VAT and Private Education – A Briefing Note For Schools

The legislation will be included in the Finance Bill 2024, due to be published shortly. However, this means that, once enacted, the legislation will apply retrospectively, and schools must plan now based on draft legislation, HMRC guidance, and the consultation response released by the Government at the Budget. A number of questions regarding the detail of the measure remain outstanding at this stage.

This insight is intended to address the most commonly asked questions. As this is a complex and evolving area, please consult your Blick Rothenberg contact for advice and the most up to date position.

What will VAT apply to?

VAT will apply to the provision of education and vocational training by a private school or private sixth form college. It will also apply to educational clubs, including homework clubs and sports, drama, or similar clubs.

For private schools that offer boarding to pupils, the boarding fees will also be subject to VAT.

When will VAT be applied to private school fees?

The change will apply to education provided on or after 1 January 2025, irrespective of when the invoice was issued.

Can fees be prepaid?

It is possible for parents to prepay fees, and this may continue to be an option offered by schools. However, the draft legislation provides that any fees paid in advance on or after 29 July 2024, for the term starting in January 2025 (or later) will be subject to VAT. For pre-payment arrangements implemented by schools prior to 29 July 2024, certain conditions must be met in order for the payment to be validly treated as VAT exempt.

HMRC has indicated that it will be scrutinising existing pre-payment schemes offered by schools to ensure that VAT is correctly accounted for on any fees paid in advance. Schools that implemented pre-payment arrangements prior to 29 July 2024 for VAT planning purposes should consider reviewing these arrangements to identify whether a VAT risk exists.

Will private primary and secondary education be subject to VAT?

Yes – all full-time private education for pupils of compulsory school age and those up to the age of 19 will be subject to VAT. VAT will also apply to education at private sixth form colleges.

The draft legislation relies on the use of age thresholds to apply VAT to education provided to pupils from compulsory school age up to and including pre-university education (i.e. A levels). These age thresholds seem likely to lead to some unintended consequences; for example, the application of VAT to fees charged for exam resits where the age 19 threshold may be relevant.

What about nursery education?

Nursery education, whether stand alone or in a nursery attached to a private school, will remain exempt where the class is wholly, or almost wholly, made up of children below compulsory school age.

How will the change impact bursaries and scholarships?

Where a bursary or scholarship is paid to the school by a third party to fund (or part fund) the education of a specific pupil, VAT will be chargeable on the full value of the fees (i.e. not just the value of the parents’ contribution).

Where a school agrees to fund or part fund a pupil’s fees itself, the value that the school contributes will be treated as outside the scope of VAT.

How will grant funding be treated?

Grant funding provided to the school on a block basis, i.e. not on a pupil specific basis, may be treated as falling outside the scope of VAT. Grant funding should be reviewed in further detail, however, if its receipt is contingent on the school meeting some other requirement.

What about pupils with Special Educational Needs (SEN)?

SEN pupils in private education with an Educational Health Care Plan (EHCP) will have the costs of their education met by the local authority which will be able to recover the VAT. However, for those SEN pupils without an EHCP whose parents meet the costs of private education there will be an impact as VAT will be added to the fees.

This issue is one to watch as we understand that there is a potential High Court challenge to the policy on the basis that it breaches human rights law.

How will military and diplomatic educational allowances be impacted?

VAT will apply to fees charged for the education of pupils that are in receipt of military, diplomatic and other allowances (e.g. Continuation of Education Allowance) paid towards private schooling. In recognition of the fact that the application of 20% VAT to the value of the fees will erode the value of these allowances, the Government has pledged to increase the value of these allowances; however, at this stage the value and timing of any such increase is uncertain.

Will VAT apply to fees paid by parents of overseas students or those living overseas?

Yes – it is the place of supply (i.e. where the education is physically provided) that determines that VAT treatment, so VAT will apply to fees irrespective of whether the pupil is from overseas or the UK.

What about supplies to international students?

The Government has clarified that where a fee is charged to an international student by an institution that is not wholly or mainly concerned with providing education for a fee, the VAT exemption will continue to apply. For example, where a Further Education college charges a fee to a student who does not have UK settled status.

It has also been confirmed that the VAT exemption will continue to apply to fees charged for Teaching English as a Foreign Language (TEFL).

