New VAT rules for Private Schools: Key changes and financial implications explained

After months of speculation, media commentary, and a General Election, HM Treasury (HMT) and HMRC published full details of the plan to impose VAT on private school fees on 29 July 2024. This was a surprise both in terms of its timing and some of the content. This article provides clarity on the changes to the VAT treatment of income earned by private schools and the potential financial implications.

Published information

HMT and HMRC have published the following:

• Draft Finance Bill Measures for the legislation to be included in the Finance Bill after the Chancellor’s Budget on 30 October.
• Explanatory Notes to the Draft Finance Bill Measures.
• A Technical Note entitled “applying VAT to private school fees and removing the Business Rates Charitable Rates Relief for private schools.”
• Revenue and Customs Brief 8 (2024): “removal of VAT exemption for private school fees and boarding fees.”

When will these changes take effect?

Private schools will be required to pay VAT to HMRC from the date the law takes effect on 1 January 2025. VAT may also be payable on payments received by the school from 29 July 2024.

Why are there two dates?

Private education will be subject to VAT from 1 January 2025. The normal tax point rules should be observed by a VAT registered private school from that date, with the time of supply typically fixed by the earlier of receipt of payment or the issue of a tax invoice.

Any fees invoiced or paid on or after 29 July 2024, which relate to terms beginning after 1 January 2025 will be subject to VAT. VAT on these payments will be due after 1 January 2025.

The Technical Note highlights that HMRC will challenge ineffective prepayment arrangements that did not create a tax point at the point of payment. HMRC focus on the nature of VAT as a transaction tax, with a prepayment required to satisfy an agreed future liability to create a tax point.

The services subject to VAT

The following services will be subject to VAT:

• The provision of education by a private school.
• The provision of vocational training by a private school.
• The provision of board and lodging to pupils in a private school.

A private school is defined by HMT as a school “at which full-time education is provided for pupils of compulsory school age.” Primary and secondary education will be subject to VAT, which will include fees earned by private sixth form colleges. To ensure uniformity across all UK nations, education will be subject to VAT from the pupil’s first year of primary school and continue to be subject to VAT if the pupil is under the age of 19.  The provision of education will include extra-curricular classes, such as drama and sports. It will not apply to clubs which are not educational.

The draft Finance Bill Measures include provisions to prevent the artificial separation of income to avoid a liability to account for VAT.

The services which will remain exempt from VAT

Nursery education remains exempt from VAT, whether it is taught in a private school or a standalone nursery.

Putting “board and lodging” to one side, all other VAT exemptions for private schools remain unchanged. This preserves VAT exemptions for examination services and other “closely related” goods and services. The Technical Note envisages that closely related goods and services will include “school meals, transport, and books and stationery”. Existing HMRC guidance confirms that closely related services will additionally cover “school trips” and “field trips”.

The Technical Note confirms that wraparound care provided in breakfast and after school clubs will remain exempt from VAT, as the provision of welfare services. This will presumably apply to both charities and privately owned schools, in the latter case because they are state regulated.

Recovery of VAT

The Technical Note envisages that “after recovery of VAT on their costs, on average, the government expects schools to be liable for VAT amounting to around 15% of their fee income.” There is no support for that statement. The retention of VAT exemptions for a proportion of fees earned by schools will inevitably change the outcome, depending on the mix of income earned for each school.

Input VAT incurred on costs relating to the provision of education and boarding will be recoverable, but VAT will not be recoverable on services that will remain exempt. Schools will therefore be partially exempt and face having to make potentially difficult calculations to work out the total input VAT that can be recovered.

There may be an opportunity for schools to secure additional VAT recovery on historical capital projects relating to property and computer hardware. This depends on the operation of the Capital Goods Scheme.

The effect of VAT registration

Private schools will be required to register for VAT once their income subject to VAT exceeds £90,000 in the preceding 12 months or if they expect to exceed £90,000 taxable income in the next 30 days. This means most schools will have to register from 1 January 2025. If a school has taxable income already, there may be benefits to registering for VAT before 1 January 2025. Income subject to VAT will include education and boarding income received on or after 29 July 2024, which relates to terms starting after 1 January 2025. This latter income should be included in the turnover calculation by reference to the start of the relevant school term.

Once the school registers for VAT, it will be required to pay VAT on all income within the scope of VAT. This will include other income earned which was previously below the VAT registration threshold.

Pupils with special educational needs

The provision of education and boarding to pupils with special educational needs will be subject to VAT. This will apply, whether or not the pupil has an education, health and care plan (EHCP).

In England, private schools may earn income from local authorities for pupils with an EHCP. There are similar provisions in the devolved nations, although the payments may not be made by a local authority. The Technical Note confirms that local authorities are entitled to recover VAT and that measures will be taken to ensure that other bodies paying private school fees will be compensated for the additional cost of EHCP provision.

The consultation

The Technical Note contains five questions, which form the basis of a consultation. The consultation is open for seven weeks until 15 September 2024. These questions are focused only on operational aspects of the VAT changes, not the principle of whether the changes should take place.