VAT on school fees – what you need to know

There has been much commentary following the publication of the draft legislation for levying VAT on private school fees and boarding from 1 January 2025. Although the draft legislation and associated policy document answers a number of questions, it also raises others. Some of these may be clarified by the Government later in the summer but many will require more detailed consideration by each individual school.

When will VAT on school fees start?

The government has set an intention to levy VAT on private school fees from 1 January 2025.

What will be liable to VAT?

Although VAT will be applied to private school fees and boarding services (state boarding schools are not covered), it will not be a blanket application of VAT to everything private schools do.

Draft legislation states that VAT may be applied to the following costs:

• Education (including sixth form) and vocational training fees at private schools
• Board and lodging fees at private schools.

The draft legislation specifically exempts other things closely associated with education. HM Treasury’s Technical Note says:

“other “closely related” goods and services other than boarding (i.e. goods and services that are provided by a private school for the direct use of their pupils and that are necessary for delivering the education to their pupils) will remain exempt from VAT.”

Currently, costs that could potentially be defined as ‘closely related’, and therefore not be subject to VAT include the below:

• School meals
• Transport
• Examination fees
• Books and stationery

This has yet to be confirmed in legislation or formal HMRC guidance - we assume that this will be the case when such services are genuinely supplied separately to the educational fees.

There is no mention of the current guidance on “educational school trips” which can be treated as “closely related” (depending on the circumstances) or the provision of laptops which cannot, so it is assumed this guidance will remain effective. However, we suspect there will be grey areas yet to be resolved.

We believe that reliefs for nursery care and state services will remain and will not be subject to VAT under existing rules.

Differences in treatment for specific supplies raises fact specific questions – i.e. when is a supply part of the school fee or should be considered a supply in its own right, even if it is closely associated (and potentially subject to other sorts of relief, such as sporting, welfare, cultural or land exemptions). This is a particularly important area as any artificial split of supplies may require notification to HMRC under its disclosure of avoidance scheme rules. In some cases, the liability may depend on whether certain services, such as school meals are included in a single package or subject to separate optional elements.

Pre-payment of school fees

Any pre-payment of fees that takes place after 29 July 2024 will be ineffective; the draft legislation puts in place specific rules to ensure VAT is chargeable on these. Fees that were paid in advance before 29 July 2024 are not subject to specific rules, but HMRC will be looking carefully into such payments.

The application of the rules will need to be considered on a case-by-case basis and we will need to assess HMRCs approach to challenging pre-payments. However, if a pre-payment is general in nature and not linked to a specific invoice for a term or year at a pre-agreed rate for a specific pupil there is a risk that HMRC will argue that it does not cover an identifiable supply and, therefore, has not created a ‘tax point’ on the payment date.

VAT Relief for SEN students

Relief for particular categories of students, like those with Special Educational Needs, will not be applied through the VAT system. The Government will look to spending measures and other VAT recovery options including local authority refund schemes to provide relief - therefore local authorities who fund school places for SEN children will be able to claim relief. However, parents who choose to pay fees for their SEN children at a school of their choice will not be eligible for relief.

Other specific categories of private schools (for example, Faith Schools) have not been specifically addressed.

VAT administration

There is no specific mention of the impact of these changes on land and property costs incurred before 1 January 2025. This is expected to be a key area of opportunity for the sector to recover VAT on costs and will require consideration by individual schools on a project-by-project basis.

As some sources of income will remain exempt, this means that many schools who are registering for VAT for the first time will have the additional complexity of ‘partial exemption’ calculations to contend with – they cannot assume all VAT on purchases is recoverable and all sales have 20% VAT added. This is not a straightforward or simple exercise and can take time. Depending on the IT system in place, meeting the requirements of Making Tax Digital for VAT can be difficult and time consuming. Some schools may need more time, and it is hoped HMRC will be supportive during this period of change.

Next steps

The legislation is still in draft, but the aims of the policy appear relatively set. Private schools will have a full schedule of work this summer as they address the practical issues that this VAT change will raise. For some schools it may be a case of making amendments to existing systems, for others a wholesale change in their commercial model and financial reporting may be appropriate.

While it may be too early to make substantive decisions on how to operate from 2025, here are some initial questions for school finance teams and finance trustees to consider in advance of detailed guidance being published by HMRC.

• Are your finance systems set up to track sales and purchases on a net and VAT basis, rather than gross?
• Are you clear on the miscellaneous income your school generates?
• Do you have good records of capital expenditure? Partial recovery of previously irrecoverable VAT on capital spend in the last 10 years may be possible.
• For those schools already registered for VAT - do you have any VAT rulings (e.g. special methods) or VAT structures in place (e.g. catering) that it may make sense to unwind?
• What additional training and support do your finance and commercial teams need?