Introduction of VAT on school fees from 1 January 2025.

As widely reported in the media over the past few months and one of Labour’s key policy announcements, the incoming Government was clear that independent schools would be removed from the VAT exemption, and so school fees would be subject to 20% VAT.

However, introducing VAT so soon, and during an academic year was not expected, and it had seemed most likely that VAT would not apply until at least September 2025.  Advancing VAT on education by at least nine months will be very unwelcome by private schools and parents, and perhaps also the state sector, who will need to work extremely hard to try and prepare for the change.  

Although schools will be able to offset some of the impact by reclaiming VAT on certain costs, such as utility bills, this will be limited given the majority of costs relate to staff.  This will be a fundamental change to a sector which has always been exempt since VAT was introduced over 50 years ago, substantially pushing up costs and adding a further financial burden to parents.

Before the Chancellor’s announcement, the Government had said that schools have had plenty of warning to adapt to the impact of having to apply VAT, but had provided very little detail, apart from saying it would be included in the first Budget (which we now know is set for 30 October) and changes would not come in until 2025.  It is therefore not clear how schools would have prepared for the change when they have already set budgets and informed parents of the fees for 2024/25, before any VAT changes.  

The Government has now issued draft legislation and guidance on the changes, and further guidance is expected to be issued to schools over the next few months.

 
It is now confirmed that all education services and vocational training supplied by private schools across the UK will be subject to VAT at 20%. Education services has been widely defined and includes boarding and lodgings.  Other closely related supplies, such as school meals and transport will remain exempt from VAT, as will nursery services.  Before and after school childcare, or childcare-based holiday clubs, that just consist of childcare and do not fall within the definition of education will remain exempt as welfare services.  

However, additional supplies of education where a charge is made for after school hours or during holidays, such as extra-curricular performing arts and sports lessons, will be subject to VAT.

Fees in advance has been a hot topic, with many schools offering arrangements for parents to make payments in advance. The Government has announced anti-forestalling provisions which will mean that payments made on or after 29 July, which relate to a school term after 1 January 2025, will be subject to VAT at the beginning of that term.

It has also been stated that “school fees paid before 29 July 2024 will follow the VAT treatment in force at the time of the normal tax point for these supplies, where the fee rate for the relevant term has been set and was known at the time of payment.”  This would suggest that payments made before 29 July will not become subject to VAT; however, this is on the basis that the pre-payments were sufficiently linked to specified school terms and charges. This therefore appears to allow scope for HMRC to challenge pre-payments which fall short of this.

As expected, pupils with Special Educational Needs (SEN) will not be subject to any exceptions, so VAT will apply, including pupils with Education, Health and Care Plans (or the equivalent in other parts of the UK).  Where pupils with EHCPs are funded by local authorities to attend private schools, the local authority will be able to recover the VAT.

It appears, although not mentioned in any announcement, that schools will be able to benefit from the Capital Goods Scheme (CGS).

Where schools have incurred large capital projects (exceeding £250k net of VAT) on school buildings, such as building new classroom accommodation or a library, or refurbishment works carried out in the last 10-year period, under the CGS, they should be able to clawback a proportion of VAT incurred over the remaining period. This will help mitigate the VAT impact for those schools which have carried out large capital projects.

The HMRC guidance says that private schools not currently registered for VAT will need to register with effect from 1 January 2025, but should not apply to register until after 30 October. The introduction of VAT will represent a substantial change for schools having to deal with the complexities of the tax.

Schools are working hard to mitigate costs by finding ways of reducing costs and assessing financing needs in the short to medium term. This is now even more urgent given the very short period to prepare for the changes and the need to communicate to parents in good time any adjustments to previously announced fees for the school year.

We have been advising schools on these VAT aspects and would be very pleased to speak with schools to see how we can help.  If you would like to discuss any of the above in more detail, please do get in touch with your usual contact or otherwise the contacts listed.

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