On 10 October 2024, the Government published guidance on charging and reclaiming VAT on goods and services related to private school fees. The guidance was updated on 22 October 2024.
There has been some clarification on certain key issues which we have summarised below. This article complements and updates our previous article on this subject.
Single package fee: if a single fee is paid for a ‘package of education’ (e.g. one fee is payable in respect of education, transport and meals), VAT will be chargeable on the entire single fee. The guidance makes it clear that independent schools should not artificially split any package to create separate service lines.
Multiple fees: if separate fees are paid for distinct services delivered (i.e. one fee for educational services, one for transport and another for school meals), each service line may have different VAT liabilities. For example, school meals may be exempt if they meet the conditions for being closely related services.
Boarding/lodging fees: fees payable for boarding/lodging at an independent school will be subject to VAT.
Application and/or registration fees: any application and/or registration fees paid in respect of a place at an independent school will be subject to VAT.
Welfare services: for the purposes of the guidance, “welfare services” are services related to the care and protection of children and can include (a) supervision and guidance provided to a vulnerable child, and (b) day care services provided by a nursery, playgroup or after school club, but crucially, welfare services do not include activity-based clubs.
If education and welfare services are provided together, and the main (larger) element is welfare, the entire supply may be exempt under the so-called “welfare exemption”. However, if the main element is education (i.e. the delivery of welfare services is secondary to that of the provision of educational services), the whole supply will be seen as a single supply of educational services and subject to VAT.
Grant payments: if an independent school receives a grant that covers a specific pupil’s fees, the whole fee will be subject to VAT. However, block grant funding that does not relate to individual pupils (for example, block grants from the Education and Skills Funding Agency or a local council) will usually be outside the scope of VAT. Where an independent school receives grant payments it will need to decide if there is “consideration for a supply” and if it is liable to VAT.
Bursary payments: an independent school must account for VAT on the total amount of the fee charged for the delivery of educational services, even if this is made up by both fees paid by parents/a third-party payer and a separate bursary paid for that pupil (such bursary being paid by a third-party individual or organisation and not the school).
However, where a school provides a bursary payment to itself, the payment will be outside the scope of VAT.
Charities: if a charity carries out several activities (including running a school) each activity must be considered separately to decide if it is a “business activity” and subject to VAT. An activity will be considered a business activity if it involves making supplies for consideration with a view to generating income. However, it is not necessary for the relevant activity to make a profit.
Nursery classes: nursery classes made up wholly of children below compulsory school age remain exempt from VAT. If the nursery contains children of compulsory school age who pay a fee, the whole of the class will be subject to VAT.
Sixth forms and further education providers: if an independent school’s main purpose is to provide education suitable for 16- to 19-year-olds, the fees paid for full time education will be subject to VAT. Education that is normally targeted at students over 19 years old (for example, undergraduate and postgraduate education) will not be affected by these changes.
School trips: if an independent school purchases travel services related to a school trip (for example, transport or accommodation) which are then resold to pupils, the school may be treated as a tour operator for VAT purposes. In such circumstances, the school must use the Tour Operators Margin Scheme to account for VAT on the trips.
Donations: donations are not subject to VAT. However, to qualify for this exemption: (1) the donor must give the donation of their own free will (2) the donor or their beneficiary must not receive anything in return, and (3) the donation must not be subject to any terms or conditions.
The Birketts view
The updated guidance, although helpful, still leaves some uncertainty, and each independent school’s liability for VAT will very much depend on the way in which it currently structures its supply of educational and related services.
What is clear from the guidance is that HMRC is unlikely to tolerate the artificial splitting-up of service lines for the purposes of reducing VAT liability. Therefore, independent schools (and their VAT advisors) will need to think carefully before implementing any VAT mitigation measures.
Also, the provisions relating to donations are likely to pose some issues. It is very common for independent schools to require donors to enter into some form of donation agreement, primarily to provide the school with comfort that a donation will actually be made (particularly where a donation is being made in a number of instalments). Removing a school’s ability to enter into such agreements, or otherwise face the imposition of VAT on any donation, will make it difficult for a school to plan with any certainty how a donation will be used in advance of actually receiving it.
Finally, as mentioned in our previous article, the original guidance left significant uncertainty as to the status of fees already paid (prior to 29 July 2024) under any Fees in Advance Scheme. Unfortunately, the updated guidance provides no further clarification on this.
The full guidance note can be found here.
If you would like any assistance in relation to reviewing your existing Fees in Advance schemes 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 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 October 2024.