VAT and Private School fees

Unsurprisingly the Labour Party Election Manifesto, released on 13 June 2024, confirms their commitment to end VAT exemption for private schools should they form the next government.

While the manifesto predicts combined additional revenue of £1.51 billion from the VAT and business rate changes there is, as yet no detail regarding timings and the precise scope of the changes.

What does seem clear is that under a new Labour government VAT would become payable on some private school fees that are currently exempt, school fees will increase and the new government would move quickly to implement the proposal.

Whether or not schools will need to pass on the full VAT charge will depend on the school’s cost profile and preparedness. Although in principle, schools charging VAT on fees will be able to reclaim VAT on costs, many costs, e.g. salaries, will not be subject to VAT. We can expect capital works may be the largest element of VAT that the school can offset against VAT on fees. But in order to reclaim any VAT, schools will need to review and amend accounting systems to record VAT on expenses and costs separately.

The general rule is that paying for a service in advance fixes the rate of VAT to that in force at the time of payment. So in principle, paying school fees in advance of any changes to the law being made could mean that exemption is preserved.

There are two potential ways in which a Labour Government might seek to reduce losses of revenue arising from prepaying school fees.

The first is the possibility of “anti-forestalling” provisions. A Government introducing a tax rise can specify that although the tax rise will take place on a future date, payments made from a past date are ineffective in avoiding the tax increase. For example, the coalition government used anti-forestalling measures in 2011 when the rate of VAT increased to 20%. These took effect from the date of the announcement in the Budget.

Introducing a change to tax legislation where the change is backdated to before a Budget announcement would likely provoke strong criticism. But it is not inconceivable that an incoming administration, particularly if it secures a massive majority, might do this.

My view is that a Government will have much more difficulty in defending a change in law that is retrospective to before it becomes elected, so payments made before July 4^th 2024 are more likely to secure exemption than prepayments made after the Election.

The second issue is that for a prepayment to fix the VAT treatment for the supply of school fees, the prepayment must clearly be for the school fees, rather than, say an advance of credit that the school can draw down upon for school fees, extras, and sundry purchases by the pupil, etc.

Thus, a payment that exactly equates to the school fees for 2024/2025 school year is clearly “for” a supply of education. But it may be open to HMRC to challenge the efficacy of a payment of a round lump sum that is not specifically for the payment of one or more years’ school fees.

While it is difficult, in the absence of detailed statements by the Labour Party as to how the change in law will be implemented, our instinct is that: -

• A payment in full, in advance of the election, of the school fees for 24/25 is likely to secure exemption for that year. A payment at this time that specifically covers all school fees chargeable for subsequent years MAY also secure exemption for those years.

• Any payment after the election, even if no “Emergency Budget” has yet been timetabled, is less likely to secure exemption.

• In either case, HMRC might challenge exemption in respect of a payment that does not precisely and clearly pay for a year’s (or a term’s) education.