With the newly elected Labour government, significant changes are on the horizon for private school fees. As of 1 January 2025, private school fees will be subject to VAT, as outlined in draft legislation recently released for technical consultation. These measures are set to be included in the Finance Bill 2024-25, marking a major shift in the financial landscape for private education in the UK.
Background on VAT and Private School Fees
Under current VAT legislation, education providers classified as an 'eligible body'—which typically includes regulated, publicly funded, or not-for-profit institutions—are exempt from charging VAT on their fees. This exemption applies to both state and private schools, allowing them to avoid charging VAT and preventing them from reclaiming VAT on their expenditures related to education services.
Will Private School Fees Increase by 20%?
Although private education will become a taxable supply, fee payers may not see a straightforward 20% increase in their bills. This is because private schools, once taxable, will be able to reclaim the VAT they incur on their expenses related to education services.
Impact on Discounted Fee Arrangements
For those benefiting from discounted fee arrangements, VAT will only apply to the amount of fees paid. This means that the discount will still be effective in reducing the overall cost, albeit with VAT applied to the reduced amount.
Who Will Need to Charge VAT?
From 1 January 2025, all private schools in the UK will be required to charge VAT on education services and vocational training. This also includes boarding fees that are closely related to the education provided. The VAT rate will be set at 20%, aligning with the standard rate for most goods and services.
Definition of a Private School
The term "private school" encompasses any institution that provides full-time education for pupils of compulsory school age and charges fees for this service. This definition also extends to full-time further education institutions, such as sixth form colleges. Importantly, state schools will not be affected by this change, and they will continue to be unable to reclaim VAT on their spending.
Clarification on 'Connected Persons'
A 'connected person' is defined by several criteria, including financial, economic, and organizational links to the private school. The definition also covers entities providing education services under arrangements designed to secure VAT-exempt supplies. Education and vocational training under this legislation include a wide range of activities, from academic subjects to sports and arts.
What Services Will Attract VAT?
In addition to core education services, any additional services provided by private schools—such as after-school programs or holiday courses—will also be subject to VAT. Boarding and lodging services closely tied to education will similarly attract VAT.
VAT on Nursery Fees
The VAT exemption will continue to apply to nurseries, whether standalone or attached to private schools. VAT will only begin to apply once children reach compulsory school age, typically starting with their first year of primary education.
Exemptions from VAT
Certain goods and services closely related to education, such as school meals, transport, and educational materials, will remain exempt from VAT. The government has indicated that it will be vigilant against practices aimed at reducing VAT liabilities through 'value shifting,' where schools might assign higher values to exempt supplies.
Pre-Payment of Fees to Avoid VAT
Parents who pay private school fees after 29 July 2024, for terms beginning in January 2025 and beyond, will be subject to VAT. Attempts to pre-pay fees before this date to avoid VAT may be challenged by HMRC, particularly if the fees for future services have not been clearly defined at the time of payment.
VAT Registration Requirements
Private schools that are not currently VAT-registered will need to register by 30 October 2024 if they begin making taxable supplies. Schools that already make taxable supplies can register at any time, but they must charge VAT from the date of their registration.
The Impact on Private Schools
The government has urged private schools to keep fee increases to a minimum, but this may be challenging, especially for schools with charitable status. The combination of VAT and the removal of charitable business rates relief from April 2025 could put significant financial pressure on these institutions. Smaller private schools and those operating on tight margins may face the greatest challenges, potentially leading to fee increases, budget cuts, or even closures.
Specialist schools offering education in niche areas, such as the arts or sciences, might also struggle as the VAT increase could drive parents to seek more affordable alternatives. Any reduction in fee income could lead to a vicious cycle of reduced enrolment and further financial strain.
Conclusion
While the full impact of these changes remains to be seen, it is clear that the introduction of VAT on private school fees will have significant consequences for the independent school sector. Schools will need to carefully navigate these changes, balancing the need to cover additional costs with the potential impact on enrolment and the quality of education provided.