Following the new UK government's General Election victory in July 2024, one of the first pieces of announced legislation was the introduction of 20% VAT being added to education and boarding fees charged by private schools.
Previously, the provision of education by registered private fee-paying schools was exempt from VAT. This meant that independent schools were not required to charge Value Added Tax (VAT) but neither could they recover any VAT incurred in relation to the provision of education.
The government argues that by changing this and also removing charitable business relief from April, it can raise £1.725 billion per year, which would be redistributed into the public finances.
But what are the wider implications of VAT on private school fees, and how can private schools and parents/carers plan ahead?
When looking at the financial impact of the potential changes, it is important for private schools to consider additional VAT that would become recoverable on costs. Schools will be able to recover VAT on any expenditure related to the provision of education, such as the running costs of the school, and equipment like textbooks and computers.
Private schools with large amounts of capital expenditure planned or recently undertaken, i.e. the building of new facilities, may find it very advantageous to be VAT registered as they will potentially be able to reclaim significant costs from the government. Currently, a business that becomes VAT registered can reclaim VAT paid on goods/assets still on hand, or services bought before it registered for VAT, if they were bought within four years of the date of registration for goods/assets and six months for services.
Working with professional advisers can help schools identify VAT-recoverable expenses and manage their financial obligations more effectively.
Upon the announcement of plans for VAT hikes, there were fears of the impact it may have on the wider private school sector, on state-funded schools which may see an influx of students as a result, and on special educational needs (SEN) provision. These VAT changes will be dependent on whether the SEN private school in question has a local authority-funded Education, Health and Care Plan.
Local authorities usually place the pupils and fund the fees for those attending SEN schools and the Local Authority can generally recover the VAT on costs for the provision of education to pupils. However, if this is not the case and parents choose to send their child with SEND to a private school, VAT will be applied to those fees.
The vast majority of independent schools have charitable status, but this will not exclude them from charging VAT. The VAT exemption currently comes from their status as a registered fee-paying school instead..
The increase in fees may make private education less accessible to many families. However, the actual increase may not technically be a full 20% for the fee payer as the increase in costs for the school will be partly offset by the ability to recover VAT on expenses.
The government predicts that fees will likely increase by around 10%, on average, and estimates that less than 0.5% of the pupil population will move to a state school from a private school following these VAT changes.
Some private schools already operate advance payment schemes whereby fees can be paid in advance for the year or the period of a child’s intended stay at the school. These schemes were more for financial planning purposes with discounts being offered for advance payment, but, for now, they offer VAT savings as well. Schools are seeing an uptake in these schemes and some schools are introducing these schemes for the first time.
Paying the fees in advance has the added advantage of fixing the tax point at the time of payment and the rate of VAT to that in force at the time of payment. These schemes allow parents/carers to pre-pay term fees in advance for multiple years rather than just one term in advance.
Schools should be wary of changing the way they structure their fees, as legislation changes are now in action. Since adopting the VAT hike in January, the government has announced that any private school fees paid after 29 July 2024 for tuition and boarding fees covering a period on or after 1 January 2025 will be subject to 20% VAT.
As well as this, any fees pre-paid before 29 July may also be subject to 20% VAT, depending on the arrangements of the specific school’s pre-payment scheme.
The introduction of VAT on private school fees will potentially introduce financial challenges for private schools. Schools should conduct careful and strategic financial planning, consider fee restructuring, new revenue streams and cost-cutting measures as well as prepare for the worst-case scenario. It is important that private schools communicate their plans with parents/carers so everyone involved can make informed decisions and manage the financial impacts effectively.
VAT can be a complex area and we have an experienced, specialist team dedicated to assisting you with your queries and offering support, making VAT less daunting - get in touch with our specialist team today.
