VAT and Independent Schools

FAQs for the year ahead

With the first full year of VAT on independent school fees now complete, practical issues and developments continue to arise. Some of these stem from apparent inconsistencies between HMRC’s new schools’ VAT guidance and its interaction with pre-existing guidance (which remains relevant), leading to differing interpretations in some areas.

As time progresses and HMRC’s guidance is updated, we expect there to be greater clarity. We have set out below our key areas of focus, together with relevant updates based on calls with our clients and correspondence with HMRC over the past three months.

Capital Goods Scheme

For schools with July or August VAT year-ends, the first Capital Goods Scheme (CGS) adjustment is likely to arise in the January or February VAT return.

CGS applies to most capitalised property expenditure exceeding £250,000 plus VAT. Note that we expect this threshold to increase to £600,000 for prospective projects in future, although this has yet to be confirmed.

For many schools, CGS offers a valuable opportunity to recover VAT on historic building projects.

In practice, some building projects may fall outside the six-year statutory VAT record-keeping requirement, meaning original VAT invoices are no longer available. Whilst input tax claims are usually supported by a VAT invoice, there is some flexibility, as VAT Regulation 29(2) and HMRC guidance VIT31200 allow HMRC to accept alternative evidence to support an input tax claim.

Where a school no longer holds VAT invoices or full building contracts, it is important to compile a portfolio of supporting evidence to substantiate the claim. For example, where the fixed asset register is the primary source of information, schools should seek to demonstrate:

that the building works in question would have been VAT-able (for example, not zero-rated new residential accommodation)
that, given the scale and nature of the project, the supplier was likely to have been VAT-registered.

Early identification of CGS-eligible projects and proactive evidence gathering will be key to maximising potential VAT recovery and mitigating the risk of HMRC challenge.

Repayment returns

Most independent schools operate three billing runs per year, which means there will typically be one VAT return period with little or no fee income. This commonly results in a repayment return, which is usually checked by HMRC prior to repayment. For more information on how to prepare for a HMRC check, please read our insight on how to prepare for a VAT audit.

As part of repayment checks, HMRC frequently asks questions about Fees in Advance, and we are seeing consistent themes across multiple schools. ISBA members can view further guidance available via the short FiA webinar hosted on the ISBA website.

Schools within the Payments on Account regime may face a particular cash flow challenge, as despite making monthly payments towards the VAT liability, the November return typically resulted in a VAT repayment.

We are aware that, in many cases, HMRC have not yet issued repayments for November returns.

Note that schools may be entitled to a repayment supplement if the repayment is not received, or if there has been no contact from HMRC regarding queries within 30 days of the VAT return submission.

Supplies of transport

Independent schools provide pupil transport in a variety of ways, and the VAT treatment depends on how the transport is supplied and charged. The position discussed below has recently been confirmed by HMRC’s policy department, as some areas were open to interpretation. It is important to note that in some cases, different options are available for the same fact pattern.

A summary of the main scenarios

Arrangement	VAT on income
Transport services included within school fee, i.e. not separately charged or separately identified on the invoice to parents.	Subject to VAT.
Transport services are provided using the schools’ own fleet/drivers.	Zero Rated – where the vehicle is capable of carrying 10 or more persons. Exempt – where the vehicle is not capable of carrying 10 or more persons.
Transport services are provided using leased coaches, but drivers employed by the school.	Zero Rated – where the vehicle is capable of carrying 10 or more persons. Exempt – where the vehicle is not capable of carrying 10 or more persons.
Transport services are provided using outsourced coaches and drivers including taxis.	Exempt – closely related to education or Outside the scope of VAT (TOMS).

Where the transportation, i.e. the buses and the drivers, are bought in and resupplied without material alteration, the supply can fall within the Tour Operators Margin Scheme (TOMS). As a UK TOMS supply, VAT would be due at the standard rate on any margin made from these transport supplies.

However, as transport services are treated as closely related supplies (VAT Notice 701/30, Section 8), these services can also be treated as exempt from VAT. Treating this income as exempt from VAT would avoid the need to prepare a TOMS calculation, which can be complicated.

Therefore, for transport supplies falling within option 4 above, schools may choose to treat this as either:

Exempt from VAT: income included as exempt income in the partial exemption calculation.
TOMS outside the scope of VAT: only the margin of these supplies is included in the partial exemption calculation.

Outsourced transport and TOMS

Where both the vehicles and drivers are bought in and resupplied to parents without material alteration, and the school acts as an undisclosed agent, the supply may fall within the Tour Operators Margin Scheme (TOMS).

However, HMRC guidance (VAT Notice 701/30, Section 8) confirms that pupil transport can also be treated as a supply closely related to education and therefore be VAT-exempt.

As a result, for arrangements falling within Option 4, schools may choose to treat the income as either:

exempt from VAT
outside the scope of VAT under TOMS.

Treating the supply as exempt can avoid the administrative complexity of preparing an annual TOMS calculation, though there may be partial exemption implications.

Summary

As schools enter the second year of VAT on fees, the focus should now be on review, refinement and forward planning. Schools should also prioritise a review of the CGS, identifying qualifying historic capital projects and gathering supporting evidence where invoices are no longer available. Early action in this area can unlock meaningful VAT recoveries and avoid missed opportunities as CGS adjustment periods progress.

Furthermore, finance teams should prepare for VAT repayment returns as a recurring feature, ensuring records are readily available for HMRC review.

Finally, transport arrangements should be actively reassessed to confirm that the correct VAT treatment is being applied, with particular attention given to outsourced services and their impact on partial exemption.

We will be exploring these topics in more detail during our VAT update for independent schools webinar on 12 March. If there are any specific VAT issues you would like us to cover, please get in touch with your usual Crowe contact.