Since the Labour government published draft legislation on VAT for private schools on 29 July 2024, many schools have responded by adjusting their fee structures, effective from 1 January 2025. According to a report published by the IFS a year ago, schools were expected to offset about 5% of the fee increase by claiming input VAT, leading to an overall effective rise in the school fee of 15%.
However, parents at schools like Eton College and South Hampstead High School have already been informed via letter of a full 20% VAT charge on fees starting 1 January 2025. Similarly, Brentwood School announced a 13.8% increase, including VAT, also effective from the same date. It is likely that other private schools will follow suit in the near future.
Despite the commotion the policy is creating for schools and parents alike, there remains considerable uncertainty about how VAT will affect both schools and parents, particularly as private schools have not previously been required to manage VAT. While our complete guide to VAT on Private School Fees addresses many concerns, there are still areas that need further clarification. This article aims to address that confusion by exploring key issues such as taxable and exempt supplies, the calculation of partial exemption, and the impact of the Capital Goods Scheme (CGS) on private schools.
What are taxable and exempt supplies for private schools?
VAT is charged and recovered only on expenses incurred on taxable supplies. Therefore, it is essential to differentiate between the taxable items and those that are not. In the case of schools, from 1 January 2025, taxable supplies mean expenses on education services and vocational training supplied by private schools.
It is important to note that not all private school supplies are taxable; some supplies remain exempt. Recognising that goods and services closely related to education are integral to children’s access to education, the draft legislation states that these remain exempt supplies. Goods and services necessary for delivering education to pupils or students and used directly by the pupils or students are considered closely related. However, boarding fees will be taxable supplies, even though they are closely related to children’s education. It is advisable to await the formal legislation from the government regarding items defined as ‘closely related’.
Taxable supplies for schools include:
- Tuition fees
- Boarding
- Lodging
- Educational and Vocational training
- Additional supplies of education after school hours or during holidays, such as after-school art classes and sports lessons
Notable examples of VAT-exempt supplies include:
- School meals
- Books and stationery
- School bus tickets
- School trips
This may tempt schools to artificially assign a higher value to the exempt goods and services and charge less in tuition and boarding fees to limit the VAT charged to parents, typically known as value shifting. HMRC recognises this risk and seeks to challenge any school seeking to avoid its full VAT liability in these ways.
In the case of nurseries, either stand-alone or attached to private schools, differentiation of taxable and exempt supplies is not necessary as all supplies continue to become exempt. This also holds true for fees of pupils with Special Educational Needs (SEN) funded by the Local Authority (LA), as the LA can reclaim the VAT charged on these fees via the Section 33 VAT Refund Scheme.
What expenses can private schools claim VAT on?
It is true that VAT-registered schools will be able to reclaim VAT incurred on certain expenses. For the claim to be successful, these expenses must have been incurred in making taxable supplies.
VAT incurred on expenses to make taxable supplies are recoverable. However, if the business incurs VAT on expenses to provide VAT-exempt supplies, VAT will not be recoverable.
How do partial exemptions work in private schools?
Normally, only input VAT directly attributable to taxable supplies is recoverable. However, if the business is engaged in both taxable and exempt supplies and the input tax on exempt supplies is minimal, businesses may be able to recover them under the de minimis rules.
Under the de minimis rules, we need to consider three conditions to calculate whether the input VAT on exempt supplies can be recovered. VAT incurred on exempt supplies will be recoverable if one of the following conditions is met.
De minimis Test 1
- The total input tax per month must not exceed £625, and
- The value of exempt supplies must not exceed 50% of the total supplies.
De minimis Test 2
- The total input tax less input tax directly attributable to taxable supplies must not exceed £625 per month, and
- The value of exempt supplies must not exceed 50% of the total supplies.
If the first two conditions are not fulfilled, we will need to perform a full calculation by allocating residual input tax, i.e. input tax that cannot be directly attributed to either taxable or exempt supplies. The allocation is performed based on the proportion of taxable supplies from the total supplies. After allocation, we proceed to the third test.
De minimis Test 3
- Total input tax on exempt supplies must not exceed £625 per month, and
- The value of exempt supplies must not exceed 50% of the total supplies.
Example:
A private school recorded the following VAT figures for the quarter ended 31st September 2025. The school’s accountant is unsure how much of the input VAT can be recovered.
| Output Supplies | Expenses | Input VAT |
| Standard rated supplies | £96,000 | £10,500 |
| Zero-rated supplies | £32,000 | £3,500 |
| Exempt supplies | £37,200 | £4,000 |
| Overheads (not directly attributable) | – | £5,000 |
| £23,000 |
Below is the procedure for calculating the input VAT that can be recovered. As there are exempt supplies and overheads that cannot be directly attributable, we should start with the simplified tests.
