The new VAT legislation, due to apply from 1st January 2025, presents many challenges and it is vital that schools carefully consider how to react.
The changes will affect private schools in different ways depending on financial position, the options available and whether your school chooses to absorb the added costs or pass on the VAT charge in part or whole to parents.
In our previous article found here, we look at what the new legislation entails and suggest initial steps you should consider, however, with an increase in financial pressure, now is the time to consider all options…
How can schools mitigate the impact of the added financial pressure?
Many schools have had to look hard at costs over a number of years already. This is difficult, as parents expect small class sizes and highly experienced teaching staff for a premium product like private education. Front-line delivery is the last area many schools will want to tackle, opting to squeeze out savings in back-office support functions first.
Using school assets to bolster finances
A school’s options will depend on its financial position, but smaller schools are likely to be impacted first and foremost. Many private schools are asset-rich and cash-poor and so making the best use of existing resources and infrastructure to maximise value and reduce costs will be an obvious area to bolster school finances, for example, generating income through lettings and internationalisation.
For trusts with a less robust financial position, the chances are this area will have been explored repeatedly over many years and therefore, the opportunities for further income generation may be limited. For schools that have enjoyed reserves and surpluses up to now, this may still be an opportunity.
Managing cash flow to reduce expenditure
There are also options that schools can utilise to manage cash flows without necessarily having to reduce overall expenditure. By using a cash flow forecasting model it allows for stress testing, making appropriate adjustments, exploring alternative revenue streams and looking at cost savings, therefore enabling schools to come up with a workable plan to enhance operational efficiency.
Can capital expenditure be used to mitigate the VAT cash flow impacts?
Schools that have undertaken significant capital works or are about to undertake large capital works need to look in particular at the impact on VAT recovery, and 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.
The cash outlay on capital projects could be funded through long-term loans, although banks have become more cautious in this area in light of the impact of VAT issues on solvency in the sector.
Should schools consider a merger or sale?
For some schools, a merger with, or sale to, an existing group or with another school will have to be a serious consideration and some schools may have no choice to avoid closure. Recent research by specialist insurance provider Ecclesiastical suggests two-thirds of schools are considering such a move.
A merger, similar to that of a public sector academy trust model, can provide greater financial stability through cost savings arising from economies of scale across the back office functions. It can also improve the attractiveness of the school/ schools to pupils – offering better facilities and expertise by drawing on the best resources from across the group.
The new VAT legislation presents an opportunity for merged entities because the ability to reclaim VAT on a single capital project creates savings that can be used across the whole trust.
What does a merger involve?
For some schools, the choice may be straightforward, for example creating a co-education trust from two existing single-sex schools. For others it might be a natural inclination to resist changes to a school's structure, which could feel like overturning centuries of tradition. Additionally, a loss of identity and parents' reactions are real fears. But it's essential for trustees to remember their charity law responsibilities to safeguard the charity's assets and act in the best interests of the beneficiaries. In this respect, a merger could be the best outcome.
Schools considering a merger should explore their options early as it is a lengthy process. Careful due diligence is essential for all parties and the trustees' primary consideration must be pupils, whilst ensuring the merged entity will be in a more robust financial position and there are no hidden liabilities. Legal aspects such as structure, employment and contractual matters, taxation, and regulatory requirement of the Charity Commission along with integration practicalities such as IT, must all be carefully navigated.
Become a Free School
For those schools where funding continues to be an insurmountable challenge, a more radical option to ensure the school remains open, would be to apply to become a government-funded Free School. Whilst freedoms over the curriculum, policies and approach enjoyed as an independent school would become more limited, some autonomy is kept, potentially allowing the school to maintain some of its existing ethos. Due to the school being government-funded, it no longer charges fees to parents, breaking down financial barriers for new admissions and potentially increasing inclusivity.
The challenges and consequently, the options, for each school will be very different depending on an array of factors.
If you would like advice and support to help guide your school through the VAT changes and the options available to you, please contact our Education specialists on 0808 144 5575 or email help@armstrongwatson.co.uk
