Andrew Needham looks at the introduction of standard-rated VAT on private school fees.
Prior to the 2024 general election, the incoming Labour government had announced its intentions to introduce VAT on private education. An announcement to this effect was subsequently made to Parliament by the Chancellor on 29 July 2024 and the publication of Revenue and Customs Brief 8 (2024).
When does it apply?
The implementation date for the introduction of VAT on private education will be 1 January 2025 and will affect all education services and vocational training supplied by a private school, or a connected person, for a charge which 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%.
It was also announced that fees invoiced or paid on or after 29 July 2024 that relate to the school terms after 1 January 2025 will be subject to the standard rate of VAT at the beginning of that term. 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.
What’s affected?
Draft legislation was also published amending VATA 1994, Sch 9, Gp 6. This covers:
EXCEPTIONS Item No.
1 The provision of education by a private school, other than the provision of education in a nursery class.
2 The provision of vocational training by a private school.
3 The provision of board and lodging which is closely related to a supply of a description falling within item 1 or 2.
Following a technical consultation on the draft legislation, the government will confirm the introduction of these changes in the budget and will legislate for the changes in the Finance Bill.
This will not affect the provision of education by other charities whose supplies of education will remain exempt from VAT but, ironically, will move the UK further away from the EU on the treatment of the provision of educational services.
The anti-forestalling provisions will prevent the prepayment of school fees retaining VAT exemption after 29 July but a number of schools had already offered parents the chance to pay school fees in advance.
Every cloud…
On a positive note for private schools, they were previously unable to recover any VAT on their costs as they made exempt supplies and were mostly not registered for VAT. However, following the introduction of VAT on private education, they will be able to recover the VAT. This will mean that major building projects as well as their normal overheads will become 20% cheaper and reduce the tax benefit for the government.
If a private school has undertaken construction work in the form of either the construction of new buildings or the renovation of existing buildings and the costs were more than £250,000 and were incurred within the last ten years, these will come within the capital goods scheme (CGS) and there will be a change of use from exempt to fully taxable, allowing some one-off VAT recovery on previously incurred expenses.
For example, a private school incurred VAT of £500,000 on the construction of new buildings three years before the removal of the VAT exemption. Under the CGS, they will be able to recover £50,000 VAT a year over the next seven years.
Given the additional input tax that private schools will be able to reclaim, the government estimates that school fees will rise by 15% rather than the full 20%.
Practical tip
The additional VAT that can now be recovered will partially offset the additional VAT on school fees.
