exam room

VAT on school fees 

Robert Warne, Partner, Head of VAT
exam room

The threat of VAT being introduced on school fees will never go away.

Like all supplies that exempt from VAT (insurance, finance, education etc) the Government can always decide to change the Law and move an exempt supply into a taxable one. This would be even easier now that we have left the European Union and the taxpayer therefore no longer has EU Law to refer to as the ultimate decision maker.

The possibility of VAT on school fees was tabled by one of the political parties a couple of years ago but one of the main arguments to rebuff this was that there would actually be a net revenue loss once you consider the amount of pupils that would end up back at state schools. This would be due to the closure of many of the smaller independent schools who are already struggling to break even and the redeployment of teachers. Although it can't be said it would never happen, at this present time it would not seem to make any financial or political sense.

How to mitigate the financial impact if it were to occur

The possible introduction of VAT on school fees has recently become a press-worthy subject due to the current political uncertainty back in 2019. Imposing the current standard rate of VAT on independent schools would of course put financial stress on the sector since in most, if not all instances, the market would not be able to absorb a 20% uplift in the price of education.

Is there anything that can be done to protect your school and mitigate the VAT cost if a future government seeks to apply VAT to fees?    

The answer is 'YES'
the reasons are outlined below.

When does VAT fall due on a transaction?

For a supply of education, the point at which VAT falls due will usually be the date that the school fees are paid. This is because the supplies are continuous in nature throughout the period of schooling and as the supply is currently VAT exempt - no ‘VAT invoice’ is raised.

How can this rule assist independent schools?

As a result of the above, the rate of VAT applicable is the rate in place at the time that the payment has been made. So, if a parent was to pay £100,000 today for five years’ school fees (or before any formal announcement that VAT is being applied to school fees), that £100,000 would be treated as VAT exempt.

If the government changed the VAT liability applicable to school fees it could only do so from a future date and, the £100,000 would therefore be protected from any VAT charge. However, any payments made after the announcement could be subject to VAT, as HMRC would usually introduce ‘anti-forestalling’ legislation to prevent pre-payment VAT planning.

Fee in Advance Schemes - VAT

Many schools already operate fees in advance schemes whereby parents can effectively pre-pay for education. These schemes have the additional benefit of crystallising the point at which VAT would be applied, providing the school has unfettered use of the funds received. Therefore, schools should consider the possible VAT benefits of using fees in advance and ensure that the terms and conditions of the scheme give the best chance of achieving VAT exemption.

We would hope that it will not be mentioned again but forewarned is forearmed as they say in war! 

Should you wish to discuss this further, please contact Robert Warne or Kieran Smith

Contact us

Robert Warne
Rob Warne
Partner, Head of VAT and Customs Duty services