VAT on independent school fees

With the publication on 29 July 2024 of draft legislation to remove the VAT exemption for private school fees, much of the uncertainty around the introduction and scope of this controversial measure has been dispelled.

From 1 January 2025, private school fees will be subject to 20% VAT.

It will apply to primary and secondary education, vocational training, closely-related board and lodging and education provided out of hours or in school holidays.

VAT will not apply to:

• nursery classes or non-maintained special schools
• goods and services closely related to the provision of education such as school meals, exam services, transport, books and stationery.
• before/after school childcare or childcare-based holiday clubs that do not provide education.

There will be no exemption for children with SEND but, where a private school placement is necessary to meet a child's needs (for example, under an EHCP) and the local authority is responsible for the school fees, it will be entitled to a VAT refund.

VAT will apply retrospectively to fees invoiced or paid from 29 July 2024 relating to terms beginning on 1 January 2025 or later.

HMRC will challenge fees in advance schemes where payments were made before 29 July 2024 unless they related to 'specific terms' fees that had already been set'.

Schools will be able to recover VAT on their own costs related to the provision of education and can set this 'input VAT' off against their 'output VAT' liability. 

Schools are expected to be able to recover a proportion of VAT on large capital projects including those carried out in the last 10 years, such as the construction of new buildings or refurbishment works.

From April 2025, private schools which are charities will become liable for full business rates. 

There will be a short consultation process on the VAT proposals and the Government will engage with schools on how to address the impact on children with EHCPs of the loss of charitable rate relief on business rates.

VAT liability can't be avoided by contracting out supplies to closely connected persons or where the purpose of the arrangement is to avoid payment of VAT. The Government warns that HMRC will challenge any school who seeks to avoid their full VAT liability in any way.

How fees paid by members of the armed forces will be treated.

Whether the consultation process will result in any other changes.

Whether and how the Government will cater for children with EHCPs in respect of the removal of business rates charitable rates relief.

Consider contributing to the consultation process which closes on 15 September 2024 and the Government's thinking on the impact of business rates on pupils with EHCPs.

Register for VAT if you aren't already registered.

Estimate the school's net VAT liability and how this will affect fees from January 2025.

Consider whether liability for full business rates from April 2025 will have an impact on school fees.

Check whether your contractual documents:

• allow you to pass your VAT liability on to parents and whether fee increases are subject to a reasonableness requirement;
• require a clear term's notice of fee increases;
• allow you to recover VAT from parents on fees paid in advance prior to 29 July 2024 in the event that HMRC concludes that it is payable.

Inform parents about the fee increases they should expect and how the school will support them.

Consider whether you can be flexible with those parents who will struggle to pay increased fees. Options include:

• Reducing fees for a period while families adjust their finances;
• Expanding disposable income-based bursaries;
• Waiving the obligation on parents to pay fees in lieu of notice if they decide before or during the Autumn 2024 term to withdraw their child with effect from January 2025.

Be prepared to respond to parental complaints about the imposition of VAT.  

Look out for further guidance and support sessions from HMRC on registering for, calculating and paying VAT.

Work closely with financial/tax advisers to ensure you comply with the new VAT rules.

This article is for general information purposes only and is not a substitute for professional advice. We do not accept responsibility for any loss which may arise from reliance on content.