VAT on Private School Fees: Navigating the Complexities and Uncertainties

15/06/2024 - 8 minutes read

VAT on private school fees is a hot topic these days with Labour’s flagship policy to introduce a 20 per cent VAT on private schools that has sparked controversy, with debates over how much money it will make the Treasury and how it will impact children.

VAT on private school fees will be imposed by a Labour government as soon as practically possible should they win the next general election on 4th July.

There are an estimated 615,000 pupils in private schools, accounting for 5.9% of total UK school population, with around 10% of overseas students, according to the Independent Schools Council.

VAT on Private School Fees: Navigating the Complexities and Uncertainties

VAT on private school fees will be imposed by a Labour government as soon as practically possible should they win the next general election on 4th July.

How much will the VAT on private school fees raise?

Estimations for how much money the VAT raid on private schools have varied.

In 2023, shadow education secretary Bridget Phillipson told the House of Commons that charging VAT on independent school fees and imposing business rates would raise £1.7bn.

But a report by the Institute for Fiscal Studies (IFS) concluded that removing tax exemptions from private schools would raise about £1.6bn a year in extra tax revenue.

The report, written by leading education economist Luke Sibieta, said: “Combining estimated tax revenues and extra public spending needs, our view is that it would be reasonable to assume a net gain to the public finances of £1.3-1.5bn per year in the medium to long run as a result of removing tax exemptions from private schools.

Since then, Labour has been using the IFS estimations.

In a recent parliamentary debate, Helen Hayes, shadow minister for children and early years, said the VAT measure would raise £1.3bn.

Other reports have found that the private schools policy might not make as much money as Labour hopes.

Maxwell Marlow, director of research at the right-leaning free market Adam Smith Institute (ASI), wrote a different report which found that it “could raise no money at all”.

His analysis of the policy found that “in a less optimistic scenario, it could end up costing £1.6bn” – while also prompting a “mass exodus to the already overwhelmed state system”.

The ASI report said it “highlights that the IFS’ findings that applying VAT to independent school fees will raise £1.3-£1.5bn is based on evidence they themselves acknowledge to be ‘thin’ and ‘sparse’.”

Mr Marlow, who authored the report, added that we are “dealing with a lot of unknowns” about the impact of the policy.

Advance Fee Schemes

The debate around VAT on private school fees has resulted in parents exploring ways to mitigate the impact of potential VAT changes.

Advance fee schemes have been circulated whereby the basic idea is that by doing so, parents can “lock in” today’s VAT rules and avoid any subsequent imposition of VAT on private school fees.

  • – When parents pay fees in advance, the time of supply (i.e., the point at which VAT is charged) is now, not when the actual service (education) is provided.
  • – By paying in advance, parents effectively “freeze” the VAT rules applicable at that time, shielding themselves from any future changes in VAT rates.

This approach assumes that VAT would be charged at the point of payment, based on the rules in force at the moment. 

Whilst this strategy may seem appealing to parents, it is essential to understand the risks and potential pitfalls associated with advance payment schemes.

For example:

  • – Labour could introduce retrospective legislation that would make payments made before the party came to power for education supplied after the new VAT policy is introduced subject to VAT.
  • HMRC could challenge schemes where the amount parents pay is placed on deposit with the school, and then used by the school to satisfy each term’s fees on the basis that the payments are not actually deemed to be fees paid in advance of a supply of education.

Most schools offering advance fee schemes explain that if either of these circumstances arise it is parents that would be required to pay the VAT on private school fees.

Legal challenges by HMRC are notoriously slow and this could result in schools pursuing parents for VAT on private school fees after their child has left the school.

How will it work?

VAT on private school fees will be achieved through the exclusion of relevant categories of schools from the current exemption. The first issue, therefore, seems to me to be how far such an exclusion would be drawn.

Some private schools cater to specific groups of children with special needs that cannot, or do not appear to be, met within the state sector. Will there be a carve-out for these schools to continue to benefit from exemption?

It has been suggested pupils attending a particular private school under an educational healthcare plan will not face VAT on their fees. Does this mean the exemption will only be retained on a pupil-by-pupil basis? If so, the schools could face complex and continuing partial exemption calculations year after year if they have a mix of pupils only some of whom meet the relevant criteria for exemption.

Will private tuition remain exempt from VAT while private schools are excluded? There are a lot of questions that remain unanswered regarding VAT on private school fees.

The implications of the imposition of VAT on private school fees, although limited to a relatively small proportion of the population, are wide and complex for those involved, and it is likely that should Labour win the election, they could be imposed in a haste with limited information in relation to all the potential consequences.

How can MCL Accountants help?

Contact MCL Accountants on 01702 593 029 if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.