VAT on private school fees – what do I need to know?

As expected, the new Labour government has published draft legislation that will make private school fees subject to VAT from 1 January 2025.

The draft measures have been published for technical consultation before they will be included in Finance Bill 2024-25.

The Labour party had outlined the proposal in their manifesto, but there was uncertainty surrounding how these private school fees measures will be implemented and what the impact will be on private schools. The draft legislation now provides clarity.

In addition to the VAT measures announced, charitable business rates relief will be unavailable to private schools with charitable status in England from April 2025.

If you would like more information to pass onto clients about VAT on private school fees, why not join 20:20 Innovation to stay up-to-date? We have numerous membership options and you can book a no-obligation demo.

What is the background on private school fees?

The VAT legislation currently specifies a VAT tax exemption for an ‘eligible body’ (generally regulated, publicly funded, or not-for-profit education providers) that provides education.

This means that regulated education providers, including state schools and private schools, do not have to charge VAT on their education fees.

This also means that the school cannot reclaim the VAT incurred in respect of making the exempt education supply.

Will fee payers see fees increase by 20%?

Those who pay private school fees may not necessarily see the fees increase by 20%.

This is because private education will become a ‘taxable’ supply and so private schools will be able to recover the VAT they incur in respect of making the education supply.

What about discounted fee arrangements?

Where children are receiving support with school fees through a discounted fee arrangement, then VAT should only be chargeable on the amount of fees paid.

Who will have to charge VAT on private school fees?

Private schools across the UK will be affected by the measure.

From 1 January 2025, all education services and vocational training provided for a charge by a private school or a ‘connected person’ will be subject to VAT at 20%.

In addition, boarding fees that are closely related to the supply of education will also be subject to VAT at 20%.

Which schools are considered to be private schools?

Private schools are defined as schools at which full-time education is provided for pupils of compulsory school age (in Scotland, ‘school age’), or a full-time further education institution (for example, a sixth form college), which charges fees for the provision of full-time education.

The VAT exemption is only lost by private schools. State schools are unaffected by the change, which also means that state schools will continue to be unable to reclaim any VAT on state school spending.

How is a 'connected person' defined?

A ‘connected person’ is one that is:

• closely bound to the private school by financial, economic and organisational links;
• connected to the private school according to section 1122 of the Corporation Tax Act 2010 (connected persons); or
• providing education services as a result of arrangements for which the main purpose, or one of the main purposes, is to secure that the provision is an exempt supply.

Education and vocational training means a course, lesson, instruction, or study in any subject. This includes activities such as performing arts, physical training, sports, and arts & crafts.

What services will be subject to VAT?

Any education or vocational training service provided by private schools will become subject to VAT, including any additional supplies of education that the school charges a fee for that takes place after school hours or during holidays.

Boarding and lodging services that are closely related to the main supply of education or vocational training will also be subject to VAT.

Does this apply to nurseries?

The intention is that nurseries, whether standalone or attached to a private school will continue to be exempt from VAT as per existing VAT law.

It will be the school fees for children who turn compulsory school age that will become taxable. So, this means that VAT will start to apply when a child begins their first year of primary school.

Before/after school childcare, or childcare-based holiday clubs, that just consist of childcare will remain exempt from VAT because care and welfare services are exempt from VAT.

Other goods and services that are “closely related” to education, such as school meals, transport, and books and stationery, are integral to children accessing education. As a result, such goods and services that are necessary for delivering the education to their pupils will continue to be exempt from VAT.

Here, the government recognises the potential for ‘value shifting’, in which a supplier assigns an artificially high value to exempt supplies and an artificially low value to taxable ones, in order to reduce the amount of VAT charged to customers.

According to the government’s policy note, “HMRC will challenge any school who seeks to avoid their full VAT liability in this, or any other, way”.

Private schools also supplying such exempt goods and services closely related to the education services will be partially exempt and so a partial exemption calculation should be carried out. HMRC will publish guidance specific to schools on how to carry out the calculation.

Is it possible to make advance payments for independent school fees to avoid the VAT charge?

Any private school fees paid from 29 July 2024 to private schools in respect of the term starting in January 2025 onwards will be subject to VAT.

Prior to 29 July 2024, in anticipation of this measure, a number of private schools offered schemes enabling pre-payment of fees in an attempt to avoid these fees being subject to VAT.

In many cases, however, HMRC would argue that the structure of these schemes means that the tax point has not yet occurred.

This would be the case where say, in March 2024, a parent paid school fees for the 2025/26 academic year but the details and fees for the 2025/26 year’s education supply had not been set at the time the payment was made, so the payment itself would be a deposit for supplies yet to be made.

In this case, HMRC would consider this to be tax avoidance, would challenge the validity of such a payment and would seek to collect VAT on the fees.

The school is not VAT registered; will VAT registration be necessary?

Schools that do not make any taxable supplies will be able to register from 30 October 2024.

Those that do make taxable supplies can register at any time, although it should be borne in mind that a business must charge VAT on taxable supplies from the date on which they become VAT-registered.

How will this impact on private schools?

The government expects private schools to minimise fee increases, although that will be a commercial decision for the schools to make.

For many private schools, particularly those with charitable status ,when the VAT increase is considered in conjunction with the Business Rates increase, minimising fee increases may be difficult.

The Independent Schools Council commissioned a review of the potential impact of the proposed changes to private school fees and how it would affect the independent schools sector.

The report indicates that the impact on independent schools could be significant and that smaller and more marginal private schools are likely to face the biggest challenge.

Private schools that have charitable status may also struggle since these schools have to operate on minimal surpluses or reserves to comply with charity law. They will therefore have limited capacity to absorb the increase by reducing fees.

Specialist schools that provide tailored education in areas such as arts, sciences, sports, and technology may also be impacted. These schools often need additional resources and specialised staff and can be more expensive, so the VAT increase may lead parents to choose other alternatives. On the other hand, if the school absorbs a drop in fee income, this may lead to budget cuts and reduced quality. This in turn can also lead to decreased enrolment in a vicious circle that further reduces fee income. Getting the right balance could be tricky!

Another potential implication is that if private school attendance falls then there's likely to be a greater demand on the resources of state schools.

Of course, exactly how much the new measures will affect private school attendance and income from school fees remains to be seen, but clearly the loss of this VAT exemption will affect independent schools to at least some degree.

If you would like more information to pass onto clients about VAT on private school fees, why not join 20:20 Innovation to stay up-to-date? We have numerous membership options and you can book a no-obligation demo.