Guidance

Charging for boarding provision: full cost recovery and rate of return

Updated 2 August 2024

Applies to England

What this guidance is for

This guidance is to help state boarding schools:

• understand the basic concept of full cost recovery
• set the appropriate fees for boarding provision on a full cost recovery basis

Managing public money

Public sector organisations, including state boarding schools, should charge for publicly provided goods and services based on full economic cost, where possible. The policy set out in this guidance is based on ‘Chapter 6: Fees, Charges and Levies’ of HM Treasury’s managing public money.

Academies and free schools are classed as central government organisations for national accounts purposes. This means they are required to comply with HM Treasury’s managing public money.

Local authority-maintained boarding schools remain within local authority accounting boundaries.

Basic policy

Boarding provision is classed as a ‘discretionary service’. This means that state boarding schools can charge for boarding provision and calculate the fees to be charged as set out in ‘Annex 6.1: How to calculate charges’ of HM Treasury’s managing public money .

Annex 6.1 explains that public sector organisations, including state boarding schools:

• should not subsidise the cost of goods and services sold into competitive markets
• should aim to recover full costs, plus a real rate of return

Academies and free schools are required to apply a rate of return of 8% to their boarding fees, to comply with this requirement of HM Treasury’s managing public money. Any gains from boarding activities must be invested back into the boarding provision, for example financing a boarding hardship bursaries scheme or related boarding capital investment.

Applying a rate of return is not a requirement for local-authority-maintained boarding schools. They are prohibited by Section 458 of the Education Act 1996 from charging above full cost for boarding provision. However, they should charge for boarding provision on a full cost recovery basis. Charges for indirect and overheads costs should be included.

If you are a local-authority-maintained boarding school in consultation about academy status, you have a requirement to charge a rate of return of 8% if you become an academy. You need to include this in your consultation proposals as this may affect your boarding fees.

State boarding schools, including academies and free schools are not allowed to charge fees for education provision.

Setting the charge

The concept of full cost recovery represents the best value for money for state boarding schools. Although there may be additional administrative and budgetary responsibilities for the school in relation to the recovery of any charges, these should be covered in the full costs calculation. They should not be a reason for not charging the full fee.

Academies and free schools must:

• charge for boarding provision on a full cost recovery basis
• apply a rate of return of 8% on boarding charges

A rate of return can be applied to other discretionary services, however, there may be tax or VAT implications for non-boarding activities. Find out more from your local HMRC Office or tax advisers.

Tax and VAT implications

If boarders receive boarding and education provision, then boarding fees are classed as a non-business activity. VAT is not chargeable, even with the application of full cost recovery plus a rate of return. For example, the chargeable fee for letting rooms would be on a full cost recovery basis, plus the 8% rate of return. This maximises the income generated from room letting.

However, letting boarding accommodation and facilities during a holiday period is classed as a business activity and VAT is chargeable to the recipient. The only exception to this rule is when a guest stays for over 28 consecutive days, then VAT is not applied.

The VAT arrangements for boarding provision are complex and mistakes could result in a penalty charge by HMRC. Schools and academy trusts should seek advice from their local HMRC office to find out the tax and VAT implications on boarding provision.

Guidance on what is considered a business activity or non-business activity is available from HRMC’s VAT Business/Non-Business Manual.

Financial accountability and reporting 

Local-authority-maintained boarding schools are accountable to their relevant local authority, foundation trust or governing body.

Academies and free schools are accountable to their academy trust, (multi-academy trust or stand-alone governing body) and the Education and Skills Funding Agency (ESFA), on how much they have decided to charge for boarding provision.

State boarding schools must include all relevant boarding incomes and expenditures in their annual reports and accounts. This is to ensure that they comply with the accounts direction by the relevant local authority and ESFA.

For guidance on what to include in your annual reports and accounts:

• seek advice from your local authority if you are a local-authority-maintained boarding school
• contact the ESFA if you are an academy or free school

Academy trusts can find out more from the Academies Accounts Direction.

Full cost recovery

The importance of full cost recovery

Full cost recovery means your organisation recovers the full cost of delivering a service, product or project, including the relevant proportion of your organisation’s overhead costs.

Both direct costs and a relevant portion of overhead or indirect costs:

• are integral to the support and delivery of a service, product or project
• must be included when calculating the overall cost of a service, product or project

If you are not recovering the full costs of delivering your boarding provision, you could be creating a financial shortfall for your school. This will affect your school’s success, financial viability and the services you provide. This shortfall may have to be met by you, through additional fundraising activities or other means.

