A Complete Guide to VAT on Private Schools

In a move that has been subject of considerable debate, the UK government announced sweeping changes to taxation for private schools, effective from 1 January 2025. The new policy will impose a 20% VAT on all education services and vocational training provided by private schools, including boarding services. This shift marks a significant departure from the current tax exemptions enjoyed by these institutions and aims to boost government revenue while supporting state education funding.

This move has captured the attention of taxpayers across the UK, regardless of whether they send their children to private or public schools. The effectiveness of the government’s plan remains to be seen, but the potential impact of these changes has sparked widespread debate. To better understand the implications, let’s begin with the major highlights of the proposed bill. 

Major Highlights

• Starting from 1 January 2025, all education services and vocational training provided by private schools, or their affiliates will be subject to a 20% VAT. Boarding services related to these supplies will also incur a 20% VAT. 
• Fees paid from 29 July 2024 for terms beginning in January 2025 and onwards will be subject to VAT. 
• Education services and vocational training provided by private schools or closely connected persons will incur a 20% VAT. Related boarding and lodging services will also be subject to the same VAT rate. 
• Other goods and services closely related to education (excluding boarding), provided directly for pupils’ use and necessary for their education, will remain exempt from VAT. 
• Schools that currently do not make any taxable supplies can register with HMRC from 30 October. Schools already making taxable supplies can voluntarily register for VAT before this date. 

Key Findings from Institute for Fiscal Studies (IFS)

• In 2022–23, the average private school fees across the UK were £15,200 in today’s prices. This amount nearly 90%, higher than the state school spending per pupil, which was £8,000 in the same year.  
• The proportion of pupils attending private schools across the UK has remained relatively stable over time at around 6-7%, despite a 20% real terms increase in fees since 2010 and a 55% rise since 2003.  
• IFS estimates that implementing an effective VAT rate of 15% (see impact on school fees below) would result in 3–7% reduction in private school attendance. This would likely generate a need for about £100–300 million in extra school spending per year in the medium to long run. 
• IFS estimates that introducing VAT and removing business rates relief exemptions from private schools would raise about £1.6 billion a year in extra tax revenue.  
• The net gain to public finances from removing tax exemptions is projected to be £1.3–1.5 billion annually in the medium to long term. 

Implementation Date and Affected Services

Currently, education services and closely related goods and services provided by eligible bodies are exempt from VAT. Amongst the eligible bodies are private schools, who are regulated by virtue of needing to register with the government and be inspected regularly. As a result, private schools have been able to offer education and boarding services without adding VAT to their fees. This exemption has allowed private schools to operate with a financial advantage compared to other sectors. 

Starting from 1 January 2025, all education services and vocational training provided by private schools or a ‘closely connected party’ will be subject to a 20% VAT. This includes boarding services related to these supplies. Any school fees paid from 29 July 2024 for terms beginning in January 2025 and onwards will also be caught by VAT at the standard rate. 

This VAT policy change will impact private schools throughout the entire UK, not just those in England.

Scope of VAT Application

The VAT will apply to:

• Education services and vocational training provided by private schools or closely connected persons. 
• Boarding and lodging services related to these supplies. 
• Any additional extra-curricular activities by private schools after school hours or during holidays, such as art lessons, sports lessons, etc. 

‘Private schools’ are defined as schools at which full-time education is provided for pupils of compulsory school age and where fees or other consideration are payable for that provision of full-time education. For VAT purposes, education refers to course, lesson, instruction or study in any subject irrespective of where and when that takes place.  

Therefore, the education and vocational training provided by fee-paying primary, secondary and sixth form colleges, either attached to private schools or standalone, will also be subject to VAT at the standard rate.

However, goods and services provided by private schools for the direct use of their pupils and are necessary for delivering the education to pupils will be exempt.

Likewise, education and vocational training provided by non-maintained special schools (NMSS) approved under the Education Act 1996, section 342, further education colleges classified as public sector institutions, state schools and academies will continue to benefit from VAT exemption.

The government is confident that the exemptions on such trainings will keep these institutions accessible to a wide range of people, thus increasing the labour market activity. 

 The policy change will have no effect on hiring out of facilities to third party or similar activities by private schools, which have always been taxable.  

Anti Avoidance – The ‘connected persons’ rule

The new VAT legislation will prevent private schools from contracting out certain services to “closely connected persons” to keep benefiting from the VAT exemption. According to the draft legislation, if an eligible body provides education or vocational training at a private school, it will be considered as provided by the private school if: 

• The eligible body and the private school are financially, economically, and organisationally linked. 
• They are connected as defined by the Section 1122 of the Corporation Tax Act 2010. 
• The arrangement’s main purpose is to ensure the provision is VAT-exempt. 

