Croner – i: vat and private school fees

Croner – i: VAT and private school fees

Contributed by Angela Bedi, Senior Technical Writer, Croner-i Ltd  

It is widely expected that, should Sir Keir Starmer win the election, his new Government will move quickly to impose VAT at the standard rate on private school fees currently exempt from VAT, although there is significant debate about how quickly this might, in fact, be achieved.  

Whatever your view of the politics involved, and the wider issues raised almost daily in the mainstream media, the relevant schools and parents are having to consider the potential financial impact such a change will have for them.  

In the following paragraphs I have attempted to highlight some of the main potential changes, the questions that remain, and the practical implications that will have to be considered as schools and pupils alike prepare for the next academic year.

Current position  

VATA 1994, Sch. 9, Grp. 6, item 1 exempts the provision, by an eligible body, of education.  

  An eligible body, for the purpose of this group, is defined in Note (1) which includes both:

  • (at Note (1)(a)), a school within the meaning of the Education Act 1996 (or equivalent provisions in Scotland and Northern Ireland) which is in a register of independent schools; and
  •  (at Note (1)(e)), bodies which are precluded from distributing and do not distribute any profit they make, instead applying any profits made from the provision of education to the continuance or improvement of such supplies.

In addition, VATA 1994, Sch. 9, Grp. 6, item 4 exempts the supply by an eligible body of any goods or services closely related to a supply of education provided they are for the direct use of the pupil or student. This allows, for example, the exemption of school meals, transport provided to pupils, accommodation, etc.  

As all school fees and closely related supplies are exempt from VAT, private schools cannot usually recover the VAT they incur on related costs. This means the VAT on such costs is passed on to parents in the fees charged.  

Scope of any future standard rate  

Presumably, the intention to levy VAT on school fees will be achieved through the exclusion of relevant categories of schools from the current exemption. The first issue, therefore, seems to me to be how far such an exclusion would be drawn.  

Some private schools cater to specific groups of children with special needs that cannot, or do not appear to be, met within the state sector. Will there be a carve-out for these schools to continue to benefit from exemption?  

It has been suggested pupils attending a particular private school under an educational healthcare plan will not face VAT on their fees. Does this mean the exemption will only be retained on a pupil-by-pupil basis? If so, the schools could face complex and continuing partial exemption calculations year after year if they have a mix of pupils, only some of whom meet the relevant criteria for exemption.  

Will private tuition remain exempt from VAT while private schools are excluded?  

Other liability issues  

Private schools often now offer nursery education to pre-school children in competition with private nurseries, many of whom benefit from exemption under the provisions in VATA 1994, Sch. 9, Grp. 7 relating to the supply of welfare services. Presumably the retention of charitable status will allow continued exemption for these supplies, again leading to complex ongoing partial exemption calculations being required where school facilities are shared.  

What of the liability of closely related supplies of goods and services? Some of these may not be subject to VAT at the standard rate when separately supplied. Transport is a good example. The transport of passengers in vehicles designed or adapted to carry not less than ten passengers is rated zero under Sch. 8, Grp. 8, item 4. Will it be possible to charge parents discreetly for any such supplies at the relevant rate? Or will they be considered, as suggested by the current wording in Sch. 9, Grp. 6, item 4, ancillary to the principal supply of education and therefore part of a composite single supply attracting VAT at the standard rate?  

Some schools, in anticipation of a challenge to their charitable status, had recently increased the level or number of bursaries and scholarships awarded to pupils unable to meet the fees, either in whole or in part. The liability of such schemes may come under closer scrutiny.  

The funding is generally by donation, which would be outside the scope of VAT if there is no benefit provided to the donor other than an acknowledgement.  

Where the bursary covers only part of a pupil’s fee, it is likely that it will be regarded as a discount on fees with VAT only due on the discounted amount. When it applies to the whole of the fee that would otherwise be charged, there is no consideration from the recipient of the education, and therefore no supply for VAT purposes.  

