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HMRC internal manual

VAT Education Manual

HM Revenue & Customs
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Group 6 Item 4 Closely related supplies: closely related goods and services sold to pupils: assisted instrument purchase schemes and laptop computers

You may be asked about the ‘VAT-free’ provision of musical instruments to pupils under an assisted instrument purchase scheme or AIPS, or of laptop computers under similar arrangements, and why this is limited to pupils at schools run by local authorities (LAs). Please also refer to VAT GPB- VAT Government and public bodies which expands on this issue.

Musical instruments are ordinarily subject to VAT. However, when they are supplied as part of musical tuition, the instrument assumes the same VAT treatment as the tuition. This is the case with any goods that are closely related to education, provided that both are supplied by the same school, college or university. In fee-paying establishments, the sale of goods that are closely related to the education taught is exempt from VAT. In the state sector, such goods are not provided by way of business if they are sold at no more than cost price; but, if sold at more than cost price, assume their normal liability for VAT.

Many local authorities operate an assisted instrument purchase scheme (AIPS). Under this, LAs sell musical instruments to the pupils receiving music tuition in their schools. Provided that it is at no more than cost price, the sale of an instrument by the LA is in these circumstances outside the scope of VAT, since it is not done by way of business. However, the LA can recover any VAT paid, under section 33, when it purchases the instrument.

The scope of AIPS varies according to the policies of the LA concerned. However, in all cases the pupil must receive some tuition on the instrument in an LA school. There is usually no requirement that the child must attend an LA school. For example, the child might be a member of a larger LA school orchestra, and receive some musical tuition through that orchestra.

Independent schools are not eligible for refunds of VAT under Section 33 of the VAT Act 1994. Consequently, the prices they charge for goods sold to their pupils may include the VAT originally borne by the school. Additionally, there is no relief from VAT for musical instruments purchased from other sources, such as retailers.

It is recognised that AIPS advantages children attending LA schools over children attending other schools. However, this is due to the fact that LAs, which are not normally engaged in business activities, are refunded much of the VAT they incur under section 33 of the VAT Act 1994. It is therefore very important that AIPS is administered with integrity, and that the rules are adhered to.

We do not expect LAs to hold stocks of musical instruments and we recognise that a pupil may wish to visit a musical instrument retailer to select the most appropriate instrument. However, thereafter it is important that:

  • the retailer sells that instrument to the LA (not to the pupil); and
  • the LA sells this instrument to the pupil (or the pupil’s parents or guardians).

Any case where the rules are not adhered to should be reported to the Education Unit of Expertise.