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The government has now confirmed when and how VAT will apply to private school fees, a move that will have major consequences for independent schools and colleges and their pupils. From 1 January 2025, almost all full-time education services and vocational training supplied for a fee (private school fees) will be subject to VAT at the standard rate of 20%. 

This announcement, along with publication of a and , has fired the starting gun for independent schools to prepare in earnest for this major change. The key points to consider are as follows.

Which schools and colleges must charge VAT? 

Schools and further education/sixth form colleges that provide full time education in return for fees will be required to charge VAT on those fees. 

However, VAT will not apply to certain fees for education provided at state sector schools, further education colleges, academies, non-maintained special schools and private nurseries (whether standalone nurseries or those attached to a private school) – these fees will remain exempt from VAT. 

Therefore, the first step in preparation is to determine whether, and to what extent, education services provided fall into the categories that will be subject to VAT from 2025. 

When must private schools start charging VAT? 

VAT must be charged on private school fees for terms starting on or after 1 January 2025, which is disappointing news for those who were hoping that the change would not come into force until the new academic year in September 2025. Affected schools must therefore act quickly to get their accounting systems ready to cope with the change in VAT treatment, a task made particularly challenging by the mid-year switchover. 

Pre-payment schemes 

As anticipated, the government has announced measures to prevent the avoidance of VAT by paying private school fees in advance. VAT will be due on any pre-payments made on or after 29 July 2024 in respect of fees for terms beginning from 1 January 2025. 

It has been confirmed that any fees that were pre-paid before 29 July 2024 will be exempt from VAT, provided the fee rate for the relevant term had been set and was known at the time of payment. However, HMRC is likely to challenge pre-payment schemes that involve paying a lump sum to the school in advance which did not, at the time of payment, relate to fees set for a specific school term. 

The government will also legislate to prevent avoidance of VAT by channelling private education supplies through connected businesses that are not school or educational bodies, and HMRC can be expected to challenge other arrangements it believes are intended to avoid VAT that would otherwise be payable on fees for private education from 1 January 2025. 

Recovery of VAT on costs

The removal of the VAT exemption from private school fees will at least allow independent providers to recover most of the VAT they incur on costs, although they may still need to carry out partial exemption calculations to deal with income from some related supplies that will continue to be exempt from VAT.

There may also be scope for VAT refunds for private schools that have undertaken significant capital expenditure in the past ten years, for example on school buildings. All such independent providers should check their records to identify qualifying expenditure and associated supporting evidence so that they are able to prepare a capital goods scheme adjustment for inclusion in the appropriate VAT return in autumn 2025. Also, those whose capital projects have not been completed should take advice on what adjustment should be made and when.

Setting fees 

The forthcoming change to VAT treatment of private school fees of course means that affected schools will be obliged to charge VAT at 20% on their fees. However, the availability of VAT recovery on related costs may mean that the impact of the VAT due on such fees might not have to be passed on in full.

Independent schools should assess the potential financial impact of this change to determine how it should be reflected in revised fees, including how much of the VAT charged on fees can be absorbed as a result of an overall lower cost base. 

Registering for VAT

Schools not currently registered for VAT will need to determine whether to register voluntarily if they already make VATable supplies and, if not, determine the date from which they will be obliged to be registered for VAT.

Given the two standard turnover threshold tests that need to be applied to determine the deadline for mandatory registration, it is likely that, on the basis of the ‘look forward’ test, most affected providers will be required to register for VAT before 1 January 2025. HMRC plans to accept registration applications from 30 October 2024, and those that do not currently make any taxable supplies must wait until that date to apply. It remains to be seen whether HMRC’s already overstretched registration teams will be able to cope with the spike in applications and process all such new registrations in time.

Schools that already make taxable supplies are entitled to voluntarily register for VAT straightaway. This might be advantageous for some that have incurred significant amounts of VAT on costs recently, although a careful balance will need to be struck between potential VAT recovery and the need to account for VAT on existing taxable supplies.

Those that are already VAT registered need not submit an application, but will have to update their accounting practices to ensure that VAT is accounted for correctly going forward. They may also need to renegotiate any VAT treatments they have previously agreed with HMRC, such as their existing partial exemption method. 

Boarding fees and supplies ‘closely related to education’

It has been confirmed that boarding services related to a VATable supply of private education will also be subject to VAT at 20%. However, charges made for other supplies closely related to education, such as school meals, transport, and books and stationery, will remain exempt after 1 January 2025. 

Although no VAT will be due on charges for ‘closely related’ supplies, this continuing source of exempt income may prove to be a mixed blessing for private schools because they will still face the additional administrative burdens that VAT exemption brings. Determining which income streams qualify for exemption under the ‘closely related’ category is currently a complex task, and it will still be necessary to carry out partial exemption calculations before recovering the VAT incurred on costs.

Pupils with special educational needs

There will be no catch-all exemption from charging VAT for private school fees for children with special educational needs and disabilities. Exemption is limited to ‘non-maintained special schools’ - independent charitable foundations whose pupils are funded through an Education Health and Care Plan (EHCP). 

In addition, local authorities and other state bodies charged VAT on school fees they fund for pupils placed at other types of private school in accordance with an EHCP, or similar arrangements in Scotland, Wales and Northern Ireland, will be entitled to recover the VAT from HMRC. 

However, despite estimates that only a third of pupils with special educational needs have an EHCP or equivalent plan, there will be no relief from VAT on school fees for children who have such needs that do not qualify for that type of state funding. Parents in this situation will be faced with the choice of paying the VAT themselves or disrupting their child’s education by moving them into the state sector.  

What happens next? 

The government says that HMRC will publish more detailed VAT guidance for private school fees before 30 October 2024. Nevertheless, the government’s publications give a firm outline of how VAT will work in the independent education sector from 2025, so schools and colleges should start preparing now for the introduction of VAT, watching out for further developments as the deadline approaches. 

For more information, please get in touch with Audrey Fearing or your usual 91探花contact.