Reprieve on vat and private school fees? | vat

Reprieve on VAT and private school fees?

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

It was in 2017 that the Labour Party first suggested removing charitable status from the approximately 70% of private schools that currently benefit from it. Concerns around the impact this might have more widely, on universities charging fees for example, led to a restriction of the policy to the current pledge to impose VAT on private school fees and mandate that those schools with charitable status will lose business rate relief.

Sir Keir Starmer recently stated that, if elected, he would end tax breaks for private schools ‘straight away’ before clarifying that it would happen as soon as possible. However, speaking at The Times CEO summit last week, Rachel Reeves confirmed, if elected, measures to impose VAT on private school fees would be contained in Labour’s first Budget, which is expected ten weeks after their election. They would then become law only after being passed by MPs in their first Finance Bill. She appeared to rule out the retrospective taxing of fees, so that the earliest possible opportunity for the changes to take effect would be the start of the spring term in January 2025.

Continuing to defend the policy she also stated that she was prepared to give schools a chance to make savings before implementing the changes so that the full cost would not have to be passed on to parents.

Realistically, therefore, it would make no sense to impose changes halfway through the academic year when budgets have already been set leaving schools with little choice but to pass on the full cost, at least initially.

Despite, therefore, a senior Labour source apparently suggesting no final decision had yet been taken on when they would be introduced, many experts now believe it is more likely that the changes will be implemented from the start of the 2025–26 academic year, allowing such efficiency savings as schools believe they can make.

Nevertheless, without any formal confirmation, parents may still consider it prudent, where they can afford to, and even if they would not usually do so, to pay the 2024–25 fees up front and try to ensure they optimise the benefit from exemption.

It must be said, however, there is no cast iron guarantee that even taking such action would provide the desired protection should the changes be affected in January. Previous anti-forestalling legislation has targeted pre-payment schemes imposing a VAT charge on the date changes take effect. The fact that most, if not all, schools ordinarily offer the facility to pay fees annually does make it less likely such a charge would be imposed, and the assurances there would be no retrospective taxing of fees but you just never know for sure.

Schools will, of course, face a myriad of VAT complexities following this change and there are many questions yet to be answered on the precise scope of the changes as highlighted in my previous article, VAT and private school fees ( Tax Weekly, issue 121, 12 June 2024), so that they will still have a mountain to climb to be ready for these changes even if they are, hopefully, delayed until the next academic year.

Useful links

For commentary on education, see Indirect Tax In-Depth at ¶50-630.

For commentary on partial exemption, see Indirect Tax In-Depth at ¶19-400.

For commentary on the Capital Goods Scheme, see Indirect Tax In-Depth at ¶19-800.

For commentary on tax points, see Indirect Tax In-Depth at ¶11-720.

For commentary on anti-forestalling provisions, see Indirect Tax In-Depth at ¶18-054.

Legislation:  VATA 1994, Sch. 9, Grp. 6 .