VAT on school fees, changes ahead?

Fee paying schools are therefore considering the impact of having to apply VAT, expected to be imposed at the standard rate of 20%, on their charges, especially given the need for schools to plan their budgets years in advance. VAT is also expected to be added to boarding charges as being ‘closely related’ supplies. The addition of VAT to education will represent a fundamental change to a sector which has always been exempt from VAT, with no VAT charged on income or recovered on expenditure, but the biggest impact will be the added financial burden to parents and guardians. Many schools are considering ways to reduce costs and the impact of being able to recover VAT incurred on expenditure, so that the normal annual fee increases can be minimised, or even reduced to lessen the burden for families.
 
There has been much discussion regarding the possibility of parents paying school fees in advance of the General Election, while the payments remain exempt from VAT. While there seem to be more independent schools introducing payment in advance (PIA) arrangements, it has always been common for schools to operate these, whereby parents can prepay fees months or years in advance of them being due. There are many reasons why this is attractive to those parents and guardians who can make advance payments, such as taking advantage of any reductions offered by the school and having the certainty that the future fees have been accounted for.
 
As a fundamental VAT principle, VAT only becomes due at the ‘time of supply’, otherwise known as the tax point. Where there is a supply of services, the tax point is normally the date when the service has been completed. However, under the VAT legislation, where the supplier receives payment, or issues a VAT invoice, in advance, then that earlier date is the deemed tax point. This means that if a school receives payment in advance under a PIA arrangement, this creates a tax point, so the VAT treatment at that date is applicable. Therefore, under the normal rules, if school fees are paid when the supply of education is exempt, then no VAT would apply, even if the services are provided after any introduction of VAT. 
 
Labour has however been clear that it will seek to block any arrangements which it believes avoid VAT and, as was the case when the standard rate of VAT increased from 17.5% to 20% in 2010, could introduce ‘anti-forestalling’ measures intended to ensure that VAT is due on advance payments made before any change in the VAT legislation. However, previous anti-forestalling provisions were only effective from the date the changes were announced by the Government, which could be the day after Labour forms a new Government.
 
Even if an anti-avoidance provision is used, this would also not be expected to apply before a change in the VAT treatment is announced. However, the possibility remains that a new Government could seek to introduce retrospective legislation if it takes the position that advance payments are part of an avoidance scheme. Although this would be highly unusual, there have been examples, albeit very few and not in respect of VAT, where retrospective legislation has been introduced allowing HMRC to go back and collect the tax.
 
There are also existing rules in place, as outlined in VAT Notice 700/8, which require disclosure of tax avoidance schemes which are intended to give a ‘VAT advantage’. It may however be difficult for these provisions to be used to suggest the arrangements are artificial when the current VAT rules are fully complied with.
 
There has been the suggestion that Labour could challenge prepayment schemes on the basis the payments are a deposit from which the school can draw down in due course and not actually deemed to be fees paid in advance of a supply. Although deposits held as security, for example where held in an escrow account, do not create a tax point, it is difficult to see how HMRC could seek to use this argument to challenge the exempt treatment of advance payments, especially if the payments are attributed to specific school term periods. 
 
It has also been reported that Labour could seek to stop schools using the ‘Capital Goods Scheme’ to clawback a proportion of VAT incurred on qualifying large capital projects undertaken by the school in the previous 10-year period, such as new classroom accommodation or a new library, which continued to be used following any introduction of VAT. This too would require a change to a well-established VAT provision and it is difficult to see how this would be targeted to only apply to the education sector.
 
Although the Labour Party has made it clear that it will do what is necessary to ensure that what it sees as the full amount of VAT due is collected, there may be an element of hoping the threat of challenge to PIA arrangements is enough to minimise their use, and so avoid the need to introduce additional changes which could be subject to challenge.

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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