Whilst there remains much speculation around potential Autumn 2024 Budget announcements, the rumours around VAT on school fees have now been made clearer by the release of policy papers by the Government regarding VAT on private school fees.

The policy papers confirm that from 1 January 2025, private school fees will be subject to the standard rate of 20% VAT for the cost of tuition and boarding.

There is no doubt that this change will affect many business owners and directors who have children or grandchildren in private education and trustees that operate a trust that provide funding for school fees.

It is worth noting that a public consultation period has been opened and draft legislation is still to be debated, meaning there could still be amendments prior to the Budget in October.

However, here is the latest information and answers to your questions on the changes to VAT on school fees.

Definition of a private school

A private school is defined as a school that provides full-time education for pupils who are of compulsory school age, or an institution which provides full-time education for students over compulsory school age but under 19 years old (for example, a sixth form college), and where fees are payable.

Where is VAT being applied?

Here are key points that have so far been released:

VAT on private school fees from 1 January 2025: VAT will be applied to private school day fees and boarding fees.

Which private schools and age of children: The government’s definition defines a private school as a school that provides full-time education for pupils who are of compulsory school age, or an institution which provides full-time education for students over compulsory school age but under 19 years old (for example, a sixth form college), and where fees are payable. Compulsory school age in the UK starts on 31 December, 31 March or 31 August following a child’s fifth birthday.

However, it looks likely that VAT will be charged on school fees from reception age (many children start reception full-time in September after their 4^th birthday).

State boarding schools, colleges and academies will not be affected.

Nursery provision: Nursery provision will remain VAT exempt, whether the nursery is attached to a private school or a standalone private nursery. However, as per above, it is likely that VAT will be charged on school fees from reception age.

Closely related goods and services other than fees: The draft legislation exempts other items closely related to the fees. Meaning that VAT should not be charged on things like books, examination fees, stationery, lunches, transport and wrap around care (as long as it isn’t an educational provision).

However, there are still some grey areas. For example, there is no current guidance around school trips as these may be classed as closely related but educational in nature.

Private schools and VAT frequently asked questions

When will VAT be applied to school fees?

VAT will be applied to private school and boarding fees from 1 January 2025. The Labour government will legislate to end the VAT exemption as part of the October 2024 Budget.

However, there is a consultation period currently running and some organisations are considering legal challenges, so some changes to the draft legislation may still happen before these changes are legislated and introduced.

Can I prepay school fees before the Budget and avoid VAT?

Prepaying school fees now to avoid the VAT charge will no longer work as fees invoiced or paid on or after 29 July 2024 (the day of the announcement) for school terms after 1 January 2025 will be subject to VAT.

Some people had been prepaying school fees to avoid VAT prior to the policy papers being released on 29 July. However, these may well be further challenged by HMRC as the technical note attached to the policy paper gives an example of challenging unallocated pre-paid fees. The technical paper states “if the scheme involved paying a lump sum to the school in advance, but the details of the supplies that the money was buying were not determined at the time the money was paid (i.e. if the money paid did not relate to  specific  terms’ fees that had already been set), HMRC stands ready to challenge the validity of such payments and will seek VAT on those fees where it is due” In other words, if the price for the term’s fees was not known at the time of payment, HMRC will argue that VAT is due on that term’s fees. Schools have differing ‘pre-payment schemes’ and the detail of each scheme will be important here. It remains to be seen how exactly HMRC will challenge pre-payment schemes, but we would expect that HMRC will engage with schools over their scheme’s rules (rather than directly with parents) since it is the school who are responsible for ensuring they charge the correct amount of VAT. Most, if not all, schools who offered an advance fee payment scheme will have retained the right to charge any additional VAT to the fee payer should this be found due.

Will my school fees go up by 20 per cent?

It is uncertain whether schools will simply raise fees by the full 20 per cent from January. This is because schools should become VAT eligible, meaning they can reclaim VAT when purchasing goods and services.

The Institute of Fiscal Studies, (the basis of Labour’s policy), estimates this deduction means that private schools will face a 15 per cent rather than 20 per cent increase in costs.

Many schools already work hard to maintain long-term financial sustainability by aiming to leverage efficiencies across the school and if part of a wider network of schools, by looking at cost savings and shared services across the school group.

It remains to be seen how much schools pass onto parents. Many schools have already indicated how much the ‘net’ impact on fees will be; after taking into account the VAT they will now be able to recover on certain purchases. It is worth contacting your school now to ask the question on how they will be looking to mitigate some of this increase if you haven’t had this communication from your school already.

If my child has special education needs, will they be subject to VAT?

Fees for pupils with Special Education Needs and Disabilities (SEND) and EHCPs funded by the local authority because their needs can only be met by private schools will be subject to VAT. However, the local authority should be able to reclaim the VAT, meaning no costs should be passed onto parents.

Where parents of children with SEND have chosen to send their child to private school, but their needs could be met in the state sector, VAT will apply to their fees.

Will VAT be charged to parents who live overseas?

VAT will be charged on the basis of where the education takes place, irrespective of the parents’ location. Therefore, VAT will be charged to overseas parents and will have to be paid as part of the school’s fees bill.

How will the changes affect bursaries and discounted fees?

This will depend on whether the full cost of education is covered by the bursary. If the school covers the full cost of the education, then no VAT should be due as there is no payment involved. If the school only covers part of the cost, then VAT is likely to be due on the remainder of the fee paid.

For discounted fees, VAT will only be charged on the discounted amount paid and not the full cost.

It is currently unclear, if the bursary is paid by a third party, whether this is classed as a grant to the school or consideration for supply of services. This needs to be reviewed and considered for each case.

My child’s school fees are paid by a trust, how will this be affected?

The trust paying your child’s school fees will need to account for any additional cost levied (either the 20% VAT or whatever the rise in costs is by the school). Trustees will need to manage and allocate the trust fund according to any increases levied by the school. Trustees should revisit their tax planning strategies with their accountants as it may require a change in strategy to cover the increased costs.

Settlors (parents or grandparents) who set up the trust fund will need to decide if they need to ‘top up’ the trust fund to cover any additional costs. They should speak to their own accountant or financial planner to assess the impact of this on their own financial planning.

Summary

The new Chancellor, Rachel Reeves will deliver her first Budget on 30 October 2024. Labour continues to talk about ‘difficult decisions’ and ‘bad news’ on the run up to the Autumn Budget.

The discussion around VAT on private school fees has already been made public, so this is likely to go ahead unless legal challenges or the consultation period dramatically change anything.

There is very little that parents can do to avoid this potential rise in school fees. They can, of course, consider returning their child into the state education system. Parents should seek advice from their accountants and financial planners when considering how and if they can afford any future school fees.

Contact us today for more help and advice on future financial planning and the effect these changes will have.

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