DfE loses £10.3m in unclaimed free school VAT refunds

The Department for Education has been left with a £10.3 million hole in its budget over a failure to secure VAT refunds for new free school sites.

New departmental accounts for 2021-22 reveal the millions in losses are a result of potential VAT refunds going unclaimed before HMRC’s deadline.

Trusts are able to reclaim the tax on non-business purchases from HMRC. The DfE said it bought several sites for free schools and paid the VAT itself, on the basis trusts would later claim and repay the department once schools opened.

But it has now formally recognised this will not happen in this year’s accounts, saying “several trusts have not reclaimed this acquisition VAT and therefore cannot repay the department”.

The claims for nine trusts’ free school sites are “no longer eligible as they are over the four-year limit set by HMRC”.

The trusts include some of England’s largest, Star Academies and the Harris Federation, with £4.1 million written off over the former and £1.4 million over the latter.

While the funds are not lost to the taxpayer and still likely to be spent on public services, they represent a missed opportunity for DfE spending on school and other budgets.

The DfE does not explicitly attribute blame, but appears to be implying responsibility lies with the trusts for the losses – or even HMRC for its deadline. The DfE also said it had contacted trusts involved to encourage them to claim.

Free school projects have faced delays

Yet many new free school plans have been plagued by construction and other delays, raising the possibility some trusts may have already been ineligible or had limited time when their schools eventually opened.

Responsibility for such delays could lie not with trusts themselves, but with the DfE, construction firms, local authorities or other stakeholders – or events beyond any party’s control.

Both Harris and Star have seen free schools delayed previously, though the report does not confirm which schools the unclaimed refunds relate to.

Five trusts have shut down

Refunds may also have gone unclaimed by trusts because they shut down – with five of the nine listed no longer running schools.

They include scandal-hit Perry Beeches Academy Trust. It was formally dissolved earlier this year after relinquishing all its schools in 2018.

The Department has now written off £1.1 million in VAT refunds it will not receive for an unspecified Perry Beeches free school site.

Another £500,000 of losses have been accepted by the DfE over the University Cathedral Free School, later renamed the University Church Free School. Its sponsor, the University of Chester Academies Trust, announced it would close for good for financial reasons in 2018.

But the Treasury agreed to directly provide the DfE with VAT funding for free school purchases from 2016, ending its reliance on trusts to make claims for subsequent deals.

Meanwhile accounts also reveal the DfE has written off £2.4 million in grant overpayments to students and providers under the Turing Scheme, which replaced the Erasmus scheme for overseas study. Another £3 million was paid out in interest charges for late payments.

The DfE and the open trusts affected have been approached for comment.