Motor Driving school/ negative commission/ vat?

Motor Driving school/ negative commission/ vat?

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Vat help line inform me standard rate vat applies to driving schools. Although I note education is an exempt supply.

Once a training package is chosen, the students pay the full fee in advance to the Driving school (DS) bank account. The DS allocates any one of a number of self-employed driving instructors to the student and transfers 90% of the fee to the chosen instructor who are not vat registered and hence the gross margin is 10%. DS has agreements with self-employed instructors and I am told that is quite normal for driving schools.

In reality a commission of 10% is received which should be applicable for the vat threshold test, however the 100% is applicable per the vat help line. This means the threshold will be reached much sooner and on a £1000 paid by student for a training course. £900 goes to the instructor. Gross margin is £100 and out put vat is £148.93. Which makes the whole model a nonsense.

I don’t know how other driving schools are structured and would appreciate any advice. Obviously it is my interest to structure it correctly as it potentially could be a good client for us.
SB

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By rkillington
27th Sep 2007 10:41

Looks as though someone didn't do their homework...
I go with Paul's comments and would add:

What do the agreements say about VAT?

If they are silent, that is a problem. If they refer to VAT it is to be hoped that they say the 90% is of the net amount, e.g. 90% of £1000 less VAT so about £765 is given to the Instructor. Even if the DS isn't registered paying attention to VAT is going to save having to renegotiate later.

What does the advertising say?

Is the advertising suggesting that its the DS that's providing the service? Does it refer to the DS acting as Agent?

Who would a learner think was providing the service to them?

If the learner thinks the DS is providing the service that will sway HMRC when they are considering the VAT treatment. There should be clear notice that the DS is acting as agent for the Instructors if that's the way it's to work.

Robert

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By theaardvark
27th Sep 2007 09:52

Not education
Most education is exempt only if provided by an "eligible body", which your Client will not be. Outside of this, education can be exempt if it is "private tuition", however this must be a subject ordinarily taught in a school or university. Tribunal rulings have stated that driving is not a subject ordinarily taught in a school or uni. It is not, therefore, exempt.

You proposed structure with your Client making a 10% commission could work. However, they must have a series of engagements in place that clearly states that your Client is acting as agent for the individual instructors, that the contractual relationship is between the customer and the instructor and that your Client only receives payment is his capacity as agent. All parties must be fully aware that this is the contractual relationship otherwise HMRC are likely to rule that your Client is acting as principal and liable to account for VAT on the full payment.

Regards

Paul Taylor
Senior VAT Consultant
Dains

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