Many academies have a choice to make about whether to register for VAT or to claim their VAT refunds from HMRC through the VAT 126 process, although any academies which make taxable supplies over the VAT registration threshold will be compulsorily required to register.
This choice may be different for an academy which is considering moving some of its activities into a subsidiary company. This may be done for corporate tax reasons or to ring fence risk within a separate entity.
Setting up a subsidiary can increase VAT costs, particularly where the activity which is to be transferred makes mainly exempt supplies for VAT, such as a sports centre or a nursery. For example, if the staff involved in the transferred entity are to remain employed by the academy, the recharge of their services will be a taxable supply which may take the academy over the VAT registration threshold. If this happens VAT will need to be charged on the salary recharge and it may not be fully recoverable by the subsidiary, creating a VAT cost which had not existed before.
The solution to this problem may be a VAT group registration. This is a single VAT registration which would include the Academy and its wholly owned or controlled subsidiary. All taxable supplies made by group members would be subject to VAT, but the advantage of a VAT group is that there is no need to charge VAT on supplies between group members, so the irrecoverable VAT cost on staff recharges would be removed.
The partial exemption and VAT recovery issues need to be considered in the specific circumstances of each Academy and direct tax and legal advice on the structure will also be required.
Jon Sparkes, a tax director with Bishop Fleming and with nearly 20 years' experience in advising charities and businesses on direct tax matters, has written an article on the tax issues of community enterprises and mutual…