Chartered accountants Clement Keys have welcomed a new VAT ruling which will enable Academy status schools to recover VAT on their non-business activities, but say robust accounting systems will be essential since failure to comply with the rules could land Academies with a stiff penalty.

Director of VAT Services Steven Simmonds says an extension to the Section 33 Value Added Tax Act 1994, which comes into effect on 1 April 2011, will put Academies on a similar footing to schools maintained by local authorities, although they will not be able to recover all the VAT they incur.

Under the new Section 33B Academies which are not registered for VAT will be entitled to recover the VAT incurred on their non-business activities which, in this context, includes the provision of free education. 

If an Academy's educational activities are wholly funded via the Education Act 1996 or Academies Act 2010 and it does not have any business activities, it can reclaim the VAT on purchases and overheads, including property costs, direct from HM Revenue & Customs (HMRC).

However, Mr Simmonds says the position is far more complicated where an Academy which is not VAT registered accepts a mixture of fee paying and free place pupils. In this instance the Section 33b refund scheme will only apply to the fee-free places, so the Academy will need to identify eligible costs and operate some form of apportionment. This calculation will become even more complicated if the Academy is also receiving taxable income (under the VAT registration limit) on the sale of goods and catering activities, for example.

Academies that are VAT registered will file their returns in the usual way, but under the new rules will be permitted to reclaim VAT on both their taxable business and non-business activities.  

"Whether an Academy purchases bookkeeping and accountancy services from the Local Authority or carries out these functions 'in-house', it will need to exercise considerable care to ensure that it is correctly identifying and allocating the VAT incurred to its taxable, non-business and exempt business activities," adds Mr Simmonds.

"It will also need to ensure that, where VAT cannot be allocated directly to a particular activity, such as overhead costs, it carries out the appropriate business/non-business/partial exemption calculations before trying to recover any VAT."

Failure to comply with the new regulations which leads to a VAT underpayment could result in quite draconian penalties. HMRC can levy a minimum of 15% of the VAT over-claimed or under-declared for careless errors, while the penalty rises to 100% for errors considered to be deliberate or concealed.

Clement Keys advises that Academy status schools should ensure their accounting procedures are robust enough to deal with the requirements of VAT record keeping, and that whether they claim a VAT refund via Section 33B or by registering for VAT they take care to recover the correct amount.