International schools tax and vat issues

17 July 2017

Many independent schools are considering entering arrangements to benefit from the establishment of an international school in the middle or far east. A number of issues arise in respect of such arrangements and schools will usually take legal advice in respect of this new activity given charity law and the optimum legal structure.

Generally, intellectual property rights will be granted to an overseas body in return for royalties. The UK school will provide advisory, management and governance services and, for several legal, risk and tax reasons, these services will normally be provided through a wholly owned trading company of the school. It is important that the trading company is wholly owned by the school as it will be easier to make gift aid payments to the school.

The structure creates multiple tax and VAT considerations

From a direct tax perspective

The school should not bear any costs of the trading company and a simple cost sharing agreement should be put in place.

If it is necessary to provide working capital to the trading company direct tax and charity law issues will arise and documented arm’s length arrangements will need to be set up between the school and the trading company.

Once the trading company has been correctly established, it will be necessary to understand the position in respect of local taxes. It may well be the case that the royalty receipt is subject to a local withholding tax which will not be deductible in the UK. This will need to be factored in when considering the projected royalty income.

Whilst the transfer pricing rules will need to be considered, it is generally the case that schools and their trading companies will not need to make any transfer pricing adjustment, unless they are specifically directed to do so by HMRC.

From a VAT perspective

Providing the arrangements are correctly set up and a VAT registration has been put in place, retrospectively, if necessary, all VAT incurred on the creation of the arrangements should be recoverable in full. This is because the supply of professional services to persons who are located outside the EU is outside the scope of UK VAT but with a right of deduction on any attributable costs.

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