Private and independent schools: Budget day VAT guidance from HMRC

HMRC published updated guidance on the VAT changes for private and independent schools on Budget Day. HM Treasury (“HMT”) released its response to the limited technical consultation on the same day.

The guidance released by HMRC on Budget Day and the HM Treasury response to its earlier Technical Note is the third substantial release of detailed guidance ahead of the change in law on 1 January 2025.

This insight provides you with a summary of the provisions, to help you prepare for the introduction of VAT.

What has changed?

For those of you who have read our earlier insights or digested the guidance from 29 July and 10 October, the core of the provisions has not changed. The HMT response is noteworthy for the number of representations which have been rejected, most importantly of course, the law will still change on 1 January 2025.

Several concessions have been made, although in some cases, they could have been inferred from earlier guidance. These are the most significant.

• Fees earned by non-maintained special schools (“NMSS”) will now be subject to VAT. This removes an anomaly between NMSS and other special schools, which would have placed NMSS at a financial disadvantage, as they would have been unable to recover VAT in comparison to other similar institutions.
• The definition of a nursery class has changed, so that one child of compulsory school age does not cause fees for the whole class to be subject to VAT.
• Higher education provided by private schools will remain exempt from VAT.
• Further education (“FE”) colleges will remain exempt from VAT, on the reasonable assumption that the FE college does not earn the majority of its income from fee paying students.
• Independent training providers and independent learning providers are specifically carved out of the changes.
• Teaching English as a foreign language (“TEFL”) remains exempt from VAT in a private school, to ensure they are not at a commercial disadvantage compared to a commercial provider which does not have to charge VAT.

A recap of the rules being introduced on fees paid towards a term starting from January 2025.

If you have already received fees as payments towards school terms starting in 2025, this income may be subject to VAT. In summary, these are the rules on receipt of fees relating to terms starting after 1 January 2025.

Start date

• Receipts before 29 July 2024 will not be subject to VAT, if the school accepted this as full settlement for a term starting after 1 January 2025.
• Between 29 July and 30 October, VAT will be payable on the later of 1 January or the start of the relevant term.
• From 30 October onwards, VAT is due on receipt.

VAT registration

Once the school has established whether it has received payments which are liable to VAT, it must then confirm when it needs to register for VAT, as that determines both whether and when the VAT is payable to HMRC.

The VAT registration threshold is £90,000 per year. Schools must therefore track their turnover to ensure they do not register for VAT later than required. For example, if a school expects to receive more than £90,000 in income liable to VAT during November, which relates to terms starting after 1 January, it may be required to register for VAT on 1 November 2024.

Any schools that do not breach the £90,000 threshold during November will almost certainly be required to register for VAT no later than early December 2024. In December, schools must track both income received during the month and bring to account any income received on or after 29 July but before 30 October, which relates to the Spring term starting in January 2025. If the total of these two amounts is expected to exceed £90,000 in the next 30 days, the school must register for VAT from the start of that 30 day period. To provide an example, if the school terms starts on 7 January 2025, using these provisions it should register on 8 December 2024.

The scope of the changes

VAT will be due on tuition and boarding fees from 30 October 2024. As a statement, this is most definitely only the starting point to determine what is liable to VAT.

The following points illustrate the complexity but are far from an exhaustive list. Schools will need to decide whether:

• Fees are for tuition or some other related service.
• They are boarding their pupils or providing welfare services.
• Other goods and services, such as catering, breakfast and after school clubs, and transport to and from school, are separate supplies with their own VAT liabilities.
• Grants or bursaries are subject to VAT.

If a school is paid to teach and board its pupils, the income it receives specifically for those purposes will be liable to VAT. In reality, income received by a school covers far more than just tuition and potentially boarding fees. If the school charges a single fee for tuition, together with related services such as meals and transport, the entire fee is likely to be subject to VAT. However, if the school chooses to offer additional services for a separate fee, each element may have its own VAT liability. The way in which those services are held out for sale will be the determining factor.

If the school can satisfy itself that it is offering separate services for an additional fee, there may well be opportunities to preserve exemption from VAT. For example, this would include catering, breakfast and after school clubs, and transport to and from school.

Recovery of VAT

Most schools will make supplies which are subject to VAT and other supplies which continue to benefit from VAT exemption. They will therefore be partially exempt and require a partial exemption method to determine their eligibility to recover VAT. This can be a method based on respective levels of taxable and exempt turnover or some other method which more accurately determines a school’s entitlement to recover VAT.

Schools may well have an entitlement to recover VAT on costs incurred prior to VAT registration. The recovery of historical VAT will depend on the nature of the expenditure and the useful life of the assets on hand when the school registers for VAT.

Conclusion

In our experience, every school is different and will need to review the rules published by HMRC in detail to determine its own requirement to pay VAT and its entitlement to recover offsetting input tax against income subject to VAT. We have the expertise to help you navigate a path to be both compliant and ensure that you remain as competitive and financially viable as possible.