VAT and school fees
As we get ever closer to the General Election on 4 July, the discussion around the various manifestos of the various political parties mounts up, with particular attention being drawn to Labour’s plans to change the VAT liability of private school fees. Currently, the supply of education by an ‘eligible body’ is exempt from VAT – this includes registered independent schools, where a fee is charged for education. This exemption extends to certain goods and services that are ‘closely related’ to the supply of education, such as catering, transport and boarding accommodation. Under a Labour government, the definition of an ‘eligible body’ for purposes of the VAT exemption will change, removing independent schools (although plans to reverse the removal of charitable status from independent schools appears to have been reversed). This means that the fees charged for education in these settings would be subject to VAT at 20%.
Since this proposed change had been aged some time ago, tax professionals across the country have been discussing the impact of these changes, both on the schools themselves and the parents of children attending the school.
26th June 2024
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Ian Mullen See profile
Theoretically, at any point in time if Labour come to power – the televised party discussions have hinted that it could be brought in as one of the first changes Labour would make when entering No. 10. This could be part of a new budget, or an independent act.
In theory, paying ahead of time for education to be provided in the future could trigger the point at which the supply is made before the education is actually supplied. This would mean that paying now – before the proposed VAT changes come into effect – would mean that the VAT exemption could be preserved. However, there are some points to consider here:
- With the average school fees being c. £18,000 a year, that would mean that parents would need about £90,000 to pay for five years in advance – a large sum to be dished out upfront.
- Assuming Labour come to power, the Shadow Education Secretary Bridget Phillipson has hinted at the possibility that the changes to the VAT treatment could be backdated, and have effect from a past date – such a change is likely to be criticised, and in our opinion would be hard for a Labour government to defend; however, it is not inconceivable.
- Paying a lump sum now may be open to challenge from HMRC as being ‘abusive’ and they may take the view that it is not specifically for more than one school year.
For more information on this read our A Guide to prepay school fees for parents.
A bursary funded by the school would mean that the education would be provided free of charge, so no VAT would apply since nothing is being paid. Offering a discount would mean that VAT is only accounted for on the discounted amount paid. However, both of these options assume that the school is bearing the costs of the bursary and/or any discounted fees.
Please note – where a bursary is funded by a third party, this would be treated differently. In all likelihood, this would be a third-party payment for a supply and would attract VAT on the supply.
Under the proposed changes, only SEN children that have an agreed education, health and care plan (‘EHCP’) will continue to benefit from the VAT exemption. However, from experience, EHCPs are hard to obtain, and many SEN pupils don’t have them. A recent report from the Independent Schools Council indicates that the changes would mean that school fees for over 96,000 SEN pupils who do not have an EHCP would fall within the scope of VAT.
Looking beyond VAT, one of the issues with funding school fees is that this is made out of income which has already been subject to Income Tax. For an entrepreneur, the gross cost is therefore considerably higher. There are opportunities to structure the funding of school fees tax efficiently, often involving trusts. Generally, such planning involves a grandparent settling income-generating assets into a trust for the benefit of grandchildren. These can work very well to ensure the income Tax side of the equation is as efficient as possible. In broad terms these work by ensuring that the income funding those fees is taxed on the children concerned, making use of their personal allowances and lower tax rates bands. However, we recommend that clients should proceed with caution. There is complex anti-avoidance legislation called ‘Settlements legislation’ designed to prevent income from being shifted from one party to another to access lower tax rates. This legislation prevents parents benefiting from shifting income from themselves to their minors/children. There are third parties selling schemes which claim to get around these rules, but HMRC has stated publicly that these do not work and will be attacked.
We do not know the outcome of the General Election, but if Labour wins, it is clear that it will implement its changes to bring independent fee-paying schools within the scope of VAT. However, we do not know the full details of this plan and how it will be implemented. We recommend that schools that will be affected by these changes seek specialist advice in order to prepare and mitigate the impact.
If you would like to discuss this further, please contact our VAT specialists David Gage & Ian Mullen or get in touch here.