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HMRC internal manual

Company Taxation Manual

Particular bodies: local authorities: LEAs, schools and colleges

Local education authorities (LEAs)

LEAs are the bodies responsible for the local administration of state sector education services in England, Wales and Scotland. Education and library boards are the equivalent bodies in Northern Ireland.  Both are within the definition of local authority for tax purposes.

Schools

When a local authority controls a school (or college or polytechnic) its income is covered by the local authorities’ exemption (see CTM80455).

Under the Schools Standards and Framework Act 1998 there are three categories of mainstream maintained school:

  • community,
  • foundation,
  • voluntary (divided into aided and controlled).

Recent years have also seen the introduction of academy schools and free schools

Community and foundation schools replaced the previous categories of county, special agreement and grant maintained. Schools in all three categories have much in common and all work closely with the LEA and receive most of their funding from the LEA. However, only community schools are controlled by the local authority and therefore covered by the authority’s own exemption.

Foundation, voluntary, academy and free schools are outside the control of local authorities and are not therefore covered by the exemption. Such schools are, however, charities within the meaning of FA10/SCH6/PARA1 (and briefly before that CTA10/S467) and will be entitled to the exemptions in CTA10/PART11/CHAPTER3. Any claim for charitable exemption or evidence that a taxable source of income or a chargeable gain has arisen should be submitted to HMRC Charities with a copy of the latest accounts (if available).  Do not ask for a copy of the instrument creating the body.

School funds

The Education Reform Act 1988 set up the local management of schools scheme for schools which continue to be controlled by LEAs. This gives school-governing bodies a limited degree of financial independence and discretion through what amounts to a form of delegated budgeting.  Individual schools may open bank accounts under these arrangements and receive interest. HMRC takes the view that the funds in local management of schools bank accounts remain in the beneficial ownership of LEAs and any interest received is therefore exempt under their exemption. Accordingly interest should be credited to these bank accounts without IT being deducted (CTM40880).

Many schools will also hold accounts with other items, reflecting for example funds collected for a school trip, donations raised to buy an expensive piece of equipment and so forth. Generally such funds are held on charitable trusts and the income is exempt.  But if there is any doubt about this, or if repayment is claimed, submit the file to HMRC Charities.

It is common for schools to be involved in fund raising operations through parent teacher associations and income will normally fall within the charitable exemption. On the other hand where it appears that governing bodies of local authority schools are engaging in adventurous or entrepreneurial fund raising schemes themselves, or have sold off some or all of the school premises, and significant amounts of tax could arise on the profits, establish the facts and seek advice from CTIS (Technical) before seeking liability to tax. 

Colleges

Further education corporations are bodies corporate set up under the Further and Higher Education Act 1992 to take over the running of institutions such as colleges of further education. The kinds of establishment covered by this category are:

  • general further education colleges
  • sixth form colleges
  • voluntary aided sixth form colleges
  • voluntary controlled sixth form colleges
  • tertiary colleges
  • agriculture and horticulture colleges
  • art and design colleges
  • designated colleges (other than voluntary aided sixth form colleges).

Higher education corporations are bodies corporate set up under the Education Reform Act 1988, which have taken over the running of polytechnics and colleges of higher education. This status was not affected by the renaming of polytechnics as universities.

Further and higher education corporations are charities.  Submit any case where a corporation claims to be a charity to HMRC Charities. Do not ask for a copy of the instrument creating the body.