Published on 22.9.18

VAT Education Update No. 47

Welcome to our new term VAT report.

The recent publication of two VAT cases involving FE Colleges, Colchester and Wakefield has entirely maintained HMRC’s view on things in relation to so called “business and non-business” issues. Further comment on these cases are on page 2 for those who want the detail of how the Courts have ruled.

A change that will affect all VAT registered organisations is the Government legislated “Making Tax Digital” (MTD). Attention to the following section is therefore compulsory reading!

Making Tax Digital

For over 40 years the Government has never prescribed how VAT records should be kept. This changes on 1 April 2019. For VAT returns starting after then the law will stipulate that VAT registered organisations must maintain primary VAT records in an electronic format. Moreover, those records will have to be digitally linked and an electronic upload performed of a 9 box summary each tax period.

In terms of the electronic uploading, this is achieved by the use of approved bridging software. HMRC are in the process of approving software applications & have started to publish on their website a list of approved suppliers. All details of this & other MTD matters is on the following link:

The software suppliers of course will charge for this, which application is chosen is a matter of personal preference; but there will be a balance to strike between cost and over-engineering!

The bridging software takes the 9 box data from a summary head sheet in your VAT return spreadsheet workings. Those workings can still be maintained in a spreadsheet; there is no requirement to directly link the VAT return upload to an organisation’s finance package.

Of course, the education sector VAT accounting has its complications of apportionments, annual partial exemption adjustments, capital goods scheme adjustments, Lennartz accounting etc. These calculations are not covered by the MTD agenda, but the final entries for these adjustments need to be entered into the VAT workings as they have in the past.

HMRC have published guidance on the record keeping requirements (details as link above). The guidance outlines at some length as to who is required to comply. It is, however, simple if your organisation is VAT registered and above the VAT limit it must comply.

The HMRC guidance confirms that the summary 9 box VAT header sheet must be digitally linked to its source entries. Therefore, the organisation’s primary sales and purchase records must be digitally maintained. Records must be kept in this format to record sales and purchases at each tax rate and date and daily cash takings records maintained for retail sales such as catering, salons etc. HMRC will allow summary entry of data supplied from external agents such as catering managers.

HMRC would like digital linking of the primary sales and purchase records to the VAT return summary spreadsheet from April 1 2019. However, concessionally HMRC are giving a year from that date for organisations to build and bridge any links currently missing.

The MTD also makes comment on how organisations that may wish to provide, strictly on a “voluntary basis”, further information. At this stage it seems to be wishful thinking that anyone would provide more than is legally required.

As we visit Davies Mayers Tax Advisers clients this autumn and winter we will endeavour to provide further information on this important change.

What is Business and Non-business: Colchester & Wakefield Cases

HMRC consider that education sector organisations that provide services that are fully grant funded by Government bodies to be engaged in “non-business” activities. Primarily this is education of learners and apprentices who pay no tuition or training fees.

The Court of Appeal (in Wakefield College) and the VAT Tribunal (in Colchester Institute) have both un-reservedly upheld the point that where public education is free to the user this is a non-business activity.

For Wakefield, after a 10 year argument, it failed to get the Court of Appeal to agree that part fee paying “co-funded” students could count the same as fully grant funded learners. This was important to Wakefield as it wanted to get VAT zero-rating for a then new (built in 2008) building. Wakefield had to show the percentage of use for non-business qualifying purposes was over 95%. The fact over 10% of learners were part fee paying and therefore “business”, disqualified the building from full zero-rating.

In Colchester the complete opposite was argued. Colchester actually argued the fully grant funded education was a “business activity” in the belief this could help it no longer pay its Lennartz liability. All of Colchester’s arguments were dismissed, again maintaining the long-standing understanding of the non-business versus business situation.

We were concerned that Colchester’s case also endangered for all FE Colleges the ability to qualify for 5% reduced rating on electric and gas supplies and zero-rating on new buildings which did meet the 95% non-business criteria. In this respect we believe Colchester’s loss should be welcomed by all Colleges.

We look forward to discussing these issues and more with you over the coming months.


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