The government has published draft legislation outlining the plan to remove the VAT exemption for private school fees. This change will also include the removal of private schools' eligibility for business rates charitable relief, although this latter change will only apply in England due to the devolved nature of business rates policy. However, the VAT changes will impact private schools across the UK, as VAT policy is reserved.
Current VAT Situation for Private Schools
At present, private schools qualify as exempt from VAT as regulated education providers, meaning they do not charge VAT on their fees and cannot reclaim VAT on their expenditure.
What Will Change?
From 1 January 2025, all educational services and vocational training provided by private schools or a "connected person" will be subject to VAT at the standard rate of 20%. This includes closely related boarding services. For parents, this likely means a 20% increase in private school fees. However, private schools will now be able to claim back VAT on their expenditures, potentially mitigating some of the cost increase.
Impact on Pupils Funded by Local Authorities
In cases where pupils are placed in private schools due to unmet needs in state schools and funded by Local Authorities, the Local Authorities will be compensated for the VAT incurred. Therefore, there should be no change in these cases.
Can Fees Be Paid in Advance to Avoid VAT?
No, this option is not available. An anti-forestalling measure dictates that any fees paid from 29 July 2024 onwards, relating to the term starting in January 2025, will be subject to VAT.
Does This Apply to Nurseries?
The legislation intends for nurseries, whether standalone or attached to private schools, to remain VAT-exempt. VAT will only apply to children of compulsory school age, starting from their first year of primary school.
How About Sixth Forms?
Private sixth form colleges, whether standalone or attached to a private school, will also be subject to VAT. However, further education colleges classified as public sector institutions will remain exempt from VAT.
Impact on State Schools and Academies
There will be no changes for state schools, including academies, as they will continue to be exempt from VAT for education and boarding services.
Other Goods and Services Provided by Private Schools
Other closely related goods and services provided by private schools, such as meals, transport, books, and stationery, which are necessary for delivering education, will remain VAT-exempt. However, HM Revenue and Customs (HMRC) has indicated that any attempts to manipulate these exemptions will be closely scrutinised.
Private schools will also need to consider partial exemption calculations, as a mixture of taxable and exempt supplies can affect the amount of VAT recoverable on expenditures. HMRC will provide specific guidance on this.
VAT on After-School and Holiday Education
VAT will need to be charged on educational activities provided after school hours or during holidays. However, pure childcare services, including before or after school and holiday clubs that solely offer childcare, will remain VAT-exempt.
VAT Registration Requirements
Private schools not currently registered for VAT will need to register from 1 January 2025. Those already making taxable supplies, such as hiring out facilities, may opt to register voluntarily from 30 October 2024.
For private schools navigating these changes, seeking professional advice on how to effectively manage VAT will be essential. If you require assistance or training, please do not hesitate to contact us.
For further details, see the government's publication on VAT changes.