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HMRC enquiry highlights VAT risks for academy trusts

| Rachel Barrett | 5 May 2023

A recent enquiry by HMRC has highlighted the need for academy trusts to be wary of accidental under-declarations of Value Added Tax (VAT) or risk potential penalties.

Academy trusts face a unique financial landscape, and navigating the complex rules and regulations around VAT can be a challenge. To avoid any costly mistakes, it is important for academy trusts to understand the complexities of VAT and how to claim relief properly.

HMRC enquiry into an academy trust's VAT return

The case concerned an academy trust that was subject to an HMRC enquiry into its Spring 2022 VAT return, triggered by significant differences from previous returns.

The differences were for valid operational reasons, but the enquiry revealed that output tax had not been declared on payments received from families for laptops purchased by the trust and sold on for student use. The HMRC enquiry resulted in a back-dated claim for output tax.

This example illustrates the importance of trusts taking care when submitting VAT claims, ensuring that VAT is reclaimed only on valid expenditures and that output tax is declared when trusts are VAT registered. Trusts need to be aware that under-declarations of VAT on returns can result in an assessment of the tax due, interest charges, and potential penalties.

Why VAT is complicated for academy trusts

While schools were under local authority control, they were reimbursed by the local authorities for the VAT costs they incurred.

Since April 2011, academy trusts have been required to apply for refunds to HMRC themselves and are required to register for VAT when VAT taxable turnover reaches a certain threshold. The expertise in the local authorities has not necessarily transferred to the trusts, leaving them with the choice between hiring a dedicated finance expert or seeking external support.

VAT is a complicated area in its own right, and it can be particularly tricky for academy trusts. While they are largely subjected to the same VAT rules and regulations as any other business, their charitable status means that they are eligible for VAT relief for certain items and services.

VAT relief can be complicated as it is available on a range of items including educational supplies and books. However, there are specific rules and exemptions around what qualifies, and trusts need to ensure that they are complying with these rules. Items can also be eligible for partial VAT relief, so it is a good idea to seek advice from an expert to help you understand exactly what is and isn’t included.

Ensuring proper VAT accounting to avoid HMRC penalties

Trusts should revisit their VAT treatment regularly. This is especially true when there has been a change in income or VATable activities, such as additional schools joining a multi-academy trust or a significant change in potentially VATable activities due to the retreating restrictions imposed by Covid.

Trusts reclaiming via the online service (VAT126) may also benefit from a review of their activities against the VAT registration criteria. If you are concerned about VAT claims or unsure about what should or should not be claimed, getting in touch with an expert for a VAT review may be the best course of action.

At Duncan & Toplis, we have a dedicated academies team that has a well-established reputation of working in partnership with academies at a time of considerable change in the education sector. Get in touch with us to find out how we can help you with VAT and more.


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