In the past month, as the legislation has come into being a few things have arisen. A mixture of light relief in the form of VAT recovery, but also confusion over "closely related services”. Read on as we explain both.

The "Closely Related Services" Confusion

Recent legislative changes have raised questions about whether private schools can continue to claim VAT exemption on "closely related services" such as catering.

Services closely related to education are exempt if they were linked to an (Item 1) exempt supply of education. However, the draft legislation removes private school education from Item 1, meaning that closely related services should no longer qualify for exemption.

Despite this, HMRC guidance suggests, without making any firm statement, that school meals may still be exempt if they meet certain conditions. The issue? Based on the legislative changes, those conditions can no longer be met as they cannot provide exempt education falling within Item 1.

Implications for Private Schools

• Schools must be encouraged to carefully assess VAT liabilities on services like catering and transport.
• The uncertainty could also impact partial exemption calculations and CGS reclaims.
• Advisors should be cautious when interpreting HMRC’s wording, as it does not fully align with the legal framework.

Private schools should prepare for potential VAT costs and seek expert advice on mitigating financial impacts.

HMRC’s Pre-Reg Input Tax Recovery – A light relief for Private Schools

HMRC’s recent policy shift on pre-registration input tax recovery will be a bit of light relief for private schools amongst the weight of VAT on fees. With the VAT exemption for educational services being lifted from 1 January 2025, private schools, many of which will be registering for VAT for the first time, now have access to input tax recovery options that were previously unavailable. This new guidance marks a significant opportunity for schools to revisit their VAT position and potentially recover costs that would have been entirely non-recoverable under the previous rules.

Previously, VAT incurred on pre-registration purchases used in exempt education before the changed would not have been recoverable to any extent. HMRC has now exercised discretion to allow recovery of VAT on goods and services that will contribute to taxable activities in the future, aligning with Regulation 111 and as stated by HMRC “adopting principles of fairness”.

The Recovery Rules: Balancing simplicity with accuracy

To streamline the process, HMRC will allow recovery based on the economic life of the purchased goods, typically assumed to be five years. This means:

1. Apportionment for exempt use: Goods used for exempt purposes pre-registration will require a proportional restriction.
2. Future taxable use: Recovery will depend on the extent of taxable use projected for the remaining economic life of the goods after January 2025.

There are example calculations in HMRC’s internal manual www.gov.uk/hmrc-internal-manuals

Implications for Private Schools

This policy provides Private Schools with a potential financial lifeline. Many institutions will now be able to reclaim a significant portion of their VAT on pre-registration expenditures, an opportunity that was entirely out of reach before. If you have Private Schools clients, you should urge them to act quickly to revisit previous advice and ensure compliance with these updated guidelines.

They need to be considering:

1. Reassessment of VAT positions: Review purchases made within the last four years to identify recoverable VAT.
2. Planning for apportionment: Ensure accurate projections of taxable and exempt use for assets post-2025.

This update also highlights the complexity of VAT and importance of staying vigilant and consulting the experts in the ever-evolving landscape.