VAT and Private School Fees

HMRC has published initial guidance, and the draft legislation, pertaining to the planned imposition of VAT on private school fees. There is a period of consultation until 15 September. My take is that while the broad principles are set out, there are still some uncertainties which hopefully can be “ironed out” during the consultation.

In the meantime, many schools will need to take action to register for VAT, and to ensure that their accounting systems can cope with being VAT registered.

Technical issues

• As of 1 January 2025, all education services and vocational training supplied by a private school, or a “connected person”, for a fee, will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.

• Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.

• Prepayment schemes involving a lump sum paid to the school in advance, may be ineffective if the payment is not sufficiently specific and identifiable (i.e. if the money paid did not relate to specific terms’ fees that had already been set.) “HMRC stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due. “

• 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. The note gives examples of school meals, transport, and books and stationery.

• The draft legislation, however, says VAT will apply to “board and lodging” which on the face of it could include school meals. It is not clear whether, say, there is a deliberate distinction between lunches in the dining hall and evening meals in boarding accommodation.

• Per HMRC, before/after school childcare, or childcare-based holiday clubs, that just consist of childcare and that do not fall within the definition of education as outlined above, will remain exempt from VAT by virtue of the fact that welfare services are exempt from VAT.

• Note however that welfare services provided by non-charities are only exempt if regulated.

Practical issues

• Schools will need to consider their VAT registration position. Schools who do not currently make any taxable supplies (such as the hiring out of their facilities) will be able to register with HMRC from 30 October, which is when the Budget will be taking place. Schools who do currently make taxable supplies can voluntarily register for VAT ahead of 30 October.

• Schools will need to have accounting systems that can cope with partial exemption and Making Tax Digital. At present, many schools do not identify VAT on expenditure separately.

• Schools should consider their partial exemption position. Some services (e.g. school meals) will remain exempt, and in principle costs referable to such activities cannot be recovered.

• Among other things, schools may wish to apply to have their “VAT year” aligned with their financial year.

HMRC says it will be publishing bespoke guidance for private schools and will hold support sessions for private schools over the coming months.