Removal of the VAT exemption for private school fees

7 August 2024| CATEGORIES: Private school fees, standard rated, VAT| TAGS: 20%, school fees, UK, VAT change

On 29 July 2024 the Chancellor announced that, from 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%. Boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%.

HMRC have published Revenue and Customs Brief 8 (2024) on the removal of VAT exemption for private school fees and boarding fees. HM Treasury have also published a technical note, draft legislation, and an explanatory note.

Background

Under current VAT law in the UK, the provision of education by an eligible body (which includes a registered independent school) is an exempt supply for VAT purposes (Schedule 9, Group 6, VAT Act 1994). Goods and services that are closely related to education are also exempt from VAT, e.g. catering, transport, school trips and boarding accommodation.

As of 1 January 2025, education services and vocational training supplied by a private school or a connected person for consideration will be subject to VAT at the standard rate of 20%. The standard rate will also apply to boarding services that are closely related to such supplies.

Other goods and services that are closely related to education, such as school meals, transport, and books and stationery, that are integral to delivering education to pupils will remain exempt from VAT.

Where children with special educational needs are placed in private schools because their needs cannot be met in the state sector, with funding by a local authority or other public body, the funder will be compensated for the VAT incurred.

Anti-forestalling measures and VAT avoidance

Fees paid on or after 29 July 2024 for education provided after 1 January 2025 will be subject to VAT at the standard rate. The RCB states that “School fees paid before 29 July 2024 will follow the VAT treatment in force at the time of the normal tax point for these supplies, where the fee rate for the relevant term has been set and was known at the time of payment.”

The technical note also refers to schemes enabling the pre-payment of fees, noting that “whilst many schools have always offered schemes enabling pre-payment of fees, there have been reports of increased numbers of parents utilising such schemes recently in an attempt to avoid these fees being subject to VAT”. It goes on to states that in many cases “the structure of these schemes means that the tax point has not yet been passed” and that “HMRC stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due.”

VAT registration

Private schools that are not currently VAT registered will need to register with HMRC in line with the normal VAT rules from 1 January 2025. 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. However, schools that opt to do this should be aware that they will need to begin charging VAT on all of their taxable supplies straight away (this does not include education and boarding services, which are currently still exempt when provided by a private school), and they will need to comply with their obligations as a VAT registered business, including submitting VAT returns and keeping relevant records.

Submissions on the technical note, which includes a number of questions for consultation, and the draft legislation close on 15 September 2024.