VAT and private schools

This article was first published by Civil Society Media on 1 December 2023.

Current legislation

The existing VAT legislation allows for the exemption of education when provided by an ‘eligible body’. Independent schools automatically fall within the definition of an eligible body under a specific provision within the legislation.  However, also included under a separate provision are charitable organisations that meet certain conditions.  These conditions are that they are precluded from distributing and do not distribute any profit they make, and if any profits are made, they are used to support further educational activity. This provision allows charities to exempt educational services.

In addition, there is a further exemption for eligible bodies who supply goods or services which are ‘closely related’ to education such as catering, accommodation, and transport services, as well as a separate exemption for the provision of welfare services (such as after school care).

Whilst it would be relatively easy to remove private schools from the list of institutions that qualify as eligible bodies, it is not so easy to remove organisations with charitable status without having a knock-on effect on charities generally, and some care will be needed when making changes to current legislation so that charities generally are not disadvantaged. Nevertheless, assuming the exemption is removed solely for private schools, what are the implications?

Impact of changes

The introduction of VAT on school fees does not necessarily mean an increase in fees charged to parents of 20%. Any VAT registered organisation which accounts for VAT on standard rated income is entitled to offset VAT incurred on costs associated with that revenue and therefore this cost reduction is usually factored into the pricing structure. Indeed, it is possible that some schools may have already suspended major costs such as capital projects, where substantial VAT costs are likely, until after the next election, in the knowledge that if VAT is registration is required, the overall cost of such projects could be reduced because there would be entitlement to VAT recovery. The extent of any recovery would need to be further considered, but there is no doubt that deferring such costs would likely be advantageous. 

Another point to note for any school that becomes VAT registered because of the change is the requirement to identify all supplies that are liable to VAT. This is where some complexities might arise with regards to accommodation, and welfare services, each of which have their own rules for determining the VAT liability and could result in continued exemption for such supplies if schools retain their charitable status. Another common area of income for Schools is rental income which ordinarily is exempt, albeit there is a specific mechanism to convert these services to taxable supplies.  

Schools already VAT registered by virtue of other activities should already have accounting records and processes that cope with VAT. However, those who are not VAT registered will need to consider their accounting software. 

In addition, for those who are already VAT registered, there may be an opportunity to apply the ‘capital goods scheme’ (‘CGS’) to recover VAT incurred on earlier capital projects.   Broadly the CGS is a scheme that requires an organisation to adjust the VAT incurred on such costs (‘capital items’) over a 10-year period. Capital items include building projects costs or property acquisition costs where these are liable to VAT and have cost more than £250k. So, if a VAT registered organisation undertook a capital project for £1m plus £200k VAT to refurbish classrooms that were used solely to provide exempt education, none of that VAT could be recovered and would represent a cost to the school. However, if 3 years later, those classrooms were used solely to provided standard rated education, the CGS would allow for VAT recovery. As the CGS has a 10-year adjustment period it would be necessary to undertake adjustments for each of the remaining 7 years. This would result in an annual repayment of £20k per annum assuming the classrooms were used solely for taxable purposes throughout the remaining period. i.e., £200k/ 10yrs x 0% -100% = £20K x 7yrs = overall refund of £140k.

What should schools be doing now?

There are several points to consider. Do existing contracts or agreements allow for VAT to be charged, if not these will need to be changed. For VAT purposes, there are special rules that govern the ‘time of supply’. If parents pay in advance of any changes being introduced, it might be possible to ensure VAT is not due on services that are enjoyed at a later date. This will very much depend on whether any legislation is introduced to prevent the ‘normal’ rules from applying.

Consider whether there are any earlier capital projects that may benefit from CGS adjustments. This only applies to schools who were already VAT registered at the time the costs were incurred. Defer proposed projects where possible to maximise potential VAT recovery. 

Review existing accounting software and ensure it is ready to cope with VAT reporting. Similarly identify the VAT liability of all activities/income streams and the extent of entitlement to VAT recovery. Schools that have both taxable and exempt income will need to undertake partial exemption calculations.

No doubt further issues will arise as any proposed changes become clearer and ultimately each school will have to consider its own specific circumstances. However, early planning and consideration of some of the above will hopefully allow for a smooth transition and provide an accurate platform for setting fees and budgeting for costs following a VAT registration. As always with VAT, early planning is essential.

If you have a question about how these changes could affect your school, get in touch with Socrates by completing the form below.