The new Labour government have recently issued a technical note and the proposed legislative changes detailing its plans to remove VAT exemptions for private school fees. This significant policy change is set to come into effect on 1 January 2025 and will have widespread implications for both private schools and parents.
VAT and Education
From 1 January, private school fees and closely related services, such as boarding services, will be subject to a 20% VAT rate. Fees paid at any point after 29 July 2024 that are advance payments for the school term beginning after 1 January 2025 will be subject to VAT. This measure addresses concerns about anti-forestalling, as some private schools began offering schemes for parents to pay fees years in advance to avoid the VAT due under this new tax policy.
There will be some supplies made by private schools that will remain VAT exempt, although overall relatively minor, such as nursery school provided by private schools, which applies to the year before a child turns five.
Pre-school and after-school clubs should remain VAT exempt, as long as it's not an extension of the private school education, but instead the provision of childcare.
Anti-avoidance measures
Although there's not been a great amount of detail given, there will also be some anti-avoidance provisions designed to close loopholes that private schools and related 'closely connected entities' might use to avoid paying VAT. The overall intention is to prevent schools from setting up separate entities to provide services that would otherwise meet the VAT exemption under the new rules.
What's next?
The Government will confirm these changes at the Budget following a technical consultation on the draft legislation. These changes will then be included in the Finance Bill.
Private schools should start discussing their VAT registration applications with their advisers now to ensure they're prepared for the changes, as well as getting all other processes in place so they are ready to charge, reclaim, and calculate their VAT and file VAT returns.
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