Simplified tests
The quarterly input VAT is £23,000, resulting in a monthly input tax of £7,667 (£23,000/3). As this exceeds the £625 threshold, simplified test 1 is not satisfied.
For the simplified test 2, the total input tax less input tax directly attributable to taxable supplies is £9,000 (£23,000 – £10,500 – £3,500). This gives a monthly average of £3,000 (£9,000 ÷ 3). As this, too, exceeds the £625 threshold, simplified test 2 is not satisfied either. Both simplified tests fail; therefore, the full calculation is required.
Allocation of input VAT
The proportion of taxable supplies is calculated as follows:
- Proportion of taxable supplies: 77% [£96,000+£32,000)/ (£96,000+£32,000+£37,200)].
- This means 77% of overhead input VAT is recoverable.
Recoverable input VAT on overheads
- Input VAT recoverable from overheads: £3,874 [77% of £5,000]
- Input VAT related to exempt supplies: £1,126 [23% of £5,000]
Based on the calculation, the following table is drawn:
| Taxable Supplies | Exempt Supplies | |
| Directly Attributable | £14,000 | £4,000 |
| Overheads | £3,874 | £1,126 |
| £17,874 | £5,126 |
Now that the allocation is adjusted, we proceed to the third test. If the third test is met, VAT incurred on exempt supplies is also recoverable. Otherwise, recoverable VAT is limited to VAT directly attributable and allocated to taxable supplies.
Third Test
- Monthly input VAT related to exempt supplies: £1,708 (£5,126 ÷ 3). Since this still exceeds the £625 threshold, Test 3 also fails.
As a result, the input VAT on exempt supplies is not recoverable. The total VAT that can be recovered is (£14,000+£3,874).
How are Schools already making taxable supplies affected?
Some private schools may already be making taxable supplies, specifically in non-educational activities, such as renting out sports facilities. The instances of VAT on these supplies do not change because of the proposed policy, and these schools can voluntarily register for VAT before 1 January 2025. Once registered, they can claim back the input VAT on goods incurred up to four years before the registration if the goods are still owned by the school and for service supplied for the purpose of the taxable supply in the six months prior to registration.
Private Schools that are not currently making taxable supplies do not have to worry about VAT registration before 1 January 2025 but can opt for voluntary VAT registration after 30 October 2024.
How does the Capital Goods Scheme (CGS) affect Private schools?
Once registered for VAT, private schools may need to make annual VAT adjustments by using the Capital Goods Scheme (CGS). Under this scheme, schools will be allowed to spread the initial VAT claimed on expenditures of more than £250,000 (excluding VAT) in the case of commercial buildings and £50,000 in the case of computer or computer equipment over several years.
Under CGS, businesses will primarily reclaim VAT on expenditures that are used or to be used to make taxable supplies. For instance, if the business expects that only 60% of the assets will be used for business purposes, it will claim only 60% of the input VAT. In subsequent periods, if the business use of assets becomes different from the initial percentage in which VAT is claimed, adjustments must be made accordingly.
CGS may still apply if expenditures were incurred before the business was registered for VAT. If the business sells the assets within the adjustment period, which is 10 years for land and building and 5 years for computers and computer equipment, certain input VAT may even have to be repaid to HMRC in certain instances.
A potential benefit for private schools is that significant capital expenditures exceeding £250,000 or £50,000 incurred over the past decade, such as for construction, refurbishment, or renovation projects or acquisition of computer equipment, may require adjustment under CGS due to the proposed changes. Although exempt businesses cannot reclaim VAT on these costs, the Capital Goods Scheme (CGS) enables tracking the use of such expenses over a ten-year period.
It is important to note that the Labour government’s draft legislation does not specifically address private schools in relation to partial exemptions or the capital goods scheme (CGS). Schools should wait for further updates and plan accordingly.
Conclusion
In conclusion, as private schools prepare for the introduction of VAT, understanding how it applies to their supplies and expenses is critical. With many schools unfamiliar with VAT compliance, clarity on taxable versus exempt supplies, the mechanics of partial exemption, and the implications of the Capital Goods Scheme (CGS) are essential for accurate financial planning. While schools may be tempted to shift values to reduce VAT liabilities, HMRC has provisions in place to prevent this. By addressing these areas proactively and ensuring thorough preparation, private schools can mitigate compliance risks and make informed decisions ahead of the 1 January 2025 deadline.