Costs associated with delivering boarding activities

The costs associated with delivering boarding activities or services within your school are:

• direct costs – incurred as a direct result of delivering boarding activities
• overhead costs, also known as indirect costs – to support and administer the school and its activities

Indirect costs are also known as back office costs and usually include management and administration support. They are sometimes split between various activities within the school.

The academy trust should identify which direct and indirect costs are part of the boarding provision. Academy trusts with academies and free schools with boarding should regularly review and adjust their costs to reflect the changing profile of the boarding provision.

Costs which should be included

Examples of associated costs in terms of delivering boarding provision.

Direct costs include:

• accommodation costs, including purchasing or leasing premises
• fixtures and fittings
• lighting and heating
• boarding building maintenance
• cleaning services
• security services
• salaries for boarding provision staff

Overheads (indirect) costs include:

• human resources – administering of staff, payroll, recruitment
• finance – accounting, budgeting, invoicing, purchasing, depreciation, and cost of provisions, insurance
• procurement and facilities – purchasing, maintaining leasing, office material and equipment such as photocopiers
• general admin tasks including answering the phone and data processing
• staff salaries (if they’re covering more than one function)

Benefits of full cost recovery

By implementing full cost recovery, you will make sure that your boarding provision is fully funded and sustainable. Calculating the full economic costs will help you to decide whether or not to provide boarding activities or services. If you are an academy or a free school, your trust must apply a rate of return for boarding provision.

Full cost recovery is also beneficial to your school if you are:

• seeking grant funding, as you will know the exact amount you need to ask for
• applying to deliver boarding provision, or other services for which there is a defined price – you can compare the funds available with your full costs of delivering boarding or other services
• in a competitive bidding situation – it will help you decide if you want to bid and at what level

Identifying direct and indirect costs

Direct costs

In most cases, it is usually easy to accurately identify the costs of delivering boarding provision or services. For example, the costs of beds could be directly attributable to boarding. For some direct costs such as utilities, you may need to apportion the cost where buildings are shared.

Indirect (overheads) costs

These costs are less clear to identify. Once you have identified an overhead, you need to determine the appropriate basis for distributing the costs across your specific boarding activities or services. This process of sharing out the overhead costs is called ‘overhead absorption’ or ‘overhead recovery’.

Apportionment of direct and indirect costs

There are a number of bases for apportionment of direct and indirect costs that could be applied to boarding provision or services. Document which method you use to make sure that your calculation is consistent each year.

For example:

• usage – expenditure incurred directly in undertaking boarding activity
• per capita – the number of people employed within the boarding activity, compared to the overall total
• space – floor area used for the boarding activity, compared to the overall total
• time – the proportion of time spent on the boarding activity, compared to the total time where staff duties cover multi-activities

Multi-activities could include things like education or pastoral activities.

How to calculate full cost recovery

To calculate the full costs of your provision or service, you need to:

• calculate the direct costs of the boarding provision or service
• calculate the total overhead costs for the whole organisation
• allocate a relevant share of overhead costs to the boarding provision or service or project

To ensure full cost recovery for your boarding provision or service, you need to complete a 2-step process:

1. Identify and account for all costs – make sure that no costs are omitted and that you have appropriate information for example budgets and forecasts, with which to cost the boarding provision or service.
2. Allocate costs – ensure that you allocate all direct costs and a relevant share of indirect costs to the boarding provision or service to be provided.

You should have robust financial reporting and accounting systems in place that you can use to allocate costs on a monthly basis for the boarding provision.

Planning for full cost recovery

Do not wait until year end, or until the boarding activity has started to assign all costs. It may then be too late to recover costs, or too time consuming to start allocating costs. Get help to plan your finances by using the tools on School Resource Management.

It is good practice to review costs each year, so that charges to the public for your boarding provision and other services or products are consistent with the full cost recovery concept. Your costs are likely to go up due to inflation and other economic factors. Your apportionment assumptions should remain consistent.

Charging full costs, plus a rate of return

This information applies to academies and free schools

Definition of a rate of return

A rate of return is the ratio of money gained or lost on an investment, relative to the money invested. It is often expressed as a percentage.

Rate of return for boarding provision

HM Treasury and DfE have agreed an appropriate rate of return to be applied by academies and free schools for boarding provision. The agreed rate of return is 8%. This is an average representation which is appropriate for the academies and free school sector.

