On 29 July 2024, Chancellor of the Exchequer, Rachel Reeves announced that all education services, boarding services and vocational training supplied by private schools will be subject to VAT.
The exact definition of “private school” is subject to consultation, however we would expect the definition to extend to all independent schools in the UK.
In a technical note issued by HM Treasury, the Government has confirmed that:
- from 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%
- boarding and lodging services closely related to such a supply will also be subject to VAT at 20%
- any fees paid from 29 July 2024 to 30 October 2024 in respect of a term starting in January 2025 onwards will be subject to VAT at 20%
- the intention is that nurseries (including those attached to a private school) will remain exempt from VAT, with fees being subject to VAT from the first year of primary school (i.e. the academic year in which the child turns five)
- other closely related goods and services other than boarding and lodging (such as school meals, transport, and books and stationery) provided by a private school, for the direct use of their pupils and that are necessary for delivering the education to their pupils, will remain exempt from VAT.
There is a big question over the status of fees already paid (prior to 29 July 2024) under any Fees in Advance Schemes (FIAs). HMRC’s technical note makes it clear that HMRC will review such arrangements and, depending on the structure, may seek to impose VAT on supplies of education and related services despite the attempt to pay fees in advance. To date, insufficient detail has been provided to determine the steps HMRC will take in respect of, and how it will interpret, existing FIAs. However, it is clear that such arrangements are likely to face a great deal of scrutiny. Whether an FIA does, or does not, stand-up to HMRC’s enquiry will depend on the terms, and operation of, the particular scheme. Where a school has taken advanced payments, each school should carefully consider its position and, if it is unable to pass on the VAT liability to the parents, explore alternative options (for example, whether or not the structure could be unravelled). Although it may be prudent to consider the contractual position of this, each school should take appropriate independent advice. It is also important to remember that we still do not know HMRC’s approach to such schemes, and this will need to be factored into the decision making.
The Birketts view
To prepare for the forthcoming changes, an independent school should:
- check the terms of its parent contract to ensure it has the right to pass VAT on to parents
- if the school intends to pass the VAT on to parents, give notice to parents as such in accordance with the terms of the parent contract (usually not less than a term’s notice will be required)
- check the terms and operation of its existing FIA (taking appropriate independent advice, as required) to better understand whether fees already paid (prior to 29 July 2024) are likely to be taxable or exempt
- if the school does not currently make any taxable supplies, register for VAT with HMRC (the school will be able to do this from 30 October 2024, but must have done it before 1 January 2025)
- if the school does currently make taxable supplies, but is not registered with HMRC for VAT, it can voluntarily do so before 30 October 2024 (but must have done so by 1 January 2025)
- if it has any comments on the draft VAT legislation, or any questions relating to it, contact the Government via email at [email protected] by 15 September 2024 (note that there are already a number of FAQs in the technical note).
The above next steps are practical tips based on information contained in the technical note. Further guidance (for example, on VAT registration for schools) is yet to be published. Therefore, the information or dates provided in this note may be subject to change in the coming months.
The full technical note and draft legislation can be found HERE.
If you would like any assistance in relation to reviewing your existing FIAs or parent contracts or advice on the upcoming VAT legislation in general, please do not hesitate to get in touch. with your main contact at Birketts or contact Ed Bouckley at [email protected].
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2024.