International Pathway Programmes, which are designed to help prepare overseas students for study at UK universities, include an academic component. Thus, where a registered private school offers such a programme, it currently remains uncertain whether VAT will apply.

Note that this contrasts with International Pathway Programmes offered by a provider in conjunction with a university or higher education college, which will remain VAT exempt.

What will be exempt from VAT?

The Technical Note and HMRC’s guidance state that goods and services that are closely related to education, which are provided for the direct use of pupils, and which are necessary for the delivery of education, will remain exempt from VAT.

The Technical Note specifically refers to school meals, books and stationery, and transport, where these are charged for alongside the education, remaining exempt. Any provision of services that are welfare related (for example, breakfast clubs and wraparound care) will be exempt, as welfare services remain VAT exempt.

What about school trips?

Where the school buys in certain services, for example travel and accommodation, and recharge these costs to parents, it may be treated as acting as a tour operator for VAT purposes.
Where conditions are met, the Tour Operators Margin Scheme will need to be applied. Detailed rules apply, however, as under this scheme VAT cannot be recovered on purchases that are recharged, but output VAT will only be accounted for on the margin.

Will schools have to register for VAT?

Yes. Schools will have to register for VAT by 1 January 2025. Schools that currently do not currently make VAT-able supplies (for example, hiring out facilities) will be able to register from 30 October 2024 and those in this position will need to consider when they expect to breach the VAT registration threshold. Schools that already make VAT-able supplies, albeit below the compulsory VAT registration threshold of £90,000, will be able to register before 30 October on a voluntary basis. However, registering from an earlier date means that schools will be subject to VAT compliance requirements from the date of registration.

We expect that there will be a significant number of schools that will need to register with HMRC, and HMRC has stated that additional resource will be available to ensure that new VAT registrations are processed on a timely basis.

Will schools be able to recover VAT?

Input VAT on costs incurred by a school will be recoverable where those costs are used in making VAT-able supplies, but any costs incurred that relate to services that remain VAT exempt will not be recoverable. As private schools will be making both exempt and VAT-able supplies, they will be partially exempt.

A further route for schools to explore is whether there is any retrospective VAT recovery under the Capital Goods Scheme. This would be on qualifying capital items acquired within the last ten years and still in use, typically acquisitions of land or buildings, extensions or renovations / refurbishments of buildings.

What about VAT compliance?

Many schools will not be prepared for the VAT compliance impacts that these measures will bring. These schools will have to ensure that existing accounting systems comply with the requirements of MTD for VAT, as well as ensuring that accounting systems are suitable for data extraction, preparation of returns and record keeping. If existing accounting systems are not MTD compliant, schools will have to invest in approved MTD for VAT software, which will impose an additional cost and administrative burden as experienced staff may need to be recruited or existing staff trained, and accounting systems migrated and tested in advance of the commencement date. An alternative would be to use bridging software to file VAT returns via an API, which is likely to result in additional agent’s fees being incurred.

Schools will have to file a quarterly VAT return. Normally this will be due one month and 7 days after the end of the VAT quarter (for example, the return for the quarter ending on 30 June will be due on 7 August).

Under Making Tax Digital (MTD), VAT returns must be submitted electronically which will require MTD compliant software. Schools will have to assess whether existing accounting software is MTD compliant and if it is not, consider investing in new software. An alternative to investment in new software is to use bridging software to file returns via an API, and we can advise on this if required.

What should schools do now?

There is limited time to prepare for the changes and we recommend that schools need to do the following before the end of 2024:

• register for VAT if not already VAT registered
• analyse and conclude on the VAT treatment of every source of income received
• analyse and conclude on the recoverability of VAT incurred on the expenses
• using the above information, assess their VAT position and determine the impact of recoverable VAT and whether fees for the term starting in January can be reduced to manage the total cost to parents once VAT has been applied and prepare communications to parents
• assess current accounting software to see if it is MTD compatible
• ensure administrative staff understand the VAT compliance requirements
• consider whether it is possible to claim historic VAT under the Capital Goods Scheme.

Would you like to know more?

If you would like to discuss any of the above and how it impacts you, please speak to your usual Blick Rothenberg contact or Gabby Donald using the form below.