The Labour Party's proposal to remove the VAT exemption for private school fees has been widely reported on, but there's a lack of clarity around how this change could be put in place.
The UK VAT regime treats fee-paying and non-fee-paying schools differently. State-administered schools gain their revenue from Government funding and are therefore not seen to be 'in business' for a VAT perspective. This is very different to private schools that are 'in business' but are exempt from VAT. This means that they don't have to pay any VAT, but nor can they recover it in most circumstances. For state funded schools, there's another mechanism for them to recover VAT charged to them through other means – the idea being that it's pointless to pass tax from one area of Government to another.
The UK's VAT Act (VATA 1994) is based upon the Principal VAT Directive of the European Union, which seeks to lay out the rules and regulations for the tax across the Bloc. It's within these rules and regulations that we get the VAT treatment of schools as it currently stands. The Public Interest Exemptions maintain that all Member States shall exempt supplies of education, and then allow a route forward for the individual jurisdictions to enact their own detailed, national legislation.
It should be noted this policy would represent a milestone VAT event as it would be the first clear divergence in primary legislation between the UK and EU VAT regimes.
The UK treatment of education was implemented on a rather discrete basis, whereby an 'eligible body' making supplies of education could be exempt from VAT. Eligible-body status is conferred, as a separate point of law, on schools and certain charitable organisations among others. Where educational services aren't supplied by an eligible body they're taxable. The law, however, doesn't currently make distinction between fee or non-fee paying schools, but instead it looks at whether schools are defined as such by the various Education Acts.
A change to the primary legislation that governs this can take place either by a change to what an eligible body is, or by a change to the Education Acts. The application of the Education Acts is much wider than determining solely the VAT treatment of schools, but also covers curriculum principles as well as the regulation of qualifications, so consideration would need to be given to any knock-on consequences.
A lot has been mentioned of boarding provision and whether this would also be subject the VAT. It’s worth noting that currently this residential aspect is governed by a different type of exemption. This other exemption is broader, for example it also considers care in our society for the aged and infirm so consideration would need to be given to how different residential supplies are taxed.
Of course, if the exemption is removed the supplies of education become taxable. So does everything else that's seen to be closely connected to that supply, eg, catering provided to children. School trips, where charged to parents, would potentially mean that they should be accounting for VAT under the Tour Operators’ Margin Scheme . Again, careful drafting of any legislative change must take place to ensure that there are no unintended consequences.
The other side to this coin is input tax, which will now fall to be recoverable for schools, potentially with up to a 10-year look back for large capital expenditure that may have taken place. Put simply, where the affected schools are forced to charge VAT, capital expenditure starts to look 20% cheaper and therefore more easy to achieve.
It's been widely reported that schools could ask parents to pay for fees now, before this potential change is effected, so that they can be treated under current legislation – however, this is a complex area of VAT law called anti-forestalling, which is usually widely discussed in a change of top rate.
This is a key Labour revenue-raising policy which they have indicated they will bring in as soon as possible to fund their first steps in government. How quickly though a Labour government could announce and legislate for this change has remained uncertain. Though speaking at the Times CEO Summit (20 June), Reeves reportedly indicated for the first time a possible 2025 implementation date, with an announcement at the first fiscal event after the election. With a fiscal event expected in the early Autumn, and the potential for anti-forestalling rules, schools and parents should be considering all eventualities.
For more insight and guidance, contact Irena Scullion or Karen Robb.
