VAT on private school fees

HM Treasury has published draft legislation on the removal of the VAT exemption for private school fees as part of a technical consultation ahead of its inclusion in the Finance Bill 2024–25 following the Autumn Budget.

Overview

The current exemption on private school fees is to be removed by the introduction of exceptions to  VATA 1994, Sch. 9, Grp. 6  for:

• the provision of education by a private school, other than in a nursery class;
• the provision of vocational training by a private school; and
• the provision of board and lodging which is closely related to either of those.

The changes will be implemented, earlier than perhaps anticipated, from 1 January 2025 with anti-forestalling measures to ensure that any advance payments made after 29 July 2024 will be subject to VAT.

Genuine pre-payments made prior to this date will not be taxed, keeping the Chancellor’s earlier promise to avoid retrospective taxation, if advance warning of the change prevents it being retrospective.

It is clear, however, that HMRC are already planning a robust challenge to the increased number of pre-payment schemes utilised recently, many of which, they believe, do not achieve the desired aim of shifting the tax point as an advance payment in connection with a fully determined future supply. Schools will therefore have to be able to demonstrate precisely what is covered by any advance payments made before 29 July if they are to benefit from exemption.

Scope of exception

The notes in the draft legislation define a private school as a school or institution at which full-time education is provided for pupils of compulsory school age or, in Scotland, school age, and where fees or other consideration are payable for that provision.

It also applies to any institution at which full time education is provided for pupils over compulsory school age but under 19.

The provisions therefore apply to all fee-paying primary, secondary and sixth form colleges, although non-maintained special schools approved under the Education Act 1996, s. 342, are excluded from the definition of private schools and will continue to benefit from exemption, as will state schools and academies.

Boarding fees will also be subject to VAT at the standard rate. The provision of nursery education will, however, continue to be exempt, as will before or after school childcare that is seen as the provision of welfare services, but not extra-curricular classes or sports lessons.

Other goods and services closely related to education such as school meals, transport, books and stationery are said to be recognised, by the Government, as integral to children accessing education and will therefore remain exempt from VAT.

Anti-avoidance

To prevent the contracting out of supplies to continue to benefit from exemption, the provision of education, by an eligible body, at a private school is to be treated as being provided by a private school if the eligible body and the private school are:

• connected persons;
• bound by financial, economic and organisational links; or
• if the main purpose of the arrangements is to secure the provision of education is an exempt supply.

Pupils with special educational needs

The exclusion of non-maintained special schools will be a welcome relief to many parents of pupils with special needs that cannot be met in the state sector but, depending on where they live, for many such parents a specialist school that is not approved, or a mainstream private school, is their only option.

It will be particularly disappointing for those parents for whom VAT will apply to their fees, particularly when provisions have been made for local authorities who fund such places to receive a refund of any VAT charged under the  s. 33  refund scheme.

VAT registration

Private schools not already registered for VAT will be required to do so from 1 January 2025, but may register, voluntarily, prior to this date if they currently make some taxable supplies, such as, for example, the letting of facilities for sport.

To manage the demand that they will clearly now face, HMRC have requested that schools who will be required to register from 1 January 2025 should not attempt to register now but should, instead, await further guidance to be issued in due course.

Conclusion

Private schools now have just a few months in which to register for VAT, meet the demands of Making Tax Digital (MTD), and work out a suitable partial exemption method.

The draft legislation addresses the substantive issue of VAT on private school fees, but considerable support and guidance from HMRC, will be required to ensure the correct VAT treatment is applied moving forward. And those schools who have implemented a pre-payment scheme will have to consider whether it is sufficiently specific to create an actual tax point at the date of payment.