As tax becomes a bigger risk, independent schools should ensure adequate processes are in place to manage this, advises Vikki Watts

The tax position of independent schools has changed significantly in recent times. What was once a fairly simple environment has become more complex, not just through the introduction of VAT on fees and the removal of business rates relief, but also because of the ways in which schools are needing to change their operations to adapt directly to the changes, and to meet shortfalls in budgets which arise as a result.

While much of the focus in recent months has been on the practical steps needed to adapt to the changes such as registering for VAT and establishing processes to manage this cost, along with the changes to pricing methodologies, there’s also a wider impact which schools should factor into overall tax governance in the longer term.

As tax becomes a bigger risk, schools should ensure that the processes in place to manage this are adequate to do so. This can involve a number of aspects, including ensuring that:

• There is a tax strategy in place which is directed by senior leadership and well understood throughout the organisation.
• There are appropriate skills available, either internally or externally, to support decision-making and implementation, and
• The process which supports the implementation of activities where there is a tax impact are fit for purpose.

While it is easy to see tax compliance as a burden, mistakes can be costly and investment in these areas can save significant sums in the longer term. On the other hand, getting tax right will enable the school to leverage opportunities quickly and efficiently, and can support the delivery of positive outcomes to the school as a whole.

Establish a tax strategy

While most schools will not have a formal obligation to have a tax strategy in place, it is best practice to ensure this is done.

Not only does this help to ensure that there are no surprises when it comes to tax filings, it also empowers finance teams and the wider organisation to make day-to-day decisions, knowing that the principles of making those decisions are well established. As a tax advisor, one of the challenges we often face is that tax is thought of late in any decision-making process, and many opportunities require decisions to be made quickly. By having a set of principles in place which can be applied when opportunities do arise, this will enable the decisions to be made more quickly and efficiently.

While keeping tax costs to a minimum will generally be a driver for the strategy, a good strategy will also consider the level of risk that the school is willing to take on to achieve this, how much complexity is acceptable to the organisation, and whether there is a priority for certain tax costs over uncertain tax risks.

By way of example, establishing a separate entity to deliver certain activities which reduces the tax cost my be a great idea on paper, but in practice the additional administration, accounting and filings will seem more appealing for a saving of thousands, but may seem onerous to save only a few hundred pounds.

Similarly, it may be preferable to adopt an approach which costs, say £5,000 in tax which can be budgeted on day one, as compared to a less certain position which means no upfront tax costs but where the level of uncertainty means that it could result in a tax cost of £50,000 at some later date.

While most schools will wish to establish a simple, low-risk strategy which results in a low tax cost, there are genuine differences in risk appetite which will mean that the way this strategy is implemented will differ by organisation. There are few right or wrong answers here, but considering the principles in advance both ensures a more efficient process when the decisions need to be made, often with short timelines, and reduces the risk of ineffective implementation.

Senior level engagement

The strategic direction should be set at a senior level within the organisation. These decisions can make a significant impact on the financial viability of the organisation and should be given proper attention.

This can also support the school in demonstrating that appropriate oversight has been given if things do go wrong. HMRC will generally ask about how decisions were made, and by whom, in the event of an enquiry or disclosure. Being able to show that the right processes were in place to get things right, and that those in charge were part of that process, can make a huge difference in demonstrating appropriate behaviour. This in turn can lead to lower levels of penalties if anything does go wrong.

Ensure you have the right skills

Tax is a complex area. As the complexity of the school’s tax position increases, so should the skills of the staff managing it. There are a huge range of ways this can be achieved, from training existing staff, recruiting additional resource, or outsourcing some or all of the tax function. However this is done, ensuring that the right staff are making the day-to-day decisions, engaging in contracts, and preparing filings for HMRC is critical. Even the best tax strategy will fail if it is not implemented appropriately.

In particular, the position on VAT is still evolving, as HMRC updates guidance, clarifies positions and, in the fullness of time, as legal cases are concluded. Ensuring that the right pathways are in place to keep up to date with this is likely to be important. There are a wealth of resources available, so engaging with advisors, signing up for updates, and maintaining networks can all support this.

Ongoing monitoring and learning

All governance processes must evolve with the organisations they support. Tax is no different and what is appropriate today may not be so in six months, one year or five years’ time. Many of the errors that I have seen in my time working in tax have arisen because a perfectly sensible process has failed to keep up with the activities of the organisation. Ongoing monitoring and reassessment reduces the risk of this happening.

A good governance process should consider when it needs to be updated. This might be as a result of changes to tax law, but also as a result of changes within the organisation. New activities, sources of income and significant transactions, should all trigger some element of review.

The changes to tax for schools creates many challenges, but they also create an opportunity to revisit the basis on which they operate and to identify opportunities to deliver more efficiently. Now is a time to step back and consider both the risks and opportunities of the situation, and to make decisions appropriate for the school to operate successfully in future.

Vikki Watts is head of charity and social enterprise tax at law firm Bates Wells

Vikki Watts