The ‘tax point’ is the date that VAT becomes due to HMRC on a transaction. For educational supplies that are continuous in nature, the tax-point is the date that payment is received.
Under current VAT legislation independent schools provide exempt supplies of educational services. With regard to school fees tax-points have been largely irrelevant, other than the impact on the completion of any partial exemption calculations undertaken. However, the application of this rule means that there is an opportunity for schools to protect their exempt status on educational services by receiving the school fees in advance.
Here is a practical example to illustrate, the figures used are purely to help understand the principle involved.
In the above example, the pupil would receive exempt school education for the full amount of the payment (£130,000), irrespective of whether the government applies VAT on fees from 1 September 2025.
This is because the tax point for these exempt supplies have been fixed at 1 September 2023, therefore VAT cannot be levied on that amount paid to the school. Consequently, until that £130,000 runs out all of the educational services provided by the school will be exempt from VAT.
It is important to note that a tax-point is created by the payment being made in advance, the school must have full unfettered use of the income rather than a payment being held in an escrow account.
As with all payments in advance there is a note of caution, it is worth mapping out potential scenarios to plan effectively. If the government announce on 1 April 2025 that VAT will be applied to school fees from 1 September 2025, , there is likely to be anti-forestalling legislation introduced at the same time. We would expect that this legislation would block the effect of making payments in advance from the date of the announcement. Therefore, it would only be pre-payments received by the school before the announcement (1 April 2025) that would be treated as VAT exempt.
It is important to remember when establishing a fees in advance scheme that it needs to be carefully managed. The discount rate applied should be set at a level where the school does not experience a loss on this transaction. Many schools already operate such schemes and if managed properly they can be attractive to parents whilst also helping the school’s cashflow. However, they are not without risk. It should be remembered that whilst you may use the cash balances taken they do need to be available to meet the operational cashflow needs of the school on a timely basis. You may attract significant sums which heightens the possible money laundering risks, and in the event of a closure of a school due to financial difficulties, the parent may lose their funds.
If VAT is applied to education it may still be possible to retain exemption over some services that fall under childcare through the current welfare exemption, providing that these services are supplied under a separate contract for a separate fee. Using a separate company to provide the care services would add a further degree of separation. For instance, it is entirely possible that a separate company could have a separate contract for exempt residential boarding services or even for other pre or post school care, that are provided for a separate fee to achieve exemption over these services.
Whilst this might work for VAT, the practicalities of implementing this need to be carefully considered. Think about how the staffing (and the named employer) would need to be structured to match these two independent services so that pitfalls are not encountered. How would this fit within the pricing model of the school? In many boarding schools there is not a significant differentiation between a boarding fee and a day fee to keep boarding remaining attractive, if the childcare element was removed this could result in the school needing to look at its pricing structure for day and boarding students to ensure that both the childcare and educational elements properly reflect these services and prevent the school from losing fee income.
The ripple effect of trying to manage the VAT position for any school needs to be carefully explored before any changes are implemented. It is crucial to consider any unintended consequences that could arise or barriers to achieving the school’s strategy.
Finally this article is written with the present VAT legislation and we cannot foresee what law changes or anti-avoidance measures may be introduced on areas which are presently treated as being 'closely related to the main supply of exempt education'.
Although the present government has made it clear that it has no intention of introducing VAT on school fees, it is part of The Labour Party’s manifesto should it be elected, to apply VAT to the sector as well as removing schools charitable status. Nothing here is certain but this is certainly a subject for schools to consider for the future.
If you would like to discuss this issue further, please contact Robert Warne, or your usual Crowe contact.
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