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BSF and the VAT Burden for Local Authorities

For the past year, the CIPFA VAT Committee have been trying to resolve some VAT issues around the Building Schools for the Future Programme and particularly Voluntary Aided schools and academies. During these attempts, members of the Committee met with reps from DCSF, PfS and HMRC. While the outcome is still a little unclear, those LAs which are likely to be affected may wish to read a brief summary of what one committee member thinks the position is so far – we understand that some authorities could be facing VAT burdens of up to £40m on their BSF programme.

Full minutes are available online from TISonline – see at: http://www.tisonline.net or read on for the summary.

While it is still a little unclear as to where this issue has got to and who is doing what to resolve it, particularly regarding VA schools, this summary represents a view as to 'where we're at' on BSF and VA schools.

The issue with VA schools within BSF remains intractable and may require political intervention. If procured under PFI, there are no problems as the unitary charge is a revenue expense and the LA can thus fully recover the VAT thereon. If procured as a conventional design and build, DCSF/PfS remain adamant that the LA acts as agent of the governors when undertaking such capital works at a VA school. Whilst the LA can recover VAT incurred on commissioning such works, it then makes on onward supply of premises to the governors. Consequently, unless the premises can be zero-rated, there is 'sticking' VAT which will fall to be met by the LA given that no additional funding is available.

In this respect, HMRC are working with DCSF/PfS to try and maximise eligibility to zero-rating, ie that 'business use' is less than 10%, using a pragmatic methodology other than that prescribed in Notice 708 (floor area). One solution might be to use the partial exemption 'simplification methodology' agreed by HMRC, taking VAT-exempt use as broadly equivalent to 'business' use and which is generally negligible (providing the VA school includes no additional externally funded community facilities). Effectively this approach ignores community use altogether on the grounds that BSF is intended to produce new schools for the delivery of statutory education. On the other hand though, there is the clear political objective that BSF schools should be at the centre of the community. HMRC are now considering this but, as the 10% de-minimis is merely a concession outwith the law, there may be only limited scope to ‘stretch’ the rules.

Remember, in any case that even if this aspect is resolved, zero-rating only applies to new build and so does not address refurbishments, ie if the BSF works at the VA school fall short of being an entirely new build but rather represent the refurbishment or renovation of existing premises, there can never be any eligibility to zero-rating. As such, the VAT incurred on the works by the LA will be a 'sticking' cost.

Furthermore, remember that even with new build, zero-rating only applies to construction work and not to the provision of fixtures and fittings or professional fees, etc. Again there is likely to be 'sticking' VAT therefore.

The key to this is DCSF/PfS stance that capital funding for VA schools can only be given to the governors, even though it might form part of the block funding under BSF (it is argued that by applying the formulaic calculation governing BSF funding, it should be possible to identify that element awarded to cover works at VA schools, especially as all DCSF VA school funding is now encompassed within BSF).

No resolution to this issue was identified and indeed no real resolution was felt to be possible without political intervention at the highest level, something some local authorities may now be considering.

For completeness, the VAT issue with academies within BSF seems to be largely resolved. If procured under PFI, the LA can fully recover the VAT incurred on the unitary charge and, whilst onward charges levied on the academy by the LA will be liable to VAT which the academy cannot recover, DCSF accept this and include an amount towards such irrecoverable VAT in academies’ funding. If procured as a conventional design and build and constructed on the LA’s own land, the LA can fully recover the VAT incurred, with the premises then leased at a peppercorn to the academy.

The only remaining issue is whether the academy sponsor might seek to provide additional funding, eg towards additional or enhanced facilities, which would breach the peppercorn. DCSF/PfS maintain such capital contributions are not ‘permitted’ but this is only guidance with no explicit legal prohibition. If such contributions are received, therefore, they amount to a lease premium with the lease of the academy becoming VAT-exempt with partial exemption implications. Of course, this is not a problem providing the proposed ‘relaxations’ to the partial exemption regime are implemented and maintained."

