Getting to Grips With VAT

Confused by VAT? Tamara Habberley explains what nursery owners need to know…

Owning and operating a nursery business is very often a stressful task, as managers and staff have a number of duties and responsibilities that need to be juggled on any given day. The financial aspect of running this type of enterprise is particularly difficult to navigate, especially for those with limited knowledge in this complex arena.

As with other types of business, nurseries can find VAT complex to work out, and are often unsure if they should register and pay VAT, and if it is possible for them to recover VAT on their costs.

This is nothing new – I have dealt with hundreds of businesses across almost all sectors that simply cannot decipher the guidance available.

Here, we will put the spotlight on VAT for nursery businesses, providing all the information you need to know about this levy, while helping you to understand the intricacies and implications involved.

Exempt supplies

Nursery businesses make predominantly VAT-exempt supplies, as the provision of nursery services falls into the exemption for childcare – which means no VAT is charged, nor is it reclaimable, on any expenditure relating to that provision. This makes a nursery business different to other suppliers in the education sector, as the nursery does not have to be what is called ‘an eligible body’ in order to make exempt supplies.

Whilst this is great in terms of giving certainty to the VAT treatment of the nursery’s core income from the provision of childcare, it also means that opportunities to change the nature of the supply to being VATable in order to recover VAT on costs are generally not available.

Businesses solely supplying exempt services cannot register for VAT. However, if your nursery makes some VATable supplies in addition to exempt childcare, it may be able to VAT register, but you would be unlikely to be able to claim back all input VAT on your costs.

Registering for VAT

If you are looking to create other supplies that are taxable, such as other non-childcare-related activities, these would be VATable and would permit registration for VAT even if the VATable turnover is below the compulsory VAT registration threshold (currently £85,000 VATable sales in a 12-month period). The business would then need to carry out what are called partial exemption calculations to calculate the amount of VAT on costs relating directly to its VATable supplies and the percentage of general overheads to be reclaimed that relate to its VATable supplies. Costs that relate directly or indirectly to exempt supplies will be irrecoverable subject to certain limits that most nursery businesses will almost invariably exceed.

Unfortunately, this would require a lot of effort, with often minimal reward, as most nursery businesses would have a very small percentage of VATable supplies, such as income from the sale of books, compared to the income from nursery fees and therefore be able to claim a very small percentage of VAT on their costs. Other examples of non childcare-related VATable activities include the sale of food, drink or posters.

This makes it important for a nursery business to identify the rate of VAT applicable on its costs to ensure that it is not charged VAT that it cannot claim back from HMRC wherever possible.

VAT & costs

If your business is fully exempt, I would suggest that scrutinising the intended VAT treatment of costs in advance of their being incurred can save the business money and increase its profit.

For example, a tenant-maintaining lease will mean that the nursery will incur VAT on maintenance costs whereas a landlord-maintaining lease will avoid future VAT costs on repairs (provided that the lease is not charged plus VAT!). Landlords can choose to treat commercial properties as VATable and charge rent on their sale or lease by a process called opting to tax, or decide to keep them VAT exempt (sales of commercial properties three years old or under are always VATable).

It is always sensible for a nursery business that is buying or entering into a lease to check that the vendor or landlord has not opted, and does not intend to opt, to tax, and that the sale or lease agreement prevents them from doing so. This will mean that the sale or lease will be VAT-free, saving the nursery business 20% on the cost of its premises.

Recharges for staff supplied between nursery businesses are plus VAT; this can be avoided by the staff being on joint employment contracts.

In some cases it can be worth nursery and childcare businesses that have been set up to provide childcare for employees of a related business to consider forming a VAT group with it to enable the VAT recovery to be based on the group’s VATable to total income.

Overall, there are very few ways in which nursery businesses can capitalise on VAT as other businesses can, which is a source of great frustration. However, speaking to a specialist can help you to ensure that you are doing everything you need to be compliant with HMRC regulations and possible identify VAT savings.

How vat works

You can only charge VAT if your business is registered for VAT. VAT is charged on things like…

● business sales, for example, when you sell goods and services;

● hiring or loaning goods to someone;

● selling business assets;

● commission;

● items sold to staff, for example, canteen meals;

● business goods used for personal reasons; and

● ‘non-sales’ like bartering, partexchange and gifts.

These are known as ‘taxable supplies’ (there are different rules for charities).

Your responsibilities

VAT-registered businesses…

● must charge VAT on their goods or services, and

● may reclaim any VAT they’ve paid on business-related goods or services.

If you’re a VAT-registered business you must report to HMRC the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return, which is usually due every three months.
Source: gov.uk/vat-businesses

Tamara trained as an artist and ran her own small manufacturing business before joining HMRC as a VAT inspector in 1991. She entered the ‘real’ business world as a VAT advisor in 1998, and joined The VAT People in 2008. This wealth of experience allows Tamara to see VAT issues from both sides of the fence, which is useful when negotiating with HMRC as well as bringing an ability to find creative and workable solutions to VAT issues. Visit thevatpeople.co.uk