VAT as an educational business (nursery school)

[JDX_John]

My wife is in the process of setting up a woodland nursery school in NE England, and we had assumed the best route would be a Ltd company. Projections show we'd exceed the VAT turnover threshold with equivalent to 10-12 children full-time so my initial assumption had been "let's VAT register, because we will incur tens of thousands of pounds of VAT-inclusive setup costs" - meaning we could reclaim anything up to £10k VAT back.

However a trainee accountant friend warns us that education businesses are not VAT-rated. He said there is a distinction between zero-rated and exempt which is where I got lost, and wondered if anyone here can advise on some basics (we'll use an accountant don't worry)?

Ideas like holding/consultancy companies were mooted but I'm not sure how morally or legally grey that is... or if there's a nicer workaround. It seems a bit unintuitive that by making education non-VAT-able, companies end up worse off not being able to reclaim VAT, but our friend thought that's just how it works.

I then got thinking about whether the classic Ltd company is not the best entity in the first place. So any thoughts on either aspect are welcome - as are any questions. Especially from those who work in this area or are knowledgeable about it.

Thanks.

 

[Scalloway]

From here

https://www.gov.uk/hmrc-internal-manuals/vat-education-manual/vatedu36900

The provision of a day-nursery is a business activity. If the provider is registered with OFSTED, which is most likely as there are few exemptions from registration, then the supplies are an exempt supply of welfare services, as they are being provided in a state-regulated institution (VAT Act 1994, Schedule 9, Group 7, Item 9 refers). Otherwise, the supplies will normally be standard-rated.

My off the cuff recommendation would be that one company owns the facility, is VAT registered and charges rent plus VAT to the second company that actually runs the nursery.

 

[JDX_John]

My off the cuff recommendation would be that one company owns the facility, is VAT registered and charges rent plus VAT to the second company that actually runs the nursery.

Thanks. I wasn't sure if this is a bit dodgy... or is a typical way such businesses would work. If the same person owns both businesses, or I own one and my wife the other, it feels a bit artificial'

That said, the facility could well be used for another purpose should things go badly or the nursery moves site (it's a log cabin in the woods) which makes it seem less so. Or even if we wanted to have the option to sell the business, and it is on land we own, we might want to keep the building separate.

 

[lesvatadvice]

Scalloway is correct on the liability issue.
But do be careful if you rent the premises from an associated company. Anti-avoidance legislation will probably prevent the landlord from Opting to Tax.

 

[paulears]

I understood that VAT was always split - educational services being the exempt part, but the non-educational side treated normally. When I did work for one of the exam boards, the fees for me doing things like examining and writing new courses were exempt from VAT, but writing material for their publishing division had VAT content. Schools and colleges claim VAT back for buying computers for the offices and other purchases of that type, and they charge VAT on some of their leisure and business courses that don't result in proper qualifications. Their training restaurants charge VAT. How exactly they manage to decide which is in and which is out I have no idea.

Some of the types of business that are not exempt are a bit odd, but most make sense

• printers;
• graphic designers;
• typesetters;
• secretarial;
• advertising;
• promotional services; and
• public relations (PR) agents.

 

[lesvatadvice]

Where there is a single supply, I would expect the exempt element to predominate over other elements of the supply. The exact outcome will depend on the specific arrangements of the supplies being made. I have seen instances where HMRC have successfully argued that there is a single exempt supply of education. In put tax deduction is therefore lost.

 

[JDX_John]

Interesting. Our single biggest expense will be the building we want - ballpark £30k. Also professional fees for surveys and so on are a few £thousand and of course all the actual resources but those are nearly all wholly for education provision.
So in initial set-up there is somewhere between £5-10k VAT which we had initially and perhaps naively assumed we'd get back. If we cannot, that's a quite a big cost so it seems worth looking into options we wouldn't normally bother.

I'm going to talk to an expert but input is always welcome.