The Labour government’s plan to impose a 20% VAT charge on private school fees in the UK will be effective from January 2025. This policy has raised many questions and brought widespread concerns amongst schools and parents, which is not surprising. However, things are not as clear cut as they first seem and it may be possible for these increased costs to be phased in.
Equally, if private schools are obliged to charge VAT on fees, they will also be able to reclaim VAT on goods and services they buy, which can be offset against their VAT costs. There are also likely to be exceptions for some taxpayers. It is clearly going to be a complicated change for everyone.
This article explains how the addition of VAT on school fees is expected to work in practice, along with potential exceptions and implications:
How will VAT be charged on school fees?
Currently private schools are not obliged to charge parents VAT, but the VAT exemption on independent school fees is being removed, which means these fees will be subject to a mandatory 20% VAT charge.
VAT will be applied to private school fees for all students studying in the UK, including those relating to international students attending a UK institution.
Bear in mind that when school fees are invoiced, aspects of the provision are segmented and so not all costs will incur VAT; however VAT will be added to the majority of the expenditure.
Some of the sub-components of private school fees, like breakfast clubs, after-school care and certain extracurricular activities may remain VAT-exempt. This will be dependent upon whether they can qualify as “welfare services” under current UK VAT law.
Additionally, boarding accommodation and transport services provided by schools might also be exempt or zero-rated, depending on the details when legislation is finally published.
How will VAT change the level of school fees?
At first glance it would appear that the addition of VAT will automatically make the whole private school service 20% more expensive, but it isn’t as clear cut as this. Like any other business which makes VAT taxable supplies, if a school is obliged to charge VAT on the supplies it makes, it would in turn be able to recover the amount of VAT which it has paid on goods and services supplied to it provided the expenditure was incurred for the purposes of providing its core business.
This means VAT on utility bills, repairs and maintenance costs or professionals’ fees could all be recoverable). In addition, any VAT charged on capital expenditure like the purchase of new buildings or to finance other major projects may also be recoverable, including projects that were completed before the change in VAT status.
Since some of the VAT paid can be recovered, schools will be able to offset some of these ‘savings’ and may be able to avoid having to pass on a full 20% cost increase to parents. In practice this could mean a final overall cost increase of say 15%, rather than the full 20%. At this stage we are just predicting what could happen. Once the legislation is unveiled, we will be able to offer further comment.
Will there be any exceptions or special circumstances regarding VAT on school fees?
Children who have an existing Education, Health, and Care Plan (EHCP) will not be affected by the introduction of VAT on school fees. This is significant because some children with an EHCP currently have the cost of private school funded by their local authority and it could have affected affordability.
There have been reports of some parents considering ways to mitigate the addition of VAT by paying for school fees in advance, before the January 2025 introduction deadline. This approach is risky because it could be caught under the GAAR anti avoidance legislation and may result in retrospective taxation.
What are the implications of partial exemption from VAT?
As explained it may be possible for schools to manage the cost increases as a result of adding VAT to fees and they may not need to pass the entire 20% increase on to parents. They may be able to offset this by recovering VAT paid out on goods and services they purchase. This could result in an overall fee increase of about 15% instead of the full 20%.
Some schools may also be able to absorb some of the VAT costs by increasing their fees very gradually, or by offering more scholarships and bursaries to help parents cope with the increased expenses. This will depend on the financial resources available to individual schools.
Will VAT be charged on after-school clubs?
After-school clubs offered by private schools might be exempt from the addition of VAT if they are classified as welfare services. This will depend on the specifics of the new legislation, once details are published.
How can schools and parents prepare for the addition of VAT?
Schools can prepare by exploring strategies to mitigate the impact of VAT, such as adjusting fee structures and enhancing financial aid programs. They can also analyse how much VAT can be recovered from services and explore the potential for offsetting some of the extra increases through recoverable VAT on purchases.
Parents should be very wary of trying to pay for fees in advance to avoid the VAT increase altogether and instead, be planning financially for potential fee increases. They could discuss their concerns with the school and explore whether any scholarships or bursaries are available.
Overall, the introduction of VAT on school fees is going to have an impact on the cost of private education, but it will not be as clear cut as adding an automatic extra 20% increase. We will be monitoring developments carefully and updating as new information becomes available.
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