This means private schools won’t be able to use these connections to avoid paying VAT on certain services. 

Registration and Compliance

Private schools not already VAT-registered will need to do so with HMRC from 1 January 2025. Schools that do not currently make taxable supplies can register from 30 October 2024, while those already making taxable supplies, such as the letting of facilities to third parties, can voluntarily register before this date.

To facilitate this transition, HMRC will implement a series of measures to ensure that all private schools are registered for VAT before 1 January 2025. These measures will include the creation of guidance products, updates to the registration systems, and additional resources made available on the HMRC website. 

Once registered, private schools will be eligible to reclaim the VAT paid on goods and services used in providing their taxable supplies. However, it is important to note that they will not be able to reclaim VAT on expenses incurred before 29 July, as their supplies were exempt before this date. Nonetheless, private schools that are not yet registered for VAT but have been making some taxable supplies may be able to reclaim input VAT paid on the purchases necessary to make taxable supplies, dating back 4 years from the date of registration. For a VAT claim to be successful, private schools must have the necessary invoices and the VAT must have been paid on the goods or services used directly in making the taxable supplies.

It’s important to note that the restriction on claiming back VAT on exempt supplies applies regardless of VAT registration status of the business. If a private school purchases goods or services for exempt supplies, they cannot claim back the VAT on these purchases, even if these expenses are incurred after 29 July. Therefore, schools must be careful in accounting for VAT, as inaccurate claims could result in fines and penalties.

The accounting for VAT on private schools will apply as for other businesses; VAT paid on taxable purchases will be deducted from the VAT collected on revenue, with the balance payable to HMRC. Private schools will need to submit a VAT return to HMRC each quarter, irrespective of whether there is any VAT to pay or reclaim. The deadline for submitting the return is one month and seven days after the end of the quarter. HMRC enforces penalties and interest for late submissions and payments of VAT.

Late Registration Penalty

HMRC penalises businesses that fail to register for VAT on time. The penalty amount depends on how late the registration is and the amount of VAT due. The penalty rates are structured as follows:

There will be a minimum penalty of £50 if there is no VAT due.

Businesses that have been charged with late registration penalty will receive a letter from HMRC detailing the penalty. The letter will include the procedure for appealing the penalty if there is a reasonable excuse for the delay.

Impact on Pupils with Special Educational Needs (SEN)

The government recognises that number of pupils have Special Educational Needs (SEN) that can only be met in a private school. In England and Scotland, the local authority is responsible for identifying and finding the pupil’s place in a private school. Where the placement at private school is necessary to meet the pupil’s needs, such schools are named Education, Health, and Care Plans (EHCP) in England, Co-ordinated Support Plan (CSP) in Scotland and Individual Development Plans (IDP) in Wales. 

When a pupil’s place in a private school is funded by the local authority (LA) because their needs are best met in private schools, the LA can reclaim the VAT charged on these fees via the Section 33 VAT Refund Scheme. This policy ensures that parents and carers of pupils with an LA-funded place in a private school are not affected by the VAT changes. The local authorities can recover any VAT charged on education and boarding fees of pupils in private schools, regardless of the reason for funding the placement. For example, if an LA funds a child’s place in a private boarding school as an alternative to foster care, it can reclaim the VAT incurred on those fees as well.  

However, there are certain number of pupils with special education needs in England, Wales, and Scotland whose needs could be met in the state sector, but whose parents have placed them in private schools. In these cases, because it was not necessary for the parents to place their children in private school to meet their needs, the fees for such children will be liable to VAT at the standard rate of 20%.  

Impact on Nurseries

Nurseries, whether standalone or attached to a private school, are currently exempt from VAT. The fees will remain exempt from VAT as long as the children have not reached compulsory school age. However, once children enter the first year of primary school—referred to as ‘Reception’ in England and Wales and ‘Primary 1’ in Scotland—the fees will become taxable. 

Impact on School Fees

The introduction of VAT on private schools means that these institutions will charge 20% VAT on their education and boarding fees. However, the government does not anticipate that fees will increase by the full 20%. Instead, the government expects private schools to take steps to minimise fee increases. 

 Like all VAT-registered businesses, private schools will be able to reclaim the VAT they pay on goods and services used in providing their taxable supplies. The reclaimed VAT will be deducted from the VAT charged on their revenue to determine the amount submitted to HMRC. 

