VAT on private school fees - potential risks and opportunities

We have outlined a number of potential areas of VAT which may be affected by these anticipated changes.

VAT compliance requirements

The VAT status of the schools affected by the proposed changes is likely to vary considerably from not being required to be registered for VAT/being registered for VAT but making predominantly exempt supplies, to the school making principally taxable supplies subject to VAT at the standard rate. For schools not currently registered for VAT this will result in increased administration in filing VAT returns, performing business / non-business and partial exemption calculations and dealing with any future HM Revenue & Customs (HMRC) compliance reviews.

If private schools are required to register for VAT, this could also result in VAT being chargeable on other income streams the schools generate. The liability of all income streams should be reviewed to ensure compliance across the board.

A 20% rise in private school fees?

Based on current plans private schools are likely to be required to account for VAT at 20% on school fees potentially resulting in either a 20% increase in prices or a tightening of the schools’ margins if prices aren’t increased and passed on.

We expect that it is more likely that the end result will be somewhere in between as a result of the schools being entitled to recover some of the VAT they incur going forward and possibly retrospectively.

With the potential changes coming into play, private schools should ensure they are set up contractually to enable them to increase their prices if VAT becomes chargeable.

We understand Labour has stated its intent to keep the VAT exemption for private school students with Special Educational Needs (SEN) who are in fee paying schools because of a shortage of provision in the state sector. This may create additional complications for private schools educating both SEN and non-SEN learners.

VAT recovery

As referred to above, there may be scope to offset some of the VAT due on fees through the recovery of VAT on any expenditure which is directly attributable to the taxable school fees to mitigate any potential liability, for example, there is likely to be entitlement to VAT recovery on direct costs of teaching such as agency staff which can be substantial.

Following this, there is also the potential opportunity for historic VAT recovery on any Capital Goods Scheme items such as large refurbishments or the construction of new buildings. As these capital goods will now be used to make taxable supplies, private schools may be entitled to recover some of the VAT incurred if the costs arose in the last 10 years.

Going forward this should work the same way that any potential qualifying capital investment would likely be, at least in part, entitled to some form of VAT recovery, reducing the total cost of these projects.

Will advance payments help to mitigate potential VAT costs?

The idea of encouraging early payments multiple years in advance has been floated as a potential option to keep school fees VAT exempt for as long as possible. The idea of this is to create an earlier ‘tax point’ at the date of payment, before the change to keep the school fees within the scope of the exemption.

We anticipate that HMRC may challenge these arrangements. This would be on the basis that early payments may not create a genuine ‘tax point’ and are simply a holding for a future terms payment which is drawn down each term. The risk for private schools, if they take advance payments based on the understanding that they do fall within the exemption, is if HMRC disagrees with this approach it may result in a VAT dispute and protracted correspondence which may ultimately result in a significant VAT liability, interest and potential penalties. If this does happen, will schools be able to charge the additional VAT to parents?

We envisage that HMRC may implement anti-forestalling measures to prevent advance payments from being a viable option. Until any legislation is in place regarding the proposed changes, it is difficult to determine and provide any certainty on the viability of advance payment schemes.

Concern for other education providers?

There has been concern in the industry that the current plans may inadvertently encompass a variety of other education providers. It appears that Labour’s current plans are only to remove the exemption for private schools but other organisations should watch any announcement closely to ensure they are not impacted.

Although Labour has made clear its intention to make the change, uncertainty remains on how this will be implemented, and when, leaving many private schools in a state of limbo until further announcements are made.

Get in touch

If you would like to discuss these potential changes, risks and opportunities in further detail, please do not hesitate to reach out to one of our public and social sector VAT specialists.

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