It came as no surprise when last month the Chancellor confirmed that private school fees will be subject to 20% VAT from 1 January 2025, with no exemption for pre-payments.
Following the Autumn Budget, the removal of the VAT exemption for private school fees will be included in the Finance Bill 2024-25. Boarding fees will also become subject to 20% VAT.
The current exemption is to be removed by the introduction of exceptions to Value Added Tax Act 1994 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.
Anti-forestalling measures have been put in place to ensure any advance payments made after 29 July for January and beyond will be subject to VAT. Genuine pre-payments made before this date will not be taxed but schools will have to demonstrate precisely what is covered by any advance payments made before 29 July if they are to benefit from the exemption.
What schools and services are affected?
The draft legislation defines a private school as:
- a school or institution where full-time education is provided for pupils of compulsory school age or, in Scotland, school age, where fees or other consideration are payable for that provision; or
- an institution where full time education is provided for pupils over compulsory school age but under 19.
State schools, academies and non-maintained special schools approved under the Education Act 1996, section 342, are excluded from the definition of a private school.
Nursery education provision will continue to be exempt, as will before or after school care that is seen as a provision of welfare services, but not extra-curricular classes or sports lessons.
Other goods and services seen by the Government as integral to children accessing education such as school meals, transport, books and stationery will remain exempt from VAT.
Special Educational Needs
The exclusion of non-maintained special schools is a welcome relief to parents of pupils whose needs cannot be met by the state sector.
But some pupils with special needs who attend a specialist school that is not approved, or a mainstream private school as a non-maintained special school is not available in their area, will have their fees subject to VAT. This will be particularly disappointing for parents of these pupils.
VAT recovery on expenditure and capital projects
In accordance with the general rules on VAT recovery, VAT will be recoverable on expenditure incurred by a private school in connection with the supply of such education. Where expenditure is incurred on items other than those connected with such education, a partial exemption calculation is likely to be required.
Also, under existing VAT law where £250,000 or more of capital expenditure has been incurred that was subject to VAT, this can be recovered over a number of years. There could now be a basis for recovering a proportion of this VAT for private schools who become newly registered.
VAT registration
Not all private schools will be registered for VAT and those needing to register have been advised by HMRC to await further guidance to be issued in due course on registering for VAT. Those schools that already make some taxable supplies, such as letting of facilities, can voluntarily register for VAT prior to 1 January 2025.
Conclusion
The pressure is on for private schools to register for VAT, meet the demands of Making Tax Digital and work out a suitable partial exemption method over the next few months.
Considerable support and guidance from HMRC will be required to ensure VAT treatment is applied correctly moving forward.
If you have any questions, please contact Carla Horsfall, VAT Director in our specialist VAT team.
