VAT alert! Further Education Colleges and Private School VAT changes

What are the new private school VAT rules?

As has been well publicised, the government intends to impose VAT at 20% on private school fees in respect of education provided from 1 January 2025 onwards. This intention was confirmed in the Budget on 30 October 2024.

There had been speculation that the proposed definition of a private school would catch some institutions that are not typically regarded as private schools such as FE colleges.

Could Further Education (FE) colleges be regarded as private schools?

Initially, there was a concern that FE colleges could be caught within the definition of a private school if they had any students aged 16-19 who are charged fees, such as international pupils who don’t meet the eligibility criteria for state-funded further education.

This concern was raised in response to the initial draft legislation which was published at the end of July. As part of the Budget Day announcements on 30 October, it was confirmed that changes would be made to the VAT definition of a private school such that institutions are only caught where relevant education is ‘wholly or mainly provision in which fees or other consideration are payable’.

In a response to a technical consultation on the new rules which was also released on Budget Day, the Treasury announced that:

“The government is confident that this [revised] definition does not capture FE colleges, because such institutions are not permitted to charge domestic 16–19-year-old pupils fees.”

It is therefore safe to assume that FE colleges will not currently be forced to make any changes to the VAT treatment of their supplies as a result of the VAT changes to private schools.

However, this is not quite the end of the story because of the interaction of the new rules and the 2020 decision of the Upper Tribunal in Colchester Institute Corporation (2020) UKUT 0368 (TCC) (‘Colchester’).

What is the significance of Colchester?

Many will remember the Colchester decision which suggested that grants provided to FE institutions should be regarded as payment for a supply of education rather than outside the scope of VAT. At that time, this supply of education would have been exempt from VAT.

HMRC have never agreed with the Colchester decision, but they did not appeal it. They released a brief in 2021 confirming their policy on grant funded education would remain unchanged but that institutions could choose to apply its conclusions. Meanwhile, they confirmed that they would be taking further steps to test the treatment of grant funding via a new appeal.

The fact remains that Colchester is an Upper Tribunal decision which is currently binding case law. If the principles of Colchester are applied to the new private school's VAT rules, there is an argument that the grant funding received by FE colleges could bring them within the VAT definition of a private school. This would result in VAT being chargeable on (at least some) supplies of education.

Has HMRC said anything about this?

In the technical consultation response released on Budget Day, HMRC made the following comments:

“Regarding concerns that public funds received by FE institutions may be regarded as fees for private education and may be within scope of this policy as a result of Colchester, HMRC does not actively impose the Upper Tribunal’s decision and is taking steps to test the primary decision on the treatment of public monies via a new appeal. This means that it remains open to institutions that continue to treat such education as non-business to claim reliefs, where all the relevant criteria have been met…

Institutions can, if they choose to, apply the conclusion of the Upper Tribunal in Colchester, which would result in them treating the public funds they receive as business income. This could bring these institutions within scope of this policy, as this income would be treated as consideration for the provision of education. However, FE institutions should carefully consider this decision and ensure they understand what their new VAT obligations would be and the financial implications of this. Providers who do this should also consider if they need to submit any error correction notices for any under or overpayment of VAT, including adjustments to previous claims for charitable reliefs.”

It therefore appears clear that at least some FE colleges will have a choice as to whether they want to be regarded as private schools and charge VAT on some supplies of education.

Should an FE college choose to be a private school?

This is not a straightforward question. We are dealing with brand new rules and there is no precedent to turn to.

The advantage of treating some education as subject to VAT is that there is the possibility of significant VAT recovery on costs.

This must be weighed against the downsides, which may include:

• The obligation to charge VAT on taxable supplies of education.
• Losing charitable VAT reliefs on some purchases (particularly construction projects).
• Increased complexity in the VAT position of the college.
• Uncertainty given HMRC’s desire to further test the status of grant income in the courts.

Relevant considerations will therefore include (but are not limited to):

• Whether VAT can be ‘passed on’ to the recipient of taxable supplies of education (e.g. the funding body).
• Whether significant charitable VAT relief has been claimed in recent history.
• The level of increased input tax recovery at stake.

We therefore agree with the Treasury’s comment that ‘FE institutions should carefully consider this decision and ensure they understand what their new VAT obligations would be and the financial implications of this’.

It is highly unlikely that there will be a ‘one-size-fits-all’ answer and each college will have to consider its own position.

What should FE colleges be doing now?

In the first instance, FE colleges should be thinking about whether they could be regarded as private schools for the purposes of these VAT rules and what impact this could have on their overall financial position in the short, medium and longer term.

These issues are likely to be complex and fact-specific. We are looking to work with further education colleges to discuss and review their options.

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