The government estimates that after recovering VAT on their costs, private schools will be liable for VAT at 15% of their fee income. The government expects schools to cover this additional cost through one of the following methods: 

• Reducing surpluses or reserves 
• Cutting back on non-essential expenditures 
• Increasing fees 

The government still expects the schools not to increase their fees and find other ways to cover the additional costs. 

Pre-payment of Fees      

The VAT regime’s ‘tax point’ can be particularly complex. Generally, for goods and services, the tax point occurs when the goods are supplied, or the services performed. However, this can be overridden by either the receipt of payment or the issuance of a VAT invoice.  

For example, a business issued a VAT invoice of £1,000 plus £200 VAT on 31 January for a service performed on 5 February. If the business is preparing a VAT return for the quarter ended 31 January, the £200 VAT will be accounted for in the quarter ended 31 January and not in 30 April despite the service being performed in the quarter ended 30 April. 

If this tax point was applied, it would mean that parents face varying VAT liabilities for fees associated with the same term, depending solely on the payment dates. To address this, the government plans to introduce legislation in the finance bill with retrospective effect. This will ensure that fees paid from 29 July, 2024, for terms starting from January 2025 onwards will be subject to VAT. Consequently, HMRC will be able to collect VAT on fees paid between the announcement of the policy (29 July) and the finance bill’s Royal Assent. 

This approach aims to create fairness between parents who may otherwise pay several years’ worth of fees upfront and those who cannot afford to do so. While many schools already offer pre-payment schemes, the government has noted that some parents use these schemes to avoid VAT. For example, if a lump sum is paid in advance without specifying the term it covers, HMRC may challenge the validity of such payments and seek to collect VAT on them. 

 The government is committed to addressing tax avoidance and ensuring that changes are equitable, so all private school attendees pay their fair share. HMRC will also scrutinise pre-payment fees to ensure that proper VAT is paid the by private schools. 

Arguments against the policy change

The policy change has been a controversial topic ever since the Labour Party initially introduced the plan. The proposal has attracted significant backlash, primarily on practical grounds. The critics of the change argue that education should not be taxed and that applying VAT to private schools will lead to increased tuition fees, making private schools more elite than they already are. 

Another argument against the policy is that higher fees could make private education unaffordable for many parents, forcing them to place their children in state schools. Consequently, the additional revenue generated by the government from the VAT on private schools might need to be spent on providing facilities to these students. 

Some surveys indicate that in 2-3 years, over 40% of private school pupils may exit the private school system. In Scotland, this could equate to more than 12,000 pupils. With each pupil contributing around £8,500 in private school fees, HMRC could lose approximately £108 million annually. If a similar replication is made for private schools in England and Wales, more than 250,000 pupils might leave private schools within 3 years, potentially costing the government over £2 billion per year. Additionally, there will be further costs associated with accommodating these students in state schools.

In contrast, supporters of the government’s plan highlight the difference between imposing VAT on school fees, where there is a free alternative (state schools), and university fees, where no such free alternative exists. They argue that applying VAT to private school fees is more justifiable because parents can opt for state education without incurring additional costs. The supporters of the government are confident that the government will be able to accommodate any number of additional pupils and that there will not be a significant impact on the state of education system. 

Consultation and Feedback

The government will be open to comments and consultation on VAT legislation from anyone until 15 September 2024. Anyone with comments on the draft VAT legislation can share their opinion by contacting independentschools@hmtreasury.gov.uk before this date. After the consultation, the government may make technical amendments to the legislation to ensure that the legislation functions as intended. Once these necessary amendments are made, the policy changes will be announced at the budget. 

Conclusion

In conclusion, the UK government’s decision to impose a 20% VAT on private schools marks a significant policy shift with far-reaching implications. Effective from January 2025, this change aims to increase government revenue and support state education funding. However, it also introduces new financial burdens for private schools and their attendees. While the government believes this approach will create a more equitable tax system, it has sparked intense debate regarding its potential impacts. 

As these changes unfold, private schools and their stakeholders will need to navigate a new financial landscape. The government’s consultation process and willingness to make technical amendments will be crucial in ensuring the policy functions as intended while balancing fiscal objectives with educational needs. Ongoing dialogue and feedback from affected parties will play a vital role in refining the implementation to mitigate adverse effects and support a smooth transition. 

Frequently Asked Questions 

Given that this change is new for many, there may be numerous questions on people’s minds. To address these concerns, here are some of the most frequently asked questions: