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VAT on private school fees

| Christine Newitt | 28 June 2024

If Labour wins the next election, which is due to take place on 4 July 2024, they propose to implement 20% VAT on private school fees which could potentially raise £1.6 billion per year.

Currently the provision of education by registered private fee-paying schools is exempt from VAT. This means that independent schools are not required to charge VAT but neither can they recover any VAT incurred in relation to the provision of education.

In this article we look at the implications of VAT on private school fees and how private schools and parents/carers can best plan for the potential VAT changes.

Offsetting VAT on expenses

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 effectively.

Which private schools will be impacted?

There are a lot of questions that remain unanswered regarding VAT on private school fees. It is not yet clear if it will be a tax across all private school fee paying pupils or if there will be exceptions for special educational needs (SEN) schools or indeed SEN pupils within an independent fee-paying school.

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. The practical implementation of such a policy for an independent fee-paying school would be complex. Where private schools have a mix of special educational needs and mainstream pupils there would potentially be the complexities of partial exemptions rules to consider.

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 rather than their charitable status.

Fee structure

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.

Some private schools already operate advance payment schemes whereby fees can be paid in advance for the year or the period of child’s intended stay at the school. These schemes were more for financial planning purposes with discounts being offered for advance payment. Schools are seeing an uptake in these schemes and some schools are introducing these schemes for the first time.

Paying the fees in advance also 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 HMRC could end up challenging these schemes. In addition to this, the media is reporting that if Labour wins on 4 July, it has been confirmed that anti-forestalling legislation will be introduced to ensure that any fees paid in advance for education provided after the VAT comes into force will still be subject to the tax.*

Strategic financial planning

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.

*Accountancy Daily

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