VAT Private Schools Fees & a Labour Government

The Labour Party has committed to the removal of several tax exemptions from private schools. This article considers their plans to impose 20% VAT on private school fees, which are currently exempt from VAT. If this affects you, please read on.

What has the Labour Party said?

Bridget Phillipson, the Shadow Education Secretary, said the following in early 2023. “Labour will put our children, their futures, and the future of our country first by asking those with the broadest shoulders to contribute their fair share by requiring private schools to pay business rates as state schools already do and to pay VAT as our colleges already do.

Labour would use the funds raised by removing private schools’ tax exemptions to recruit 6,500 more teachers, as well as to offer additional teacher training and careers advice and work experience for all pupils.”

How much will this raise?

The Institute for Fiscal Studies (“IFS”) issued a report in July 2023 entitled “Tax, private school fees and state school spending.” The IFS estimates that this change may raise an additional £1.7bn VAT.

To arrive at this estimate, The IFS has used data provided by the Independent Schools Council for the 2022-23 school year. The IFS has assumed that:

• Total fee income is £10.2bn
• That 20% of private school costs are subject to 20% VAT.

This leads to a gross yield of £2bn VAT reduced by £340m VAT on costs and a net yield of £1.7bn. There are further assumptions and estimates for specialist provision and boarding fees, which can be accessed in the IFS report.

School fees are exempt from VAT, which means no VAT is charged and no VAT can be recovered. To calculate the net change, the IFS has correctly calculated both the VAT due and the VAT which is currently suffered as a cost.

How and when will this happen?

HM Treasury (“HMT”) would need an Act of Parliament to change primary VAT legislation. Specifically, the definition of an “eligible body” in Note (1), Group 6, Schedule 9, VAT Act 1994. The definition of eligible body in Note 1 relies on several Education Acts, together with other separate qualifying criteria, which include a restriction on the distribution of profits.

It should be noted that in consultation with the education sector, HMT and HMRC have previously tried and failed to remove several anomalies from the VAT exemption for the provision of education.

The combination of archaic legislation, the need for parliamentary scrutiny of any changes, a reasonable consultation process, and a lead time for such a fundamental shift in tax treatment, will cause a lead time to any changes. It is impossible to be certain, but particularly given the bottleneck of parliamentary time, our best estimate is that these changes will not be introduced until at least the payment of fees for the 2026 – 27 school year. This estimate is based on the assumption that the General Election is no earlier than the fourth quarter of 2024.

Will this impact all income earned by the school?

The target market for this measure is the fee-paying independent sector, which includes both day schools and those which accept boarders. HMT may consider that the removal of the VAT exemption for education will also remove the exemption for closely related goods and services, as these are exempt by reference to VAT statute. HMRC guidance provides the following definition of “closely related”:

• “For the direct use of the pupil, student, or trainee.
• Necessary for delivering the education to that person.”

HMRC guidance provides the following examples to fit the above definition, “accommodation, catering, transport, school trips, and field trips.”

In our view, it would be a mistake to assume that all additional goods and services will be subject to VAT. In the absence of legislative provisions driving the VAT exemption, the treatment of linked goods and services should be determined by the wealth of HMRC guidance and leading case law on the definition of single and multiple supplies.

The starting point should always be that every supply is taxed on its own merits unless it is inextricably linked to an overarching supply.

How best to prepare for this change?

The most important action is to stress test the profitability of your business model on the assumption that the change could be introduced from the 2026 – 27 school year. To allow you to carry out this exercise, you should:

• Review accounting systems and processes to ensure that you separately record all additional revenue earned in addition to school fees.
• Separately itemise VAT on all costs incurred to ensure that you maximise the recovery of VAT on your costs.
• Keep a record of past capital spend, as elements of this may be eligible for VAT recovery.

There is a change of mindset required to deal with this change. Rather than a desire to include additional revenue under the banner of VAT exemption, you would be better served by viewing additional revenue as discretionary spend by the pupil, parent, or guardian if that revenue would not ordinarily be subject to VAT. This is not VAT avoidance, merely the application of VAT law and practice to your particular circumstances.

How can we help?

We can determine the VAT profile of the school on the assumption that VAT is imposed on school fees. This can include an analysis of all additional revenue to determine whether it should be liable to VAT. We can also advise you on other opportunities to optimise the school’s VAT profile.