Removal of the VAT exemption for private school fees and boarding services – draft legislation published
Overview
Taking advantage of Brexit freedoms, the government has decided to remove the previous VAT exemption on private education services, meaning that with effect from 1 January 2025, the UK will join New Zealand and South Africa in charging VAT on private education services.
On 29 July 2024, the Chancellor announced that as of 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%. Boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%.
Proposed changes
The government has published a technical note and consultation outlining the design, scope, and expected impact of applying 20% VAT to private school fees across the UK and removing the business rates charitable rates relief for private schools in England.
Anti-forestalling measures have also been announced stating that fees invoiced or paid on or after 29 July 2024 that relate to the school terms after 1 January 2025 will be subject to the standard rate of VAT at the beginning of that term. School fees paid before 29 July 2024 will follow the VAT treatment in force at the time of the normal tax point for these supplies, where the fee rate for the relevant term has been set and was known at the time of payment.
The technical note acknowledges that many schools have offered schemes enabling pre-payment of fees in order to avoid the VAT rise, however it considers that in many cases the way these schemes are structured means that the tax point has not yet arisen. The technical note gives the example of where a lump sum has been paid to the school in advance, but the details of the supplies that the money was buying were not determined at the time the money was paid (i.e. if the money paid did not relate to specific terms’ fees that had already been set). The document notes: “HMRC stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due.”
Under the proposed legislation, all other goods and services provided for direct use of the pupils, and which are closely related to education or vocational training, will remain exempt from VAT when provided by a private school or by another eligible body to a private school. Other points to note under the proposed legislation include:
· The introduction of a new exception from the exemption in Schedule 9 of VATA 1994, defining “private school” for the purposes of the exception
· Examination services provided by or to a private school will continue to be treated as exempt for VAT purposes
· Education provided in a nursery class by a private school will continue to be treated as exempt for VAT purposes
· Confirmation that supplies of welfare services such as after-school childcare and holiday clubs by relevant institutions which do not fall within the definition of education will remain exempt from VAT
In addition to the VAT changes, the government will legislate to remove the mandatory and discretionary elements of charitable rate relief from business rates for private schools, which is expected to come into force in April 2025.
Consultation
The government welcomes comments from interested stakeholders on the questions contained within the technical note, and on the draft VAT legislation, to ensure it achieves the government’s policy objectives. The consultation will be open for 7 weeks until 15 September 2024. We are happy to assist with any consultation responses that you may wish to make.
VAT considerations
Private schools that are not currently VAT-registered will need to register with HMRC in line with the normal VAT rules from 1 January 2025. Schools which do not currently make any taxable supplies (such as the hiring out of their facilities) will be able to register with HMRC from 30 October. Schools which do currently make taxable supplies can voluntarily register for VAT ahead of 30 October if they wish. HMRC will publish further guidance on registration for schools in due course.
Affected schools and adjacent organisations will want to consider the impact of the changes and in particular understand how VAT incurred on related costs may in future be recovered as input tax. Those affected will be required to register for VAT (where not already registered), to adopt partial exemption methods, or agree special partial exemption methods with HMRC, and consider the impact of the Capital Goods Scheme obligations where VAT has been incurred on capital items during the preceding ten years.
It will be necessary to take measures to bring accounting systems up to date with the need to monitor VAT incurred on related expenditure and undertake the more detailed reporting necessary for ongoing VAT compliance.
Way forward
Please contact 4 Eyes Ltd if your school is affected by these changes. There may be VAT savings available to mitigate some of the new costs and it will be important to get a robust compliance framework in place as soon as possible.