The 8% rate of return must be applied by all boarding academies and free schools in accordance with ‘Chapter 6: fees, charges and levies’ in HM Treasury’s managing public money.

Find out how a rate of return for boarding provision is calculated in the section on How to calculate full cost recovery and rate of return.

Applying a rate of return

DfE recognises that it is not always clear whether full cost recovery in respect of boarding has been fully applied. However, academy and free school trusts should make sure that the relevant element of fixed and indirect costs are properly apportioned to the boarding provision.

Discretionary services: charging above cost

Academies and free schools can charge above cost for boarding and other discretionary services. This is explained in ‘Chapter 6: Fees, Charges and Levies’ of HM Treasury’s managing public money. There are exceptions to full-cost charging for certain discretionary services provided in competition with the private sector, where a rate of return is usually charged.

Boarding activities provided by academies and free schools qualify as an exception. This means you must apply a rate of return of 8% to calculate the fees.

Ability to offer bursaries

Academies and free school trusts can continue to work with their partners to provide bursary-funded boarding provision to pupils. All boarding provision should be charged at the same fee rate, but the bursaries can be used to reduce the boarding fees that parents and carers pay.

The income generated by applying a rate of return can also be used to fund hardship bursaries to pupils.

Restrictions on the use of gains

Gains resulting from the application of the 8% rate of return for boarding activities cannot be used for non-boarding activities.

Change or review of the rate of return

The rate of return will change over time, once the department is content that it has been adopted across the academy and free school sector.

How to calculate full cost recovery and rate of return

The following examples show how to calculate the full fee that can be charged by an academy or free school.

Apportioning direct costs: example

A trust is providing boarding and education to pupils at the school premises. No other services are run from the premises.

The services provided operate from distinct and separate parts of the same building, and so direct costs are easily identifiable. They include things like building costs and maintenance, furniture and fixtures and fittings from the boarding half of the building. Boarding and education share the same electricity supply and pastoral staff equally.

Calculating the direct costs

Direct costs	Boarding costs
Direct costs for boarding provision (such as building costs and maintenance )	£50,000
Total electricity bill = £1,000 apportioned on a 50/50 split	£500
Pastoral staff total cost = £25,000 apportioned on a 50/50 basis	£12,500
Boarding provision costs	£63,000

The direct costs of the boarding provision is £63,000.

Calculating indirect costs using full cost recovery: example

Using the same trust in the apportioning direct costs calculation, the board of trustees spend 30% of their time on boarding governance and strategic development:

• boarding occupies 15% of the director’s time (or equivalent role)
• bookkeeper, receptionist and general office administrator staff who deal with queries across the whole school or academy

A decision is taken to apportion their costs based on the proportion of direct costs for boarding, compared to the total direct costs for the whole school or academy. This works out at 25% boarding, 75% education provision.

Additional costs include office consumables like paper and pens which cannot be attributed specifically to either provision. Apportionment is used on the same basis as for administrative staff.

All other overheads are apportioned on the basis of floor space occupied, which is a 50/50 split. They all occupy parts of the same building as the academy or free school.

Calculating the indirect costs

Type of indirect cost	Boarding	Education	Total
Board of trustees (30% boarding)	£600	£1,400	£2,000
Director (15% boarding)	£6,000	£34,000	£40,000
Bookkeeper and administrative staff (25% boarding)	£6,750	£20,250	£27,000
Office consumables (25% boarding)	£750	£2,250	£3,000
All other overheads (50/50 split)	£37,500	£37,500	£75,000
Total indirect costs	£51,600	£95,400	£147,000

Calculating the basic fee of a boarding place: example

Type of cost	Amount
Direct cost (from apportioning direct costs example)	£63,000
Indirect cost (from additional costs example)	£51,600
Total cost of boarding provision	£114,600

Calculating the basic fee

1. Calculate direct costs: £63,000
2. Calculate indirect costs: £147,000
3. Calculate the total cost of the boarding provision: £114,600
4. Calculate the base boarding fee by dividing the total boarding cost by the number of boarding places in the academy or free school.

In this example there are 50 boarding places so the basic fee would be: £114,600 ÷ 50 = £2,292

Calculating the rate of return: example

We can use the figures from the full cost recovery calculation example, to calculate the full fee that an academy or free school can charge.

Cost	Amount
Basic boarding fee per place	£2,292.00
Rate of return (8% of £2,292)	£183.36
Total full cost recovery and rate of return per boarding place	£2,475.36