Labour’s private school VAT plans may have unintended consequences

Gabby Donald, VAT Partner  said:

We can expect the new Labour government to move forward with its plans to make private school fees subject to VAT. Comment in recent weeks suggests that, although this change may not take effect until 2025, parents and schools can expect anti-forestalling legislation to be introduced soon to prevent fees that are not normally due being paid in advance to avoid the 20% VAT charge. The details of these measures will need to be carefully considered by schools once published, before turning their attention to the introduction of VAT on school fees.

Whilst we know that the incoming Labour government has made some specific commitments on private school fees and not to raise the standard rate of VAT, we have no knowledge of any plans beyond this. We know the new government will need to raise money and believes this can come through growing the economy and by cracking down on tax avoidance.

The UK VAT system is complex and already contains a broad array of anti-tax avoidance provisions, the incoming Chancellor has a real opportunity to reform and simplify the existing system. Doing this, in consultation with business, could create a stable and more straightforward VAT system within which businesses can invest and grow. Alongside this the Chancellor should look again at HMRC’s funding to ensure that the Tax Authority is properly resourced, and its staff are trained to implement the law (including anti-avoidance measures) correctly.

John Havard, Consultant said:

The new government wishes to continue attracting foreign investment. When that is achieved it is often accompanied by assigning home country employees to the UK, typically for 3-5 years. Such employees with children of school age will want them to continue to receive home country type education whilst in the U.K. This allows them to easily transition back into home country schools when the assignment to the UK ends.

There are fee paying schools in the UK which cater specifically for this market. e.g. the French Lycee in Kensington and the American School in London. Under Labour’s announced policy, these schools will have to charge VAT, thus increasing the cost of the assignment. Considerably so if the employer reimburses the cost and picks up the additional tax paid on this benefit in kind.

There is a solution to this – allow the employee a deduction against their taxable income for the VAT incurred on fees related to home country type education. Only employees eligible for overseas workday relief would be allowed to take the deduction against employment income.

Would you like to know more?

If you would like to discuss the above or how it may affect you, please get in touch with your usual Blick Rothenberg contact or Gabby Donald using the details on this page.