 Input tax recovery  

 The imposition of VAT on fees will confer on schools an entitlement to recover the previously irrecoverable VAT on related costs.  

Of course, not all costs include VAT. Salaries typically represent the biggest ongoing cost to schools, and they are not subject to VAT. But there will be some benefit from the future recovery of VAT on, for example, energy costs, on telecommunications, on repair and maintenance, and on the cost of equipment and furnishings.  

 Significant savings may be achieved on capital expenditure when upgrading or improving the facilities offered to pupils if the VAT incurred can be recovered as input tax. Schools contemplating sizeable expenditure may therefore want to delay, at least until the position becomes clearer, and potentially avoid losing out.  

 Schools that have recently carried out substantial works falling within the Capital Goods Scheme may be able to benefit from some recovery of the VAT previously incurred, but they will have to have sufficient documentation to enable them to carry out, and allow HMRC to verify, the scheme calculations.  

 Schools should also consider carefully whether any external letting activity will require a future option to tax to preserve recovery of this VAT, particularly if the Capital Goods Scheme applies.  

 This enhanced ability to recover VAT should mean schools can absorb some of the increase in fees faced by parents. How much will depend on the individual circumstances of the school.  

 Tax points  

 Anecdotal evidence suggests that many schools are, at least, considering encouraging parents to pay future fees in advance to avoid having to charge VAT.  

 The time of a supply can, in certain circumstances, influence the liability to VAT or otherwise. Under fundamental principles, VAT is due at the time of supply, known as the tax point. The basic tax point for a supply of services is when the service is completed except for invoicing. Where a supply of services has no completion date, because it is an ongoing or continuous supply, there are specific rules for determining a tax point. In essence, a tax point is created by the receipt of a payment or the issue of a VAT invoice.  

 Although it may be subject to some debate, the supply of education could be considered a continuous supply of services, and therefore a tax point will be created each time a payment is received, or a VAT invoice is issued, in connection with the supply. Even if the supply is not considered continuous, a basic tax point may be overridden by the creation of a tax point when a prior payment is received, or a VAT invoice is issued.  

 The relevance of this is that a supply’s liability is established at the time of supply. In other words, if an actual tax point is established before any change in the liability of the supply from exempt to standard rated the supply will, in theory, be exempt from VAT.  

 The cost of prepaying fees free of 20% VAT, whatever uplift that represents, even if it must be funded by a loan arrangement, can appear attractive to those with the relevant resources. There is a further consideration, however.  

 Anti-forestalling provisions  

To prevent what HMRC considered to be avoidance of VAT, when there was a previous change in the liability or rate of VAT, anti-forestalling provisions were introduced.  

 When the standard rate of VAT increased from 17.5% to 20% on 4 January 2011, for example, Finance (No. 2) Act 2010, Sch. 2 introduced a supplementary charge on the date of the VAT change, rather than at the time of supply, on certain supplies spanning the date of the VAT change. It is therefore reasonable to assume that similar provisions will apply in this instance, although that is not certain, and the precise details cannot be known now.  

 In the worst-case scenario, they could result in an accelerated liability to VAT on future fees.  

 If, however, in the normal course of business, schools have requested payment of fees up front for, say, the coming academic year, there may be some merit in ensuring this is carried out before any future changes are introduced to benefit from the current exemption. Any more aggressive planning is much more likely to be challenged at some point in the future. That should not mean it cannot be robustly defended but, as always, individual circumstances must be considered.  


The implications of the imposition of VAT on private school fees, although limited to a relatively small proportion of the population, are wide and complex for those involved, and it is likely that should Labour win the election, they could be imposed with potentially irreverent haste, forcing difficult decisions to be contemplated now with no certainty and limited information in relation to all the potential consequences.  

 It will be for each school to consider the best course of action, bearing in mind the likely timescale, and balancing the risk of anti-forestalling provisions against the benefit of increased VAT recovery. 

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