VAT on school fees: a briefing on what we know

Further to our article VAT on school fees: Q&A, the Government has announced measures to abolish the exemption from VAT on independent school fees, with effect from 1 January 2025. The announcement was accompanied by the publication of draft legislation, a technical note, and an explanatory note, all of which can be accessed via this link.

The headline points are that:

1. 20 per cent VAT will be introduced on fees for education provided by a “private school” (or a connected party) from 1 January 2025.
2. At the same time, VAT will be introduced on “board” and “lodging” provided by a private school.
3. “Closely related supplies” will not attract VAT: nursery provision will also remain exempt, but fees for Reception classes will be subject to VAT (even if those classes include children who have not yet reached compulsory school age).
4. Anti-forestalling measures will be introduced to apply VAT on payments made on or after 29 July 2024 which relate to education provided after 1 January 2025.
5. Business rates relief will also be removed. This will be legislated for separately and is intended to take effect from April 2025, subject to Parliamentary processes.
6. The Government has launched a consultation on the policy and the draft legislation. The consultation closes on 15 September. It asks for responses in respect of five questions, four of which are extremely narrowly framed and relate solely to the definitions of “private school” and “connected person”.
   
   

Given the timing of the announcement over the summer break and the unexpectedly early date of 1 January 2025 for introducing VAT, schools will be ramping up their preparations. This will be challenging in circumstances where so much of the detail surrounding the policy remains unclear, with many unknowns.

Rather than summarising the draft legislation and technical note (which we encourage you to read), we have outlined below three key issues which schools may wish to include in their planning and discussions over the summer.

This article is an abridged version of a client briefing which we have prepared for independent school bursars and heads. If you are a head or bursar and would like to receive the full version of the briefing please contact Joanne Ali at [email protected].

What we know: the parent contract and VAT

Schools will want to review their terms and conditions/parent contracts to ensure they cater for the addition of VAT and include necessary VAT provisions.

What we know: closely related supplies

Under current UK VAT law, goods and services that are closely related to education are also exempt from VAT eg school meals, transport, books and stationery, and boarding provision. Because of the way the draft legislation is structured, closely related supplies will remain exempt from VAT, except for board and lodging. The technical note explains this as follows: ““closely related” goods and services other than boarding (ie goods and services that are provided by a private school for the direct use of their pupils and that are necessary for delivering the education to their pupils) will remain exempt from VAT.”

There are a couple of areas of uncertainty here:

1. The first is the general complexity of the law surrounding “closely related” supplies. Whilst in theory one could produce a list of the types of goods and services schools typically supply and their associated tax treatment, the tax analysis will often vary depending on each school’s specific circumstances and the economic and commercial reality “on the ground”. With some of a school’s activities being taxable while others remain exempt, without any clear dividing lines, this could create a potentially huge administrative burden on schools.
2. The second is how the Government proposes to define “board” and “lodging” and how this impacts schools with boarding and wrap-around provision.
   
   

What we know: comms with parents

As noted above, schools are in a difficult position, caught between the need to provide clarity to parents as soon as possible, even though much remains unclear in terms of the detail of the policy and any revisions that might be made after the consultation closes on 15 September, in the run-up to the Autumn Budget on 30 October. At the same time, however, parents will understandably want and need to know what they will be paying in January 2025.

If terms of communications over the next few weeks, we would suggest using the following key “knowns” as themes:

• The sector is unlikely to get any substantive clarity until after the consultation closes on 15 September (at the earliest) and on budget day on 30 October (at the latest). Even after the budget, there may be amendments in the Commons, HMRC will have to publish guidance, and there may be on-going legal challenges to the policy or to any guidance published under it. This creates uncertainty and suggests that comms should not make promises or undue commitments.
• The fact that fees (inclusive of taxes) will go up by around 20 per cent.
  
  

This article is an abridged version of a client briefing which we have prepared for independent school bursars and heads. If you are a head or bursar and would like to receive the full version of the briefing, please contact Joanne Ali at [email protected].

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

© Farrer & Co LLP, August 2024