fixtures and fittings
• Kitchens, caretakers’ dwelling houses and swimming pools

The logical result of the Revenues decision is that the amount of any delegated budget to be used on capital expenditure could effectively be reduced by 15% or the current VAT level as this amount becomes part of the cost of the supply.

Given that voluntary schools are a kind of maintained school, do not charge fees to students, the governing body employs the staff and decides the schools admission arrangements and the foundation owns the schools land and buildings, is the situation going to be any different for Foundation and Trust Schools?

Although the situation looks similar the key is in the wording that makes the governing body of a voluntary body statutorily responsible. The School Standards and Framework Act 1998 provides that monies made available by a local authority to the governing body of a maintained school remains the property of the authority until it is spent, and when it is spent it is as the local authority’s agent. The School Standards and Framework Act specifically stipulates that this is NOT the case in respect of voluntary schools.

There is no relationship between land and building ownership and the ability to recover or otherwise, the VAT payable.

In order that there is no doubt, where a Trust or Foundation school is involved in tripartite building programmes it might be worth noting in the contract that sums received from the local authority and spent by the governing body is done as the local authorities agent.

Published 14/09/2009. The author of this article is Julia Green