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HMRC internal manual

VAT Government and Public Bodies

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Local authority education services: voluntary aided schools: paragraph 7 of guidance on section 33 recovery agreed with the Department for Education

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Introduction VATGPB7520 paragraphs 1 to 4 VATGPB7530
paragraph 5 VATGPB7540 paragraph 6 VATGPB7550

HMRC Guidance for Local Authorities (LA) and Voluntary Aided (VA) Schools - VAT recovery under section 33 VAT Act 1994 (continued)

7. Insurance arrangements for VA schools

Whilst HMRC can advise on the VAT consequences of arrangements, they are unable to give any advice regarding who is responsible for insuring school premises and property. DfE advise that, although they expect the school premises to be insured, the actual detail of what to insure is for the individual parties to determine. In that context the school may need to seek advice from DfE, their LAs, especially in relation to funding for premiums and access to LA schemes, and from their Dioceses or other trustees (the ultimate owners of the buildings).

A) Responsibility for funding of insurance premiums

The various Education Acts described above provide that, in the case of a VA school, although a LA’s statutory duty to “maintain” the school includes the “duty of defraying all the expenses of maintaining it”, this duty does not extend to certain capital expenditure, for which statutory responsibility is laid to GBs.

The authority’s duty to “maintain” in respect of all schools extends to the funding of premises insurance premiums as this is not “capital expenditure”. Funding of premiums may be done in many different ways at the discretion of the authority, but must not disadvantage VA schools, which are entitled to equity with non-VA schools. In other words, where insurance is taken out, the LA is obliged to provide sufficient funds from its revenue budget (usually Dedicated Schools Grant) to each VA school, to enable the school to meet all its insurance premium costs (including any premiums payable to the diocese). If they are not allowed access to LA-managed insurance schemes, then there must be compensating recompense in their revenue funding so that they can buy into another scheme. In this respect, ownership of buildings is not a consideration. LAs insure Foundation schools (who own the buildings) and VA schools should be treated in the same way as those and community schools.

VA schools should be treated in the same way as other maintained schools in relation to providing for any revenue premises losses (currently below the de minimis level of £2000 - see above) i.e. those for which the authority is responsible.

B) Premises Insurance 

DfE advise that for premises insurance, ideally cover should be provided through a single insurance policy entered into by the school governors and identifying all parties with an insurable interest, together with their respective level of risk and responsibility for the insurance premiums (the LA will be responsible for certain expenditure, as set out above).

A VA school GB would be responsible for the financial cost, in the event of damage or loss requiring capital expenditure at a VA school. As with other capital expenditure, DCSF agree to fund 90% of replacement costs via capital grant, leaving the remaining 10% of costs to be met from the GB’s own resources. In order to cover this liability, GBs should arrange insurance cover for their 10% liability (typically through the church diocese or its equivalent) for the benefit of the GB and the trustees.

However, although DCSF will continue to meet their commitment to 90% capital costs, they advise that there is no contingency reserve from which this 90% funding can be drawn down. The 90% funding must therefore be met from existing funding streams (either the schools’ own funds or the programme allocated through LAs, usually the Devolved Capital Formula or Local Authority Co-ordinated Voluntary Aided Programme (LCVAP). This has led to unplanned reprioritisation where a major incident at a VA school could see such funding used in an emergency and thus diverted from other VA school planned projects.

In light of this, in order to provide more certainty for all VA schools and so that VA school capital programmes are not disrupted by unplanned emergency calls, DCSF now advise VA schools to consider some form of 100% insurance, i.e. the full reinstatement value of the buildings, either through private providers or through a scheme operated by the LA (buy back). VA schools may also take insurance cover for the costs falling upon school governors for the hire of necessary temporary accommodation while insured damage is being repaired or replaced.

C) VAT Recovery 

As regards VAT recovery on any capital costs as a result of an insurance claim, the normal rules as set out above will apply. The responsibility for capital expenditure rests with the GB and any supply of building works falling within this definition will therefore be a supply made to the GB, who will be unable to recover the VAT charged on those works. Therefore, when establishing the insurance policy and its value, the insurer should be made aware that any VAT incurred in respect of such works at VA schools is irrecoverable and the premium should therefore reflect that. DfE have confirmed this view and recognise that this will result in increased premiums for VA schools.

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Annex A VATGPB7570 Annex B VATGPB7580