VAT exemption on private school education

What are the changes?

The Chancellor has clarified that the VAT exemption on education, vocational training and board/lodging where provided by private schools or a closely associated body is to be removed from 1 January 2025, making these supplies subject to VAT at 20%.

Education provided by private schools to individuals where local authorities fund the schooling because of Educational Health Care Plans (EHCP) will also be subject to VAT at 20% from 1 January 2025. This is contrary to the original statement by the Labour Party, which stated these fees would remain exempt, but HMRC have confirmed local authorities will be able to recover this VAT charged by private schools as section 33 bodies.

The draft legislation also confirms that both nursery fees for pre-school age children and supplies of closely related goods/services to education remain exempt from VAT.

Anti-avoidance provisions have been put in place for supplies by bodies closely related to private schools also being caught by the changes. In addition to any VAT group structuring of schools and closely related bodies, this is to stop convoluted avoidance plans that were touted by some as potential means to avoid the 20% VAT charges by creating another entity to supply the education and/or boarding through.

The much-anticipated anti-forestalling clause for advance school fees has also been clarified to apply to all pre-payments of private school fees received on or after 29 July 2024 but before 30 October 2024 (when the legislation comes into force). The impact of these changes means that any advance payments received in that time period are treated as creating a tax point (i.e. a VAT accounting time) as either 1 January 2025 or the first day of the term the pre-payment relates to.

Therefore, any advance fees received from 29 July 2024 going forward will be treated at the appropriate VAT rate for the school term the payment relates to, i.e. if relating to the 2024 autumn term they will be treated as VAT exempt, but for all terms thereafter VAT will be applicable at 20%.

The Government has also announced that business rates relief will be removed from April 2025.

This has been softened by the announcement of a government consultation process running from now until 15 September 2024, which will look at the proposed private school definition and connected parties/persons draft legislation amongst other things.

Where does this leave schools and parents now?

Private schools now have clarity that VAT will be due on school fees and boarding from 1 January 2025, but closely related supplies provided directly to pupils will still be exempt from VAT. Any nurseries or after-school clubs will largely remain exempt from VAT under the care and welfare legislation.

Schools can now use this information to consider what VAT recovery is available on costs incurred and look to large capital expenditure, both past, present or planned, to see if any VAT can be clawed back under the Capital Goods Scheme for those expenses over £250,000.

Some schools that are not already VAT registered may benefit from an earlier voluntary VAT registration date where they already make taxable supplies (such as zero- rated transport) in order to maximise VAT recovery opportunities, but would need to balance this against any VAT due on standard or reduced rate services.

Schools that do not currently make any taxable supplies will be required to register ahead of 1 January 2025 (the earliest date they will be able to register from being 30 October), and HMRC will be issuing further guidance closer to the date on this and operation of the partial exemption scheme for schools.

With regard to advanced payment schemes, whilst the Government has made the situation clear from 29 July 2024 going forward, for those schools which have accepted several years’ worth of fees prior to this the situation is much more complex. The technical notes make it clear that HMRC will be looking at any advance payments to check if they meet the tax point rules and many schools will not have considered the fact that the payments and invoices raised need to relate to specific terms at a specific value. The guidance is clear that these payments will be scrutinised and/or challenged by HMRC, therefore we would recommend that any schools that have taken advance fees carefully consider if they should be liaising with parents now over any VAT that may be due. Our previous blog on advance fees can be found here.

As per our previous blog posts, schools should not only review income and expenditure to assess VAT recovery but also explore ways to generate more income for the school from other areas. We shared examples in our previous blog here.

If you have any questions, our VAT and Not for Profit team are here to help. To get in touch, click here.