The March Budget – implications for Education

In his budget speech on 12 March, the Chancellor announced an investment of £200m the accelerate raising standards in weak schools and that failing schools (defined as schools currently failing to meet the targets that at least 30 per cent of pupils should leave with five GCSEs in the A*-C band, including English and maths) face a revised 2011 deadline – brought forward by 12 months from 2012.

The Chancellor also announced an extra £10 million spending on science in schools as part of a package of measures designed to improve schoolchildren’s skills. The aim is “to give every science teacher in secondary and further education access to high-quality professional development to help improve their teaching.” The initiative is linked to the National Science Learning Centre, on the back of a coalition between individual pharmaceutical companies, the Government and the Wellcome Trust, all of which are to make financial contributions amounting, with the Government’s £10m, to a £30m “enthuse science fund” in total.

Also on Budget Day, a report was released showing the breakdown, by department, of progress towards the 2004 Spending Review efficiency targets reported to end December 2007 and announced in Budget 2008. For Education and Skills, the report shows efficiency gains delivered for Education and Skills of £3380m as against the target of £4,350m for 2007-08. Net reductions in civil service posts in Education and Skills amounted to 2058.

This report can be downloaded from the Treasury website at: http://www.hm-treasury.gov.uk/media/B/8/bud08_efficiency_216.pdf.

The Government’s report Ending child poverty: everybody's business sets out the next steps, including the measures announced in Budget 2008, that will make further significant progress to halving child poverty by 2010. The document also sets out the Governments vision for a renewed drive on child poverty for the next decade including a number of areas of further work and approaches the Government will pilot that will help develop the strategy for 2020.

This report can also be downloaded from the Treasury website at: http://www.hm-treasury.gov.uk/media/3/F/bud08_childpoverty_1310.pdf.

CSR 2007: the implications for Education funding

The Chancellor’s October announcement on the pre-budget report and Comprehensive Spending Review 2007 confirmed the expectation that spending on education would increase at lower rates than it has done in recent years. However, those lower rates have turned out to be slightly higher than many had expected. In percentage terms, spending on education is set to rise by only 2.8% a year over the three years of the CSR period – the rate of increase had been widely predicted at 2.5%. The 2.8% compares with, for example, some 7.5% pa from 2000 to 2003 and with forecast GDP growth of 2-2.5% for 2008 and 2.5 - 3%. The chancellor states in his report that per-pupil funding in maintained schools will rise by “almost 20 per cent in cash terms (10 per cent in real terms)” from £5,550 in 2007-08 to over £6,600 by 2010-11.

Of the announced amounts, some £250m is additional money aimed at helping ensure that that “all children at school are ready to learn and able to benefit from truly personalised services and support”.

And on the capital side, the chancellor announced details of the expected primary school building programme. An additional £200 m is intended to accelerate the primary capital programme and “newly build or entirely refurbish” an additional 75 schools by 2010-11. Together with the already announced funding of £550 million available this should allow at least one school to be newly built in every authority by 2010-11.

It should be noted that the additional money above is accompanied by efficiency reforms intended to realise annual net cash-releasing savings of £4.5bn by 2010. This figure covers the whole of DCSF spending (not just schools and local authorities) and includes estimates savings of £500m from the rollout of schools capital initiatives. Local authorities will need to adopt new strategies of efficiency and value for money if there are to meet their share of these savings and the momentum of improvement already built up over several years is to be maintained while the rate of spending growth slows.

Turning to financial inclusion, the chancellor also announced a £11.5m package of support for schools to teach children financial skills.

Pre-budget report - Implications for Education Finance

The Chancellor's pre-budget report on 6th December included some early indications for the forthcoming Comprehensive Spending Review 2007 and in particular, some early indications of additional capital and revenue funding for Education during the CSR period 2007-2011. Learn more

Education - What's in the budget?

Click here for a round up of the main implications of the Budget delivered on 22 March 2006.