HMRC focus on private schools

Why you should read this

The focus to date has quite understandably been the desire to deal with the myriad of issues leading up to the imposition of VAT on tuition and boarding provided from 1 January 2025.

This insight focuses on what happens when HMRC arrange a VAT inspection. This includes the process of arranging an inspection, what they will inspect, the challenges you may face, and how best to address them.

Booking the inspection

There are two common reasons for HMRC to contact you. First, the school has asked for a repayment of VAT, in which case HMRC are likely to focus on the specific VAT return requesting a repayment of VAT. Second, the school or college has been selected for a routine VAT inspection, in which case HMRC will look at the school’s activities as a whole. In either case, you should first make sure you have actually been contacted by HMRC, which can be confirmed on HMRC’s website.

If the school has requested a repayment of VAT, it is of course in your interest to deal with the inspection as quickly as possible, as the VAT will not be repaid until HMRC are happy it is properly due. If it is a routine VAT inspection, you should agree to a date that suits you, when the accounting records are ready and key personnel are available to host HMRC.

What HMRC want

HMRC have two objectives. First, whether the taxpayer is competently dealing with their tax compliance obligations. Their focus will be on the accurate recording of income and expenditure, the timely filing of VAT returns, and payment of VAT due to HMRC. They will expect to see detailed accounting records that can be audited for the accuracy of the information on the taxpayer’s VAT returns.

Second, at a more detailed level, they will expect the taxpayer to understand the VAT liability of supplies and be able to explain the conclusions reached on both the payment and recovery of VAT.

Likely challenges from HMRC

HMRC have a standard checklist of areas to cover during all VAT inspections. These include cars and related expenditure, business entertainment, bad debts, and unpaid creditors. We can provide further details separately on these issues. For schools and colleges, whether you are dealing with a request for the repayment of VAT or a routine VAT inspection, these will be the areas of focus for HMRC.

Prepayments

HM Treasury introduced legislation which specifically targets ineffective prepayment arrangements. If you received lump sum payments from your parents before 29 July 2024 and these do not settle a liability in full for a specific term’s fees, you should expect these arrangements to be looked at in detail by HMRC.

Pre-registration VAT

The rules allow the recovery of pre-registration VAT in specific circumstances. For goods, up to four years prior to registration, for services, up to six months. In addition to policing the time limits, HMRC will look closely at the distinction between goods and services, particularly in relation to building work, and will audit the time apportionment of VAT on goods purchased in the four years prior to VAT registration.

VAT liability

There are several areas for HMRC to explore and the following points are intended to illustrate potential areas of focus.

• Has the school correctly identified the point at which it is required to register for VAT? This will determine the amount of VAT paid to HMRC on the first VAT return.
• Although it may be relatively straightforward to identify the tuition fees and boarding fees which are subject to VAT, has the school understood the extent of the VAT exemption available to closely related goods and services?
• Should discounts and bursaries offered to students be included in the amount of income subject to VAT?
• Does the school issue VAT invoices to its parents? If so, this will fix the point at which VAT is payable to HMRC rather than the receipt of cash.

How to address the likely challenges from HMRC

As with most things in life, preparation is key to success. We recommend that you prepare a defence file to document the rationale for all key decisions you make in relation to VAT. As it is impossible to predict when HMRC contact you, this will be your memory bank for questions which may be asked a few years from now.

If you would like to discuss any aspect of the issues discussed in this article, please do not hesitate to contact us.