VAT on private school fees – Budget update

Following our previous article, the Government has provided responses to the feedback received during the consultation period for the introduction of VAT to private school education which ended on 15 September 2024. Whilst most of the draft proposals have remained, there are a few elements that have subsequently resulted in changes to the draft legislation.

Draft legislation changes

Non-maintained special schools (NMSS) have now been brought into the legislation, although they will not be subject to the same anti-forestalling rules as other private schools. This is reportedly in order to put NMSS on the same footing as other fee-paying schools and allow them the benefits of VAT recovery on expenditure. As many NMSS are funded through local authorities (who are normally eligible to be able to recover the VAT charged), this should not present a significant problem other than administratively, except where there are high numbers of privately funded students, where this may present a VAT cost.

HMRC also recognised that that elements of the draft legislation were unclear in relation to higher education (HE) schools/colleges. In particular they have amended the scope of the VAT on fees to ensure only fee paying HE institutions are caught by the legislation rather than those funded by the Government.

Confusion surrounding which further education (FE) colleges income was caught by this proposed legislation has now been clarified. HMRC have confirmed that it will not treat funding in the same way as private fees, as per Colchester Tribunal outcome, however FE institutions can choose to do so if it advantages them to do so.

Clarity has been provided that TEFL courses will remain exempt.

Clearer guidance for nursery education is now available. A nursery class is exempt from the VAT on private school fees, based on the majority age of the class at the time of the supply, providing they are below school age, with those classes of wholly or mainly of school age being treated as subject to VAT.

Charity business rate relief

Business rates relief for charitable independent schools will be abolished in England from April 2025. The exceptions are for those schools which provide full-time education to wholly, or mainly, pupils on educational health care plans (EHCP) and also those HE/FE (pupils aged 16 -19) institutions which do not wholly or mainly charge private fees, for example publicly funded FE colleges.

Summary

The main changes with regard to todays announcement confirm NMSS have been brought into the scope of VAT on school fees and will need to calculate when they need to register for VAT in order to account for VAT on school fees from 1 January 2025.

Previous HMRC guidance published on 10 October 2024 detailing single and multiple supplies and the recovery of input tax remains as originally stated, with no new information provided. Rumours that the capital goods scheme (CGS) could potentially be restricted from a 10-year period to a much shorter period have yet to be seen in any published material.

Next steps

All schools that fall within the scope of the new legislation should urgently assess the timing and operation of VAT registration. Recent HMRC guidance remains open to confusion and many schools may need to seek advice on this.

HMRC have previously stated that they will provide extra support for schools who need to register for VAT, in order to complete the processes quickly. A dedicated email address has also been established to deal with queries.