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VAT Government and Public Bodies

HM Revenue & Customs
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Local authority education services: voluntary aided schools: Annex B of guidance on section 33 recovery agreed with the Department for Education

For … go to … For … go to …
Introduction VATGPB7520 paragraphs 1 to 4 VATGPB7530
paragraph 5 VATGPB7540 paragraph 6 VATGPB7550
paragraph 7 VATGPB7560 Annex A VATGPB7570

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

Examples when VAT is recoverable by LA under section 33

Example Comments
1. Where GBs undertake revenue works and pay for works through the delegated budget. GB acts as LA’s agent (S49(5) SSFA).
2. Where GBs donate funding to LA which LA uses to meet expenditure for works for which LA is responsible. Provided the conditions in para 10.4 of Public Notice 701/30 and/or para 7.3 Public Notice 749 (also para 12.1.3 of V1-14 and para 12.3 of V1-07 Ch 21) are met, LA may recover VAT under section 33.
  As the public notices state, this route will not be open for funding which comes from GBs and is used by LA to fund works that are the responsibility of the GBs. This is because:
  * it will be difficult in most cases for the LA/GBs to argue that the LA can retain ownership of capital works in VA schools (GBs will usually own school buildings and LA will have to incur ongoing costs of upkeep which would normally fall to the GBs).
  * In these arrangements, including where the funding originates from DCSF, Scottish or Welsh Assembly Government, direct grant paid to GBs to fund 90%/85% of capital projects, any such funding paid by GBs to LAs to fund capital works should be treated as consideration for a supply to GB. In other words, the money is not donated because it obtains benefits for the GB.
3. If a private school fund (eg operated by the GB or PTA) donates monies to the LA (or delegated budget) and is used by the LA to pay for works, goods or services for the school, VAT is recoverable provided the conditions in para 7.3 of PN 749 (LA contracts for, pays for, retains ownership etc) are met (also see V1-14 para 12.1.6). For the reasons in first bullet in 2 above, the LA would be unable to use such donated funds to pay for capital works for which the GBs are responsible.
4. Where LAs or GBs receive donations from organisations such as PTAs, charities or commercial organisations to buy goods and services for the school. Goods and services must be for the benefit of the school and not the donor and, where received by GB, funds are paid in to delegated budget and not GB’s own private account used to meet its own obligations (i.e. must satisfy para 7.3 of PN 749).
5. If a LA decides to spend its own funds (excluding the delegated budget), by means of an order placed directly by the LA (i.e. not by the GB) with a supplier, then the VAT would be recoverable. This is so even if the expenditure is on work to the premises of a VA school for which the GB is responsible. When LA uses its own funds, VAT may be recovered under section 33 as described in PN 749 para 7.1 - i.e. LA must procure the goods or services and receive the supply.
6. PFI funding, including BSF PFI funding, awarded to LA. Any unitary charge from the PFI provider is regarded as revenue expenditure and as such is the LA’s responsibility.

Examples when VAT would not be recoverable by LA under section 33

Example Comments
1. Under no circumstances should any VAT be recovered by LA in respect of expenditure met from 90%/85% DfE, Scottish or Welsh Assembly funding (e.g. Devolved Formula Capital). This funding is awarded to pay for capital works for which the GB is responsible and therefore when it is spent, any VAT incurred is incurred by GB not LA. DfE, Scottish and Welsh Assembly Government funding is calculated to include irrecoverable VAT.
2. If remaining 10%/15% is met directly from GBs’ fund raising. This applies even where payment is met from the delegated budget (see comment). This also applies where, for example for cash flow reasons, GB spends delegated budget to pay for work which is the GB’s own responsibility, then subsequently top-up delegated budget by an equivalent amount using funds from the GB’s own resources e.g. rents, fund raising activities etc. In effect, this seems to simply amount to borrowing from the delegated budget. Clearly in this arrangement, the GB is not acting as LA’s agent when the delegated budget is spent. In effect, they are spending their own funding and VAT is therefore not recoverable by LA.
3. Where GB’s 10% liability is met using delegated budget funding. S49(6)(b) SSFA specifically excludes GBs from acting as LA’s agent when they use delegated budget to meet their own liabilities for capital works.
4. Where GB spends own private funds on revenue expenditure itself procuring the goods or services. i.e. not paid for from delegated budget or donated to the LA or delegated budget.
5. If GB pays funds to LA to carry out work for which GB is responsible. Funding is consideration for a supply from LA to GB and subject to VAT at normal rate (business activity) - VAT incurred by LA on making the supply is not recoverable under section 33 (but normal VAT business rules would apply).
6. LA donates funds to GB for capital works for which GB is responsible. Unless LA procures, receives and pays (para 7.1 of PN 749), then supply is not to LA. (Although under para 15.5 of PN 701/30 HMRC historically allowed recovery by LA, this has now been reviewed and revised and the correct position is now as set out in this guidance).
7. On expenditure paid for from income obtained by GB from other sources e.g. where charges are made for community services e.g. adult education, sporting facilities etc where money is owned by GB and cannot be paid into delegated budget.  
8. On expenditure paid for from funding awarded to GB by lottery, Sport England etc. Funding does not belong to LA. The GB, as the body awarded the funding, is the body responsible for carrying out the works. Therefore, to the extent that any money is passed to the LA, this may represent consideration for supplies by the LA to the GB to allow it to carry out its commitment in respect of the funding.
9. On expenditure from LA Co-ordinated VA Programme (LCVAP) funding. This funding originates from DCSF and is administered by LAs. However, it is intended to support capital projects which are the GB’s responsibility (see section on LCVAP in Blue Book).
10. Although paid via the LA, BSF funding for Design & Build or redevelopment of VA schools is awarded and belongs to the GB for these capital works for which the GB is responsible (exceptionally BSF grant is paid to meet 100% of GB’s liability - see Blue Book). For D&B or redevelopment works procured under BSF, the LA and GB will enter into a Development Agreement for the BSF works. Acting as principal, the LA will procure/project manage BSF work for all schools in its area. When complete, the LA will make a supply of the works to the GB, which will be subject to VAT unless the work can be zero rated. The LA will retain the school’s BSF funding as consideration for the supply of the works to the GB.

HMRC public notices and published guidance referred to above can be found on HMRC website: