VAT on Private School Fees — what’s the latest?

It has been widely reported that the Labour Party plan to introduce VAT on private school fees if they win the General Election on 4 July 2024.

There are just under 2,000 private schools in England and Wales and 70% of those are registered as charities. Currently, most supplies of education by private schools’ benefit from a VAT exemption. Similarly, goods and services that are closely connected to the supply of education are also exempt from VAT.

With the current polls suggesting a Labour win, it is crucial for parents and schools to be aware of what these changes could mean for them. It’s important they are aware of the risks of paying school fees in advance or splitting supplies to avoid a VAT cost.

Becky Hayes, Partner and Head of VAT at Westcotts looks at what this policy change could mean and how parents and schools can prepare.

What will change if VAT is added to school fees?

If Labour wins the next general election, it is reported that the VAT exemption will be withdrawn in the first 12 months. This will raise funds to invest in teachers and mental health counselling in state schools.

We of course do not know the extent to which Labour plans to change the exemption eligibility conditions. Some are suggesting that this could see an increase in school fees by up to 20% although this is unconfirmed. With an increase in taxable supplies, schools will increase their recovery of VAT incurred on costs so they may not pass on the full VAT cost to customers. Additionally, private schools would still retain charitable status leaving donations and gifts free of VAT.

How can I prepare?

We have seen commentary on ways to avoid paying VAT on school fees. For example, paying school fees upfront before any changes are announced. Or, splitting out supplies and increasing values of boarding or after school clubs that may still benefit from an exemption.

Whilst paying advanced school fees before any change is announced will create a tax point, there is no guarantee that these will not be subject to VAT in the future. This is particularly where fees are paid for many years in advance. For example, anti-forestalling rules are often included in any change to VAT rates. These rules prevent tax avoidance between the date new legislation is announced and when it is effective. HMRC could also challenge the VAT treatment of advance payments schemes where the purpose of the scheme is to avoid paying VAT.

Some schools might consider splitting exempt supplies of boarding or after school clubs from an overall package to reduce the VAT cost. However, this will only work if the supplies are distinct and independent. There are already rules in place in respect of single and multiple supplies. If, in reality there is one overall package of education that is being supplied, then it should be treated as a single supply for VAT purposes.

Getting expert advice is crucial for any potential legislation changes in VAT, to prepare your finances for the future. At Westcotts, we proudly support a range of educational trusts across the region. Our expert understanding of the complex nature of this sector comes from experience developed through our client portfolio. We can provide support and advice in a variety of areas, including tax and VAT. Get in touch with Becky Hayes, Partner and Head of VAT to see how she can help you by calling 01392 288555 or email becky.hayes@westcotts.uk.