VAT on private school fees

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Further details on the proposed introduction of VAT on private school fees have been announced.

Following the Chancellor Rachel Reeves’ announcement on 29 July, an HMRC Revenue and Customs Brief, technical note and draft legislation were issued.

Adding VAT to private school fees was a key Labour manifesto pledge and the proposed changes have been widely publicised.

 

Who is impacted?

Operators of fee-paying private primary and secondary schools, sixth-form colleges who provide education or vocational training services and boarding services for a fee across the UK.

 

When will the changes apply?

Draft legislation has been issued by HMRC and a consultation period on the draft legislation has been announced until 15 September 2024. The charges will apply from 1 January 2025.

 

What services are impacted by the proposed new measures?

The new measures impact the VAT treatment of the provision of:

• Education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%.
• Education and vocational training provided at sixth forms attached to private schools and standalone private sixth form colleges will also be subject to VAT.

HMRC has also gone further than anticipated, announcing that boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%.

Private schools will also need to charge VAT on any additional supplies of education they charge a fee for after school hours or during holidays. For instance, extra-curricular performing arts classes and sports lessons.

Where parents and carers of children with Special Educational Needs (SEN), additional support needs (ASN), additional learning needs (ALN) have chosen to send their child to private school, but their needs could be met in the state sector, VAT will also apply to their fees.

 

What services are not impacted by the proposed new measures? 

The new measures do not impact the VAT treatment of the provision of:

• Nurseries (both standalone nurseries and those attached to a private school) remain exempt, up to the first year of primary school
• Before/after school childcare, or childcare-based holiday clubs, that just consist of childcare and that do not fall within the definition of education will remain exempt from VAT by virtue of the fact that welfare services are exempt from VAT.
• Other “closely related” goods and services other than boarding (i.e. goods and services that are provided by a private school for the direct use of their pupils and that are necessary for delivering the education to their pupils) will remain exempt from VAT. HMRC will challenge any school which seeks to avoid VAT through value shifting to other ‘closely related’ goods and services.

Pupils with SEN, ASN or ALN, where it has been identified that a pupil’s needs cannot be fully met in the state sector or are best met elsewhere, should also not be directly financially impacted as additional funding will be provided, where required, or provision made for the VAT cost to be neutral for funding bodies through existing special VAT refund scheme arrangements.

 

Prepayments and planning schemes

As anticipated, as part of the new legislation HMRC has included proposed anti-forestalling and anti-avoidance legislation.

The Government will legislate in the Finance Bill with retrospective effect to provide that fees paid from 29 July 2024 (date of announcement) pertaining to the term starting in January 2025 onwards to be subject to VAT.

The Government judges the date this policy was formally announced to be a fair point from which to subject fees to VAT, given that it is on this date that the details of this policy change were made clear to taxpayers, and draft legislation was published.

HMRC has also advised that it will be scrutinising the detail of prepayment schemes to ensure that schools pay the correct VAT.

HMRC has also included connected party anti-avoidance provisions in the draft legislation to prevent use of connected party structures to circumvent the new rules. Prepayments made before 29 July 2024 may also be at risk of challenge

 

VAT registration for private schools

Private schools not already VAT registered will need to become VAT registered in line with the normal VAT turnover threshold rules from 1 January 2025.

Schools that do not currently make any taxable supplies will be able to register with HMRC from 30 October, the day of the Autumn Budget.

Schools that already make taxable supplies can voluntarily register for VAT ahead of 30 October.

If schools opt to do this, they should be aware that they will need to begin charging VAT on all of their taxable supplies straight away (this does not include education and boarding services, which are currently still exempt when provided by a private school), and they will need to comply with their obligations as a VAT-registered business, including submitting VAT returns and keeping relevant records.

HMRC will be putting in place a number of measures to ensure that all private schools can be registered ahead of 1 January 2025, including publishing bespoke guidance ahead of 30 October, updating registration systems, and putting additional resource in place to help process applications.

HMRC will also hold support sessions for private schools over the coming months. The government will contact schools with information about when they will take place.

 

What to do now

It is essential private schools evaluate the financial impact of the VAT changes on budgets and financial forecasts. In particular, the decision whether to absorb the VAT increase or pass on in part or whole will be crucial.

Given the scale of change, it is important that finance teams also have the skills to complete accurate VAT returns. Training on VAT recovery rules is essential for private schools which are not currently VAT registered given the complexity of VAT recovery for business that make both taxable and exempt supplies.

Schools that have undertaken large capital works or are about to undertake large capital works need to look in particular at the impact on VAT recovery.

Due to the VAT Capital Goods Scheme some private schools may be able to recover additional VAT on projects over £250k (excluding VAT) undertaken in the last 10 years - previously blocked due to education supplies being exempt – which would provide a cash boost.

Accounting systems will need to be updated and tested to ensure that VAT can correctly be accounted for and that VAT returns can be submitted in compliance with Making Tax Digital for VAT requirements.

Schools that are not VAT registered will need to assess the best time to VAT register.

Any private school that has entered into prepayment arrangements needs to take specific advice on its prepayment arrangements to assess the risk of challenge by HMRC. Getting this wrong could lead to significant VAT liabilities in the future should HMRC challenge, with potentially no recourse to recoup from parents.