The new Labour government has published draft legislation that will subject private school fees to VAT beginning on 1 January 2025. This move, which had been outlined in the Labour Party’s manifesto, removes the uncertainty about how these measures would be implemented and their impact on private schools. The draft measures are currently open for technical consultation and will be included in the Finance Bill 2024-25. Additionally, private schools with charitable status in England will lose their charitable business rates relief from April 2025.
Background on Private School Fees
Under current VAT legislation, an “eligible body,” which typically includes regulated, publicly funded, or not-for-profit education providers, enjoys a VAT exemption on education services. This means that both state schools and private schools do not have to charge VAT on their education fees. However, it also means that these schools cannot reclaim VAT on expenses related to the provision of education. The new legislation will remove this exemption for private schools, marking a significant shift in how these institutions are taxed.
Will Fees Increase by 20%?
While the VAT on private school fees will be set at 20%, fee payers may not see a direct 20% increase in their fees. Since private education will become a taxable supply, private schools will be able to recover VAT on certain expenses related to providing education. This could offset some of the costs, although the actual impact on fees will vary depending on each school’s financial situation and strategy for handling the VAT charges.
Discounted Fee Arrangements
For students receiving support through discounted fee arrangements, VAT will only be charged on the actual amount paid. This ensures that those benefiting from financial assistance or scholarships are not disproportionately affected by the VAT implementation.
Who Will Have to Charge VAT on Private School Fees?
The VAT will apply to all private schools across the UK from 1 January 2025. Any education services or vocational training provided for a charge by a private school, or a “connected person,” will be subject to VAT at 20%. This includes boarding fees closely related to the supply of education.
Definition of Private Schools
Private schools are defined as institutions that provide full-time education for pupils of compulsory school age or full-time further education (such as a sixth-form college) and charge fees for this education. The VAT exemption will be lost only by private schools, leaving state schools unaffected. As a result, state schools will continue to be unable to reclaim VAT on their spending.
What Is a “Connected Person”?
A “connected person” refers to entities closely linked to a private school through financial, economic, or organizational ties. This includes individuals or organizations connected to the school under section 1122 of the Corporation Tax Act 2010, or those providing education services as part of an arrangement primarily designed to secure exempt supply status.
Services Subject to VAT
All education and vocational training services provided by private schools will become subject to VAT, including additional supplies of education outside regular school hours or during holidays. Boarding and lodging services that are closely related to the main educational supply will also be taxed. However, nurseries, whether standalone or attached to a private school, will remain exempt from VAT as per existing law. The VAT will only apply once a child reaches compulsory school age.
Exempt Goods and Services
Certain goods and services will remain VAT-exempt. Before- and after-school childcare, as well as childcare-based holiday clubs, will continue to be exempt from VAT, as they fall under care and welfare services. Additionally, goods and services closely related to education—such as school meals, transportation, and educational materials like books and stationery—will also remain exempt, recognizing their integral role in delivering education.
However, the government is cautious about potential “value shifting,” where schools might assign higher values to exempt supplies and lower values to taxable ones to reduce VAT liability. HMRC has stated it will challenge any schools attempting to avoid their full VAT liability through such methods. Schools offering both exempt and taxable services will need to perform a partial exemption calculation, with HMRC providing specific guidance on how to do this.
Advance Payments for Independent School Fees
From 29 July 2024, any fees paid to private schools for terms starting in January 2025 onwards will be subject to VAT. Some schools had offered pre-payment schemes to help parents avoid VAT, but HMRC may challenge these payments if the tax point has not yet occurred. For instance, if a parent pays for the 2025/26 academic year in March 2024, but the fees and details have not been finalized, HMRC might consider this payment a deposit for future supplies and thus taxable.
VAT Registration for Schools
Private schools that do not currently make taxable supplies will be able to register for VAT starting from 30 October 2024. Schools that do make taxable supplies can register at any time, but they must begin charging VAT from the date they become VAT-registered.
Impact on Private Schools
The introduction of VAT on private school fees, combined with the loss of charitable business rates relief, presents a significant financial challenge for many private schools, especially those with charitable status. The government has expressed a desire for schools to minimize fee increases, but this may be difficult for schools operating on tight budgets or with limited reserves. Smaller and more marginal private schools are likely to face the most significant challenges.
Specialist schools, which provide tailored education in areas such as the arts, sciences, sports, and technology, may also be impacted. These schools often require additional resources and specialized staff, making them more expensive to run. The VAT increase could lead parents to seek alternative options, potentially reducing enrolment and putting further financial strain on these institutions.
Moreover, if private school attendance drops, there could be increased demand on state schools, straining public resources. The long-term impact of these measures on private school attendance and finances remains uncertain, but it is clear that the loss of VAT exemption will have significant consequences for the independent schools sector.