VAT on Independent School Fees
26 January 2024
Fees in advance: not quite the silver bullet some thought they might be.
Fees in Advance (FIA) schemes have been promoted as being one means by which independent schools may be able to lessen the effect of a new Labour government making independent school fees subject to VAT. Recent reports, however, suggest that Labour, if in power, will introduce new legislation that will prevent FIA schemes from being effective protection from any imposition of VAT on school fees.
Since Labour announced its intention to make independent school fees subject to VAT back in 2022, attention has been turned to what schools can do to mitigate the potential impact such a move would have. One much-touted approach has been the promotion and use of FIA schemes.
Under an FIA scheme, a payer makes a lump sum payment to the school, the lump sum being used by the school to cover some or all of the termly school fees for a set period of time in the future. As tax legislation currently stands, the “tax point” (i.e. the date on which tax becomes due on a particular transaction) for education provided by independent schools is fixed at the date on which payment for such education is received.
The thinking was that, if independent schools’ tax-free status was removed, schools could utilise FIA schemes to mitigate the effect of VAT being due on fees. The logic being that by receiving some or all of the fees whilst their tax-free status remained, the education provided by schools and paid for by such fees would remain tax-free; the tax-point for such education being fixed when fees were not subject to VAT.
However, it is now being reported that Labour is considering passing legislation so that VAT is applied at the time that education is delivered, rather than when it is paid for. This would mean that VAT would apply to all fees, regardless of when payment was made. Effectively, this would result in any fees paid in advance under an FIA scheme, in respect of education yet to be provided, becoming liable for VAT.
There is a frustrating lack of clarity in terms of exactly how and when Labour will implement this policy. However, if Labour do win the forthcoming general election, it is almost certain that independent school fees will become subject to VAT; Labour has, on numerous occasions, stated that certain new policies will be funded by the tax revenue generated.
Therefore, independent schools need to be looking carefully at the measures they can put in place to soften the impact VAT on fees will have. This must include checking both parent contracts and FIA scheme terms and conditions to ensure that when fees do become subject to VAT, that VAT can be passed on to parents.
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 January 2024.