As expected, the new Labour government has published draft legislation subjecting private school fees to VAT from 1 January 2025. VAT on private school fees is here.
The draft measures have been published for technical consultation before they are included in the Finance Bill for 2024-25.
The background
The current VAT legislation includes a VAT tax exemption for an “eligible body” (typically regulated, publicly funded, or not-for-profit education providers) that offers education.
This means regulated education providers, such as state and private schools, are currently not required to charge VAT on their education fees.
The details
A new policy will impact private schools throughout the UK starting in January 2025. Under this policy, all educational services and vocational training offered for a fee by a private school, or a “connected person” will be subject to a 20% VAT.
Furthermore, boarding fees that are closely associated with the provision of education will also be subject to a 20% VAT.
Private schools are institutions that offer full-time education to students of compulsory school age. They also include those that provide full-time further education, such as a sixth-form college, and charge fees for their educational services.
Where children receive support with school fees through a discounted fee arrangement, then VAT should only be chargeable on the fees paid.
What services will be subject to VAT?
Any education or vocational training service provided by private schools will be subject to VAT.
This includes any additional education services for which the school charges a fee, provided after school hours or during holidays.
VAT on private school fees will also affect 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 for nurseries, whether standalone or attached to a private school, to continue to be exempt from VAT in accordance with existing VAT law. So, nurseries are not affected by the introduction of VAT on private school fees.
This ties in with the current governments plan for childcare and early education.
However, the school fees for children who turn compulsory school age will become taxable. Thus, VAT will start to apply when a child begins their first year of primary school.
Will anything be exempt from VAT
There will be some services which will be exempt and you need to be aware of these:
- Before/after-school childcare or childcare-based holiday clubs that consist of childcare will remain exempt from VAT because care and welfare services are exempt from VAT.
- Other goods and services “closely related” to education, such as school meals, transport, books, and stationery, are integral to children accessing education. As a result, such goods and services necessary for delivering education to their pupils will continue to be exempt from VAT.
The government fully acknowledges there may be an issue with ‘value shifting’, where a supplier deliberately overvalues exempt supplies and undervalues taxable ones to reduce the 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”.
Can you make advance payments for independent school fees to avoid the VAT charge?
In anticipation of this change, some private schools offered the option to pre-pay fees before 29 July 2024, to avoid VAT. Therefore, any advance fees paid to private schools from 29 July 2024 onwards will be subject to VAT.
Furthermore, if advance fees were paid routinely prior to July 2024, they may also be subject to VAT in due course.
For example, if a parent paid school fees in March 2024 for the entire 2025/26 academic year, but the details and fees for the 2025/26 year’s education supply had not been finalised at the time of payment, then the payment would be considered a deposit for supplies.
In this scenario, HMRC would consider this to be tax avoidance. They would challenge the validity of such a payment and seek to collect VAT on the fees.
How will this impact on private schools?
The government expects private schools to keep fee increases to a minimum, but ultimately, it will be up to the schools to make the commercial decision.
Many private schools, especially those with charitable status, may find it challenging to minimise fee increases when considering the potential impact of VAT and Business Rates increases.
The Independent Schools Council has commissioned a review to assess how the proposed changes to private school fees may affect the independent schools sector. The report suggests that the impact on independent schools could be significant, especially for smaller and more financially vulnerable private schools.
Private schools with charitable status may also struggle. They are required to operate with minimal surpluses or reserves to comply with charity laws, limiting their ability 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 affected. These schools often require extra resources and specialised staff, making them more expensive.
What’s next
We are here to help whether you are a parent running your own business and want help with improving your cashflow or a private school with a charitable status.
Look at how we work for more information.