Be prepared

VAT

The introduction of VAT on fees from 1 January 2025 presents a substantial new risk for auditors to consider within their engagements this year. Auditors will be keen to understand how your school has implemented the changes, and key questions are likely to include:

• Has your school correctly registered for VAT?
• Does your school have adequate systems and processes for capturing transactions requiring inclusion on the VAT return?
• Has your school correctly identified all income streams incurring VAT and applied the correct rate of VAT?
• Has the school correctly captured and classified all expenditure between recoverable, non-recoverable and partially recoverable for inclusion on the VAT return?
• Timing/cut-off - Are all relevant transactions arising in the period captured within the correct VAT return?
• Are VAT returns being submitted and paid on a timely basis?
• Is VAT correctly charged on any fees in advance received on or after 29 July 2024?
• Has any VAT reclaimed under the capital goods scheme been correctly accounted for in the financial statements? Further guidance to assist schools on accounting for these transactions is available here.

This will create inevitable additional work for the auditor. You should discuss this with them well ahead of the audit to understand what their approach will be to testing, as well as what additional information you will be required to provide.

Documenting the changes you have introduced to systems and controls to accurately capture VAT transactions for inclusion on the VAT return will be helpful to the auditor, allowing them to focus on the areas which are new and not previously understood. Likewise, summarising the advice you have taken in the period and what you have concluded regarding the VAT treatment for individual income streams and costs will provide clarity. This will assist with identifying potential issues early, which means they can be resolved ahead of the audit.

Going concern

We expect that going concern   will be a more significant area of focus for many schools this year following the impact of VAT on fees, rising national insurance, loss of charitable reliefs and continuing pressure on the cost of living.

It’s no longer viable to simply consider the next twelve months. Instead, Governors will need to ensure they review the long-term plan for the school, considering management’s assessment of future cash flows, forecasts, risk appetite and scenario plans.

For independent schools, cash remains key and understanding the available working capital is paramount. Assessing money coming in from fees and other income sources vs required investment for the school year, form the basis of your cashflow forecasts. Governors should consider whether the period covered is sufficient and how different scenarios and assumptions may impact the calculations.

When evaluating the data presented by management on the assessment of your school’s financials, we recommend keeping the following front of mind:

• Is the period covered sufficient? Do you need information beyond the next twelve months?
• Are you comfortable with the opening cash balances?
• Is the split between restricted and unrestricted funds clear? 
• Do you have any loans? What are the covenants on these? Are they being met, and when are they due for repayment or renewal?
• Does your predicted year-end cash position tie in with forecasts?
• Do the forecasts support different future scenarios, and are they mapped to your agreed risk appetite?
• Have different presented scenarios been adequately stress-tested? Do these scenarios map back to your risk register?

Your auditor will want to understand all of this, management must prepare an assessment which summarises the key challenges facing the school and their impact on forecasts and projections. Auditors will challenge key assumptions, including pupil numbers, debtor recovery, inflationary increases and timing of cash flows, so you should consider sensitising budgets and forecasts around these and other critical variables to understand what a reasonable worst case looks like. You can then determine available headroom on the cash position and document any mitigating actions required to ensure the school has sufficient working capital over the life of your forecast. Where borrowing is in place, it’s also essential that your going concern assessment considers any lending covenants to determine if these are still met under the conditions set out in your forecasts.

Where uncertainties arise over the ability to continue as a going concern, speak to your auditor early so they can consider what additional work is required and provide guidance on suggested disclosures within the financial statements.

Check out our insight here for a fuller discussion on considerations around going concern.

Other considerations for an efficient audit

While the matters set out above will be essential to completing audits in 2025, there are other areas of good practice which are worth highlighting to ensure a smooth and efficient audit.

Here are our top four recommendations:

1. Review past audits
   
   • Conduct a debrief for the previous audit, with your teams and the auditor to identify successes and areas for improvement.
   • Review previous audit reports to understand past findings and recommendations to ensure any issues are addressed. This will help avoid repeating the same mistakes.
2. Stakeholder communication
   • Establish key reporting deadlines with Governors and develop a detailed audit timetable with key milestones to help track progress.
   • Define expectations with the Board and key committees surrounding the form and content of the annual report, so any required changes can be actioned early. Much of the preparation can be brought forward as most activity is delivered throughout the year, so structure and content can easily be determined in advance. Placeholders for the latest exam results and financial results can be added at a later date.
   • Inform all teams involved in the audit process across the school (including those outside of the immediate finance function) of their roles and responsibilities in the audit process.
   • Ensure individuals remain accountable for the timely delivery of agreed tasks.
3. Discussions with your auditor
   • Schedule a meeting with your auditor earlier in the planning cycle to understand any key changes in audit or accounting requirements as well as audit deliverables. This will allow you to plan accordingly and ensure additional information is prepared in time for the audit.
   • Agree on a timetable for delivering audit planning requirements, interim and final audit requests, and audit finalisation.
   • Discuss the accounting treatment and audit requirements for any new activities, significant changes or transactions within the period to ensure you can prepare accordingly.
4. Organise documentation
   • Compile all necessary documents, including financial statements, contracts, employee files, and operational records. A checklist can help ensure nothing is overlooked.
   • Review and update internal control documents and procedures. Ensure that cash handling, disbursements, and other financial processes are well-documented and followed consistently.
   • Establish a secure method for sharing documentation with auditors and communicate this to all stakeholders.

Simple measures like these can reduce the effort and time taken to deliver an audit, allowing you to focus resources on other important priorities. Our teams deliver external audits for a number of independent schools. If you would like to explore these issues in more detail, contact Daniel Haines or your usual Crowe contact.