VAT on independent school fees

VAT on independent school fees – what we know so far

On 29 July 2024, the new Labour Government published a policy paper on the removal of the VAT exemption for private school fees. All education services and vocational training supplied by a private school for a fee will be subject to VAT at 20% from 1 January 2025. Boarding services will suffer the same treatment, but pupils with Education Health and Care Plans which state their needs cannot be met in the state sector will be exempt from the application of VAT to fees. The policy document states that nurseries will remain exempt, with the VAT applying to fees for children in the first year of primary in a private school upwards.  

Prepayment of fees and related organisations

The government has promised to collect VAT from parents who prepay private school fees from 29 July 2024 in a bid to avoid the end to the tax break. Any fees paid “pertaining to the term starting in 2025 onwards will be subject to VAT”.  

If an organisation other than a private school provides education or vocational training at a private school, they could be caught by the removal of the VAT exemption. If an organisation provides education or vocational training at a private school, it will be treated as provided by the private school if the organisation and the private school are financially, economically and organisationally linked, if they are connected as defined by the Corporation Act 2010 and the arrangement’s main purpose is to ensure the provision is VAT-exempt.   

Exemptions for related goods and services

Closely related goods and services, such as school meals, books, stationery, and school transport, will remain exempt. This is a policy decision to reflect that “the government considers the risk of schools artificially assigning greater value to closely related goods and services … to limit the amount of VAT they are charging … to be low”.  

Reclaiming VAT

Like all VAT registered businesses, private schools will be able to reclaim VAT.  

Schools are expected to be able to recover a proportion of VAT on large capital projects, including those carried out in the last ten years. From April 2025, private schools which are charities will become liable for full business rates.  

Things to consider for private schools

Schools will need to register for VAT with HMRC if they are not already registered. It would be prudent to check the school’s contracts with parents/carers to determine if they allow the school to pass VAT liability on to parents/carers and the terms in those documents concerning the imposition of fee increases (such as notice periods and “reasonableness” requirements).

An increase in the amount of fees is not likely to be a popular decision, so schools should prepare themselves for parental/carer complaints. To support parents/carers, schools may wish to consider how support can be provided to them by way of bursaries, payment holidays and waiver of requirements to pay fees in lieu of notice if parents/carers decide to withdraw their children due to an increase in fees.

From a financial point of view, a school should calculate its VAT liability position as accurately as possible and consider the impact this will have on school fees. It should also determine whether it will have liability for full business rates from April 2025 and what impact that will have on school fees.

Finally, schools should work closely with their professional tax advisers to ensure compliance with the new VAT rules, and bursars should consider any guidance or support published by HMRC so they are aware of the latest relating to the exemption change.