One of Labour’s flagship policies is to raise addition funds removing private schools’ VAT exemption and business rate relief. An IFS report published in 2023 calculated this would raise about £1.6bn per year.
Education is exempt from VAT when provided by an eligible body. Any changes would presumably target the eligible body status of private schools, with the result being VAT charged at 20% on their fees.
Matt Orange, Head of Indirect Tax has explained more.
Take it away Matt
In an attempt to avoid paying the additional VAT and ‘secure’ today’s VAT rules, we are seeing a rise in the number of pre-payment schemes.
The reason the popularity of these schemes is increasing is because the receipt of payment in advance triggers a tax point for VAT, which means that any payments received by the school in advance of the law changing will follow the existing treatment and be exempt from VAT.
However, Labour are fully aware that the use of these schemes could result in a significant amount of VAT being avoided and have already announced they will introduce measures to counter this.
Potential Anti-Forestalling Measures
We may see anti-forestalling measures introduced, which would cover payments made between the official announcement of the tax change and when it becomes legislation.
Alternatively, they might enact retrospective legislation affecting payments made before the law is changed and related to education services delivered after.
Implications for Prepayment Schemes
If either of these measures are introduced it is likely they will mean the use of these prepayment schemes fails to achieve the desired outcome and VAT will still be payable on the school fees.
Perspectives of Parents and Schools
Nevertheless, the use of these schemes is likely to be popular. From the parents’ perspective the best case scenario is no measures are introduced and the use of the schemes is successful in keeping any prepaid school fees VAT exempt, whilst the worst case scenario is they end up paying the VAT they are trying to avoid.
Risks for Private Schools
The private schools also need to be aware of the risks they face when offering these schemes. VAT disputes with HMRC often take several years to resolve and they will not want to put themselves in a position where they need to pursue parents of former students for the additional VAT.
Planning Ahead for VAT Changes
Private schools will be able to reclaim some VAT they incur on costs so may also want to plan ahead and consider the full effects these proposed changes will have. Adding 20% on top of existing fees will be unwelcome by many parents, but it is unlikely schools will be able to keep fees at or near existing levels, even after considering the VAT they can reclaim.
