With the General Election bringing potential for a Labour government led by Sir Keir Starmer, there’s speculation that VAT at the standard rate could be imposed on private school fees.
Applying VAT to private school fees involves more than just increasing the tax; it requires changing a fundamental VAT principle, making education taxable when it is currently outside the scope of VAT.
This legislative change would need approval from both the Commons and the Lords, likely making it a lengthy process. Given that many politicians send their children to private schools, the personal financial impact might also reduce the likelihood of the bill passing through both houses quickly, if at all.
However, it’s important to stay informed as, if the changes do go ahead, the financial impact on affected parents could be significant.
In this week’s Tax Tuesday, we explore the very possible implications and preparations surrounding VAT on education.
Current VAT exemptions for Private Schools
Under the Value Added Tax Act 1994, private schools are exempt from VAT on fees and related services such as meals, transport, and accommodation. However, schools cannot reclaim VAT on related costs, passing these expenses onto parents.
Scope of future VAT standard rate
The VAT imposition might exclude certain school categories from current exemptions. Key issues include:
- Special Needs Schools – Private schools catering to special educational needs may continue to benefit from VAT exemption, potentially leading to complex partial exemption calculations if only some pupils qualify.
- Private Tuition – Uncertainty remains whether private tuition will remain VAT-exempt while private schools are charged VAT.
- Nursery Education – Private schools offering nursery education might retain exemptions, complicating partial exemption calculations where facilities are shared.
Financial impact and preparations
Parents and schools must consider the financial impact of potential VAT changes. For parents, they will face a direct increase in the cost of their children’s education. This may become a significant burden, especially for families who may be already stretching their budgets. Parents may need to reassess long-term financial plans or consider alternative education options.
The favoured solution may be found in paying school fees early to avoid future VAT charges. This strategy’s effectiveness depends on the specifics of the legislation rumoured to allow early payments.
Liability of closely related supplies
Certain supplies, like transport, might not be subject to VAT at the standard rate when provided separately. Transport in vehicles designed for at least 10 passengers is zero-rated. It’s uncertain if schools can charge parents separately at the relevant rate or if these supplies will be part of a composite supply attracting standard VAT.
Bursaries and scholarships
Schools increasing bursaries and scholarships to retain charitable status might face closer scrutiny. VAT implications vary depending on whether bursaries cover full or partial fees.
Input tax recovery
VAT on fees allows schools to recover previously irrecoverable VAT on related costs like energy, telecommunications, and maintenance. Delaying significant capital expenditures until after VAT changes could enable VAT recovery, providing financial benefits.
Tax points and anti-forestalling provisions
Some anecdotal evidence suggests schools are encouraging early payment of future fees to avoid VAT. However, anti-forestalling provisions could impose VAT on fees paid in advance if new regulations are introduced. Schools must weigh the risk of these provisions against the potential benefits of increased VAT recovery.
How can we help?
The potential imposition of VAT on private school fees, should Labour win the election, could pose complex challenges for both parents and schools. It’s important to consider the likely timeline for these changes, as well as the risk of anti-forestalling provisions that could affect tuition costs.
On the plus side, schools may benefit from increased VAT recovery, which could potentially offset some financial impacts. By staying informed and planning proactively, parents can better manage the financial implications and ensure they are prepared for evolving regulations.
If you need guidance from our VAT experts on any current VAT queries, please contact your relationship principle, email tax@haroldsharp.co.uk or call 0161 905 1616 if you’d like to discuss.