VAT partial exemption for private schools

The term “partial exemption” is used to describe a business that has both taxable income (which is VAT standard, zero or reduced rate) and VAT exempt income.

The school must apply the standard partial exemption method based on turnover, unless it successfully applies to HMRC for an alternative special method. 

The calculation involves determining taxable income as a percentage of total income, which includes both taxable and VAT-exempt income. However, grants, bursaries and donations are excluded. The resulting percentage is then rounded up to the next whole percentage point. For example, if taxable income is 81.1% of total income, the taxable rate will be 82%.  

As a simplification, this calculation can be carried forward from the previous year, rather than performed for each quarter, then amended when the annual adjustment is performed for the year ending March, April or May.

VAT on costs, on each purchase invoice, must be allocated to one of three “pots”, as follows:

1. Used exclusively for onward taxable sales. For example, classroom materials
2. Used exclusively for onward VAT exempt sales. For example, costs of a nursery or a holiday club
3. Everything else, termed residual input tax. Typically overhead costs such as energy, building repairs, audit fees, IT etc

The irrecoverable exempt input tax has two sources, all of pot B and the % of pot C.

We have extensive experience in performing partial exemption calculations, including the provision of practical advice and training. If you wish to discuss this in further detail, please get in touch with one of our Indirect Tax team members.