VAT Changes to Private Schools: Key Points to Understand

The legislation has removed the VAT exemption for private school fees, bringing new challenges and opportunities for schools, parents, and the education sector as a whole.

What’s Changed?

From 01 January 2025, all private schools and institutions providing education or vocational training services have been required to charge VAT at the standard rate of 20%.  This applies to any fees charged for education or boarding services.  Additionally, any extracurricular services, such as after-school clubs or holiday courses (e.g. sports, arts, and other activities) are also subject to VAT.

Services deemed "closely related" to education, such as school meals, transportation, and supplies like books and stationery will continue to be VAT-exempt.  The legislation will apply to the schooling of children who come within the UK’s compulsory school ages, so nursery classes provided at private schools will not be affected.  However, private sixth form colleges are also captured if they provide full-time education to pupils under 19.  The compulsory school age is five to 16 in England, Scotland and Wales and four to 16 in Northern Ireland.

Special Considerations for SEN Pupils

Pupils with Special Educational Needs (SEN) attending private schools funded by Local Authorities will not be affected in the same way.  In these cases, the Local Authority can reclaim any VAT incurred under the Section 33 VAT Refund Scheme.  However, it’s important to note that this refund is not available to parents or carers funding private SEN education out of pocket.

Timing and Transition Period

Although the official start date for these changes was 01 January 2025, schools must be aware that any fees paid from 29 July 2024 onwards, which relate to services provided in the 2025 terms or later, will also be subject to VAT.  Any fees that were paid prior to this date would have followed the existing VAT rules.

This transition period highlights the importance of understanding tax points and advance payments to avoid costly VAT liabilities.  Schools should have been reviewing any payments received in advance for future terms and determined whether VAT needed to be retrospectively applied, or not.

Practical Steps for Private Schools

Given the complexity of these changes, schools need to take proactive and specialist tax advice to prepare and ensure compliance.  Here are some key action points:

1.   Audit Advance Payments for Future Services

Review any pre-payments that had already been received for terms starting after 01 January 2025.  Since the VAT treatment of advance payments can be tricky, schools should evaluate if VAT applies to these payments and adjust their invoicing accordingly, mindful of the anti-forestalling measures.

2.   Clarify Which Services Will Be Taxable

The introduction of VAT on education services, boarding, and extracurricular activities means that private schools will have to distinguish between taxable and exempt supplies.  Comprehensive VAT advice will be crucial to identifying which supplies will be subject to VAT and ensuring that input VAT can be recovered.

3.   Recover VAT on Previous Capital Expenditure

Schools should investigate whether they can recover VAT on previous capital expenditure – where the goods scheme (CGS) applies.  There may now be scope to reclaim some input tax through  the CGS annual adjustments that are made over ten years for land and building projects costing at least £250,000 excluding VAT; and over five years for computer expenditure exceeding £50,000 excluding VAT.  The principal opportunity for most schools will be recent building projects such as new school or boarding facilities, or renovations that can now be treated as VAT-reclaimable.

4.   Reassess Overhead Allocation for VAT Recovery

By properly allocating overhead costs related to VAT-taxable services, schools can potentially increase their VAT recovery.  This involves carefully evaluating how each service — education, boarding, and other supplies — contribute to the school’s overall VAT position

5.   Train Your Finance and Admin Teams

For many private schools, dealing with VAT will be an entirely new challenge. Ensuring that the finance, accounting, and administration teams are trained on these new VAT rules will be essential to maintaining compliance.  Staff need to understand how to handle invoicing, VAT registration, and how to ensure the correct VAT is charged on all applicable services.

6.   Alternative Income Streams

Many schools have identified opportunities to increase their revenues to help count the added costs of VAT.  For example, by increasing the hiring of facilities (gymnasia, sports facilities and swimming pools, etc.) to external users – and some have even identified scope to become filming locations or  wedding venues!

Additional Implications

Impact on School Fees: Many private schools will be faced with the challenge of either absorbing the VAT cost or passing it on to parents, which could result in higher fees.  Schools will need to communicate these changes clearly to their stakeholders to avoid confusion.  The Government’s expectation was that “the majority of schools” would only pass on about 10% - with reclaims, efficiencies and reserves being used to meet the balance of costs faced by schools.

VAT Thresholds: Schools that have previously made only exempt supplies but now make taxable supplies will need to be aware of the VAT threshold, which currently stands at £90,000 in taxable turnover.  Once this threshold is crossed, VAT registration becomes compulsory.

Cash Flow Considerations: With the inclusion of VAT, schools should evaluate how this will affect their cash flow.  The timing of when VAT is due (usually quarterly) should be factored into budgeting processes to ensure there is no strain on school finances.

WHY PROFESSIONAL ADVICE MATTERS

The new VAT regime introduces additional complexities, but also opportunities for VAT recovery that should be carefully explored.  Schools need to be proactive to ensure they comply with the new regulations while minimising any negative financial impacts on them and in turn their respective parents.

VAT in real estate is complex, and every deal is unique.  E³ Consulting could help assess any past capital projects to ensure the VAT reclaims, that may be possible are truly optimised.  As with most tax, errors and/or non-compliance can lead to penalties and further tax compliance visits.  Don’t risk getting it wrong – get in touch to see how we could help.