Local authority education services: voluntary aided schools: paragraphs 1 to 4 of guidance on section 33 recovery agreed with the Department for Education
HMRC Guidance for Local Authorities and Voluntary Aided Schools - VAT recovery under section 33 VAT Act 1994
1. Section 33 VAT Act 1994
S33 of VAT Act 1994 is a special refund scheme that allows specified bodies, including local authorities, to recover VAT incurred on their non-business activities. In order to be considered by HM Treasury for inclusion in s33, a body must:
- undertake a function ordinarily carried on by local government; and
- have the power to draw its funding directly from local taxation.
In all local authority maintained schools, the local authority has an obligation to provide free education for school children. This statutory requirement is a non-business activity.
2. Maintained schools and delegated budget
All maintained schools, including VA schools, receive recurrent funding from their local authority under arrangements set out in sections 45-53 of the School Standards and Framework Act 1998 (SSFA), which allows every maintained school to be financed by its local authority by means of a ‘budget share’. This funding is referred to as the delegated budget.
3. Governing bodies (GB) and VAT recovery
Under section 36(1) of SSFA, governing bodies of maintained schools are legal entities in their own right, and therefore separate from the local authority. Governing bodies are not bodies specified in s33 of the VAT Act 1994 and therefore VAT incurred by governing bodies in respect of their non-business activities may not be recovered under s33.
Under s49(5) of SSFA ‘any amount made available’ by a local authority to the governing body of a maintained school shall remain the property of the local authority until spent by the governing body. It shall then be taken to be spent by them as the local authority’s agent. This generally allows the local authority to recover VAT on expenditure made by the school from its delegated budget.
4. Voluntary Aided schools and GB responsibilities
However, in the case of VA schools, s 49(6) SSFA stipulates that the governing body does not act as the local authority’s agent when spending amounts from the delegated budget to meet expenses payable by the governing body in relation to work for which it is responsible. Consequently, VAT cannot be recovered by the local authority on any such expenditure made by the school unless the value falls under the de minimis limits – see Section 5 below.
In return for a continuing degree of autonomy over pupil admissions, hire of staff and contents of religious curriculum, governing bodies of VA schools retain responsibility for certain capital work. These responsibilities and definition of capital expenditure are contained in the following legislation:
- School Standards and Framework Act 1998 (SSFA);
- the Regulatory Reform (Voluntary Aided Schools Liabilities and Funding) (England) Order 2002 (RRO) (applies in England only);
- the Education and Inspections Act 2006; and
- the Capital Expenditure in respect of Voluntary Aided Schools (England) Regulations 2007 (applies in England only).
The SSFA (as amended by the RRO) makes the governing body of a VA school responsible for all capital expenditure in relation to school premises, with the exception of playing fields and related buildings on those fields for which the local authority is responsible. The Education and Inspections Act 2006 contains the current definition of capital expenditure (see para 5 for further details).
In England, the Department for Education may make grants to governing bodies of VA schools in order to help them meet these responsibilities (SSFA Sch 3 Para 5). In Scotland and Wales, the devolved authorities have similar responsibilities. (The situation in Northern Ireland differs in that the Department of Education and the Education and Skills Authority are responsible for the delivery of education.)
The Department for Education funds 90% of a governing body’s qualifying expenditure in England, while in Wales this remains at 85%. The Department for Education and the devolved education authorities in Scotland and Wales understand that VAT will not be recoverable by the governing body in respect of this expenditure and therefore their grant includes funds to cover the irrecoverable VAT costs. VA school governing bodies are expected to meet the remaining 10%/15% of costs from their own resources although Paragraph 8 of Schedule 3 SSFA allows local authorities to contribute to the governing body’s 10%/15% contribution, if they so wish.
|For …||go to …||For …||go to …|
|Paragraph 5 Capital and revenue definitions||VATGPB7540||Paragraph 6 VAT & expenditure||VATGPB7550|
|Paragraph 7 Insurance||VATGPB7560||Annex A Flowchart to determine VAT recovery on revenue and capital expenditure||VATGPB7570|
|Annex B Examples of when VAT is recoverable by local authorities under section 33||VATGPB7580|