VAT on school fees

This article was first published by Independent School Management on 5 September 2024.

Changes to existing legislation

In terms of changes to existing legislation in the 1994 VAT Act, it is interesting that schools remain technically still eligible for an educational exemption. However, the proposed new legislation specifically excludes the provision of education, board, and lodging by a ‘private school’. Nursery education continues to be exempt.

Definition of private schools:

‘Private schools’ are defined as schools at which full-time education is provided for pupils of compulsory school age or, in Scotland, school age (whether or not such education is also provided for pupils under or over that age), or an institution at which full-time education is provided for persons over compulsory school age but under 19 and which is principally concerned with providing education suitable to the requirements of such persons (for example, a sixth form college), and where fees or other consideration are payable for that provision of full-time education.

Exclusions and related services:

Also excluded from exemption are any entities which are closely connected by “financial, economic or organisational links” to the private school. This prevents schools from using any such entity to get round the proposed changes in the legislation.

Drafting the legislation in this way ensures that the exemption for other goods and services closely related to the provision of education, as set out in the 1994 VAT Act, such as catering, transport, books, and stationery, will still apply when provided by a private school because technically the school is still an eligible body. It will be interesting to see what position HMRC takes in instances where there is a single fee that includes catering and other services. Will it argue that this is a single taxable supply of education or a multiple supply such that each constituent element of the supply takes its own VAT liability?

VAT on additional and extracurricular services

Any additional services after school hours or during holidays such as extracurricular performing arts classes and sports lessons will be subject to VAT. However, before/after school childcare will remain exempt on the basis that this is covered by the exemption for welfare services set out in VATA 1994 Sch 9 Grp 7 item 9.

Examination services and special needs education

Another area where the exemption will continue is the provision of examination services by or to an eligible body. The exemption for the supply of teaching English as a foreign language remains when supplied by a commercial entity. However, it seems such services provided by a school will become taxable. This point will need to be clarified during the consultation process.

Rather surprisingly, it is proposed that education provided by private schools to pupils with special needs will also be subject to VAT. In most cases, this will probably be funded by local authorities that are unable to secure places in state schools and therefore will pay a private school to provide the education. In such cases, HMRC says that VAT will be charged to the local authority which will be able to reclaim the VAT charged under the special refund rules applicable to local authorities. The downside with this approach is that where a parent meets this cost, VAT will be an additional cost to that parent. Whether there’s an argument that the services supplied to pupils with special needs might be exempt as a welfare service under the provisions mentioned above remains to be seen and this will undoubtedly have been raised during the consultation process, which finished on 15 September.

Anti-forestalling legislation and payment schemes

As set out above, anti-forestalling legislation will be introduced to capture all payments made after 29 July this year and before the formal change on 1 January next year. There has been a lot of debate about tax points – the date at which VAT becomes due – and whether these are triggered when a payment is made. Given the introduction of the anti-forestalling legislation, this question only really arises in relation to any payments made before 29 July.

Several schools have offered advance payment schemes to potentially avoid VAT on private school fees. In the technical note, HMRC comments as follows: “In many cases, the structure of these schemes means that the tax point has not yet been passed. For instance, if the scheme involved paying a lump sum to the school in advance, but the details of the supplies that the money was buying were not determined at the time the money was paid (i.e. if the money paid did not relate to specific terms’ fees that had already been set), HMRC stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due.”

Schools that have entered such arrangements may therefore want to check whether there is a risk of challenge from HMRC for prepayments before 29 July.

Practical issues for schools

In terms of practical issues, schools that are not currently registered for VAT and have no current taxable supplies (goods and services on which VAT can be applied) must do so with effect from 1 January 2025 and HMRC has indicated that applications can be made from 30 October. Schools that have some taxable income can apply for a voluntary VAT registration from a current date, but that means they would have to account for VAT on goods and services that are currently liable for VAT. Education and boarding would continue to be exempt until 1 January 2025.

Regardless of when a school registers for VAT, it will likely be partially exempt and will therefore need to undertake calculations to determine the level of “input tax,” or the VAT on costs, that can be recovered. Those not familiar with these calculations will probably require support and guidance not just with the calculations, but also setting up reports and recording VAT appropriately to make the calculations easier. Indeed, the level of VAT recovery will be informative for schools when they are trying to determine the level of fee they intend to charge parents. It will be a commercial decision for schools whether to pass on the full 20% VAT charge.

For schools that have undertaken capital projects in the past, the partial exemption recovery rate calculated above will form the basis of any capital good scheme adjustments in relation to VAT incurred on such projects – hence the importance of getting this right. Broadly, the capital goods scheme allows for adjustment of VAT costs over a 10-year period based on the use of that asset. In the past, schools would have been using their school buildings for wholly or mainly exempt educational purposes. The introduction of VAT from 1 January 2025 presents the opportunity to adjust the VAT not previously recovered as the school buildings will now be used mainly to undertake taxable activities.

VAT registration will require appropriate VAT accounting records and identification of VAT on all taxable income streams. For schools that sublet or rent out parts of their property, they may want to consider the merits of opting to tax to ensure such supplies are liable to VAT. If a school also has a trading subsidiary, it may want to consider whether a VAT group registration might be appropriate. Each school will have its own set of circumstances, and it will be important that appropriate advice is sought as necessary.

If you would like assistance with VAT registration, partial exemption calculations, and preparing your school for the upcoming legislation, get in touch with Socrates by filling in the form below.