Comprehensive Guide to the Upcoming VAT Changes on Private School Fees

On 29 July 2024, the UK Treasury introduced draft legislation set to impose VAT on private school fees starting from 1 January 2025. This significant shift is part of broader tax reforms aimed at levelling the playing field between private and state-funded education. While the legislation will take effect on 30 October 2024, the VAT will only be applicable to services provided from 1 January 2025 onwards.

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Understanding the Implementation Timeline

The legislative changes are staggered to allow schools and parents time to adjust. The law officially comes into force on 30 October 2024, but VAT will only apply to educational services rendered from 1 January 2025. This staggered implementation ensures that parents and schools aren’t immediately hit with VAT on existing services but have time to plan for the added financial burden.

Anti-Forestalling Measures: To prevent any attempts to circumvent the VAT by prepaying for services before the VAT is applicable, the government has introduced anti-forestalling measures. Payments made after 28 July 2024, for services that will be provided from 1 January 2025 onward, will be subject to VAT. This prevents schools from offering fee-in-advance schemes that attempt to lock in current VAT-free rates for future services.

Scope of VAT Application

The VAT will cover both educational and boarding services provided by private schools, marking a significant change in the taxation of private education. This comprehensive application means that almost all aspects of a child’s education in a private setting will now be taxed.

Educational Services: The VAT will apply to all educational services provided by private schools from the first year of primary school onward. This means that parents with children entering primary education or continuing in secondary education could see their school fees increase by 20% due to VAT.

Boarding Services: In addition to educational services, boarding services provided by private schools will also be subject to VAT. This is particularly significant for parents of boarders, who will see a substantial increase in their overall costs.

SEN (Special Educational Needs) Provisions: The VAT application will also affect children with special educational needs (SEN) placed in private schools. If these children are placed under an Education Health and Care Plan (EHCP) funded by a Local Authority (LA), devolved government, or non-departmental public body, the LA can reclaim the VAT. However, if parents choose to place their child in a private school outside of state recommendations, VAT will apply, adding another layer of cost.

Connected Persons: The VAT will also apply to services provided by “connected persons,” ensuring that private schools cannot circumvent the tax by outsourcing services to related entities.

Exemptions and Exceptions

While the VAT will broadly apply to private school services, there are notable exemptions designed to limit its impact in certain areas:

Nursery Education: Nursery education, whether provided by standalone nurseries or those attached to private schools, will remain exempt from VAT. This means that parents of younger children will not face the same tax burden as those with children in primary or secondary education.

Vocational Training: While VAT will apply to sixth forms attached to private schools, vocational training provided by further education colleges will remain exempt. This exemption aims to support vocational education and training outside of the traditional school environment.

State Schools and Academies: Education and boarding services provided by state schools, including academies, will not be affected by the VAT changes. This maintains the current tax status for state-funded education, keeping it more financially accessible than private options.

Related Services: Closely related services, such as school meals, transport, and books and stationery, will remain VAT-exempt. However, the government has warned that any attempts by schools to artificially reduce the VAT burden by shifting value to these exempt services will be challenged as tax avoidance.

Childcare Services: Before and after school childcare services, such as breakfast clubs or holiday clubs that consist solely of childcare, will remain exempt as welfare services. This provides some relief for working parents who rely on these services.

Implications for Schools and Parents

The introduction of VAT on private school fees is expected to have significant financial implications for both schools and parents. The government has stated that it does not expect fees to rise by the full 20% VAT rate, as schools can now reclaim VAT on certain expenses. However, the overall cost to parents is still likely to increase.

School Strategies: Private schools will need to carefully consider their pricing strategies to remain competitive while absorbing the VAT impact. They may also need to invest in new accounting systems to manage VAT compliance and ensure that they can reclaim VAT on eligible expenses.

Parental Concerns: For parents, the introduction of VAT means higher fees, which could lead to difficult decisions about whether to continue with private education. Some may consider moving their children to state schools or reducing other expenditures to accommodate the increased costs.

Government Expectations: The government has indicated that it expects private schools to take steps to minimize fee increases, projecting that schools will be liable for VAT on around 15% of their fee income. However, since VAT is a tax on consumption, the true impact will depend on how schools and parents respond to the changes.

Reclaiming VAT

As private schools will now be subject to VAT, this does mean that they can reclaim VAT suffered on expenditure. Whilst these claims are likely to be fairly minimal on an ongoing basis, VAT can be reclaimed on any goods or assets held at the point of registration going back up to four years. Where significant capital expenditure has been incurred on buildings or computer systems, it may also be possible to claw some of the VAT suffered on this back under the capital good scheme rules – in some cases going back as far as ten years.

For more information, please contact our VAT Team.

Future Considerations

As the January 2025 deadline approaches, schools and parents will need to stay informed about the evolving tax landscape and prepare for the financial changes ahead. Schools should engage with tax advisors to ensure compliance and explore all possible exemptions, while parents may need to reassess their financial plans in light of the new costs.

The introduction of VAT on private school fees marks a significant change in the UK’s educational landscape. While the government has taken steps to phase in the changes and provide exemptions where possible, the financial impact on private education is likely to be substantial. By understanding the new rules and preparing in advance, schools and parents can better navigate this challenging transition.

For more information, get in touch via email, or call us on 01904 558 300.