Diplomats, international schools and VAT on private education: a question of reciprocity?

Diplomats lobbying the UK Government against VAT on international school fees

European diplomats have recently lobbied the UK government to seek an exemption from the proposed imposition of Value Added Tax (VAT) on fees for international schools. Such schools are often at least partially funded and operated by states, such as the French Lycée Francais Charles de Gaulle in South Kensington, London.

International schools often provide education to the children of diplomats and are seen as an important part of the community for many foreign nationals in the UK. The fact that many such schools are at least partly owned or funded by states means that taxing them may be problematic under international law.

The future of international schools in the UK

No other European country imposes VAT on private education. The EU VAT principle of fiscal neutrality prohibits treating similar services differently for VAT purposes. With the UK no longer bound by EU regulations post-Brexit, it has the freedom in English law to decide how and what to charge VAT on, leading to this contentious issue.

But despite Brexit, the UK still has international obligations in this area. The principle of reciprocity, a cornerstone of international relations, provides that privileges and immunities granted to diplomats and states in one country are subject to reciprocity by other countries. In other words, the privileges and benefits that are granted by one state to the nationals or legal entities of another, should be returned in kind.

Therefore, the argument is that if UK schools in other states benefit from the privilege of not having to pay VAT on school fees, should international schools in the UK, partially funded by sovereign states, charge VAT? 

As a French spokesman commenting on international schools said to the Financial Times: “they are not typical private schools … we have been in contact with the British government and hope that the implementation of the reform will take into account the very distinctive nature of these schools, as is the case in France, where similar schools, such as the British School of Paris, are exempt from VAT.”

However, if the UK Government does press ahead and impose VAT on school fees it could lead to retaliatory measures from other countries, potentially affecting UK international schools abroad. It could also risk eroding the UK’s standing among the diplomatic community, which has recently come under scrutiny following a series of English court judgments which have arguably diluted protections for states and diplomats in the UK.

VAT and the diplomatic sector

Another important issue is whether diplomats with children in private education will also be liable to pay VAT. It is clear in international law that diplomats are exempt from most taxes under Article 34 the Vienna Convention on Diplomatic Relations 1961 (VCDR). This provides that diplomats shall be exempt from all dues and taxes, personal or real, national, regional, or municipal, except for indirect taxes normally incorporated in the price of goods or services.

This means that while diplomats are exempt from direct taxes, in theory they may still be liable to pay VAT, which is an indirect tax. This is certainly the position in the UK, but by no means globally. For example, the United States treats sales tax levied on goods as a direct tax, and an exemption is granted.

But while the UK may in theory be able to charge VAT on diplomats, the issue becomes less certain in relation to VAT on school fees. This is because, as the leading commentator on diplomatic law Eileen Denza states, there is a broad agreement in international law that diplomats should not be required to contribute to publicly funded services. For example, diplomats are already fully exempt from UK council tax. Indeed, public education falls within the category of "non-beneficial services" and exempt from taxes under Article 23 VCDR.

However, the issue with the Labour Government’s policy is that the money raised through VAT on private school fees is earmarked to be spent in the state education sector across the UK, including funding 6,500 new teachers in England. Requiring diplomats to pay VAT on school fees would therefore risk blurring clearly established lines.

It may be that a compromise can be reached. Circumstances already exist where diplomats can obtain a VAT exemption or rebate in the UK for high value goods purchases. Therefore, if the UK Government has not already exempted diplomats for VAT on school fees, it may struggle to justify not doing so.

Many thanks to trainee Constance Gillespie for their help in writing this article.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2024