VAT Guidance for Independent Schools

Reduced rate VAT for Independent School energy contracts.

On a virtually daily basis, we encounter schools which have been given misleading advice with regards to VAT on energy bills, leading to possible penalties from HMRC. Often the advice is provided by ill-informed energy consultants seeking to claim a share of any reduced VAT liability, irrespective of the future potential liabilities they create.

This guidance note is intended to clarify an essentially straightforward piece of legislation. It is based upon a review commissioned by Powerful Allies and undertaken by leading Accountants, Bishop Fleming (copies available upon request).

VAT on energy supplies to Independent Schools

There are two levels of VAT applicable for electricity and gas supplies to Independent Schools and importantly these are applied at an individual meter level. For VAT purposes, it is not possible to amalgamate meters across an Estate

• For Commercial energy meters, VAT is levied at 20%, plus there is an additional charge called the Climate Change Levy (CCL).
• For very small or Domestic/Residential meters, VAT is levied at the reduced rate of 5%, and there is no Climate Change Levy (CCL).
• For Charitable Education providers, VAT is levied at the reduced rate of 5% but only where there is no charge for the service. Thus, for Independent Schools which charge for their service, this Charitable dispensation is not applicable.

VAT for Day Schools

• Where there is no boarding provision or any residential use on site, the above rules apply.
• VAT will be levied at 5% on very smaller meters only (suppliers automatically assess this and bill accordingly) and VAT will be levied at 20% across all other meters, plus the Climate Change Levy.
• Any encouragement from energy consultants to apply 5% VAT across the entire estate as a means of a) showing savings in their proposals or b) reducing VAT costs, exposes the school to HMRC penalties, and should be dismissed.

VAT for Boarding Schools

• Where a school provides Boarding or “relevant residential” premises, we strongly recommend schools apply for the reduced rate of VAT for those meters which supply the actual accommodation and associated facilities.
• With mixed use premises, an apportionment process can be applied; this should be “fair and reasonable”.
• In the event that more than 60% of energy usage for a given meter is deemed to be for Residential purposes, the reduced 5% rate of VAT is levied on 100% of consumption through that meter. So, for obvious reasons this threshold is crucial.
• The process involves a VAT Declaration signed by the school and sent to each supplier. The school is liable to HMRC for the accuracy of this Declaration; suppliers have no role in vetting Declarations, although they are encouraged to challenge improbable claims.
• The VAT Declaration can be back dated, and refunds are readily achievable from the current supplier. In practise, gaining refunds from previous suppliers is more problematic.
• The assessment of VAT is a subtle process but can yield significant savings when undertaken in a careful and forensic way. Powerful Allies has considerable experience in apportioning costs and minimising VAT liability within the agreed legal framework.