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The Government has now published draft legislation concerning the removal of the VAT exemption for fee-paying private schools, as well as the removal of charitable business rates reliefs for schools located in England. Irena Scullion analyses the changes that are to be made over the coming months.
HM Treasury published draft legislation and its technical note on the VAT treatment of school fees and business rates for private schools in the UK on 29 July 2024.
The UK VAT exemption for supplies of education has been effected by introducing the concept of an ‘eligible body’ – put simply, a school that teaches children would be exempt from VAT. The draft legislation published has confirmed that, from 1 January 2025, private schools will be excepted from this definition and will therefore become taxable to the standard rate of VAT at 20%. As this change happens partway through the school year, there will be a split in treatment so that fees related to the 24/25 winter / Michaelmas term will be exempt from VAT, with any fees from subsequent terms being taxable.
It's also been confirmed that boarding and lodging fees will also become taxable at the standard rate of VAT. For some schools that offer places from nursery through to sixth form, it will only be the nursery years that will remain VAT-exempt. Any child that has a local authority sponsored enrolment for special educational needs will also not be affected by this change owing to concessions already in place.
While none of this comes as a surprise, given that this policy was a key manifesto pledge, there are complexities that now need to be analysed and implemented prior to the effective date of change.
VAT registration
Many private schools won't currently be registered for VAT on the basis that they either didn't have any VATable income, or otherwise had VATable income that fell below the obligatory registration thresholds. This will now change with effect from 1 January 2025.
The process of gaining a VAT registration is relatively simple, though it can take time for HMRC to process applications. However, there are other adjustments that schools will need to be making now to ensure that they can be compliant.
Is your accounting system set up to be able to record and manage VAT?
If not, it will require careful consideration to ensure that the appropriate set up is adopted and required information is retained. In addition, once VAT-registered private schools will need to adhere to the Making Tax Digital for VAT requirements, which can present challenges.
Are your financial staff adequately trained to be able to consider VAT and the complexity around liabilities?
Government guidance has specifically stated that some goods and services such as meals, transportation and books will remain as being exempt from VAT. There may be instances where zero-rating, instead of exemption, is available. The key difference with this would be that there is 0% charge with associated right of recovery.
Are your leasing arrangements compliant?
Some schools lease out properties and sports facilities that they may have, and these are likely to be on long term agreements. These contracts will need to be reviewed to ensure that the school can be efficient and compliant with VAT law.
Capital goods scheme
While the publishing of draft legislation will have caused dismay for many, the opportunity to benefit from some VAT recovery on capital items will now result in large amounts of previously blocked VAT being recoverable. This will apply to certain expenditure on land and buildings incurred up to 10 years prior. Any private schools that have spent significant sums on these assets should review their position and lodge claims where appropriate. Going forward, of course, capital expenditure is going to become up to 20% cheaper, which will allow investment in the longer term.
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The published draft legislation has been clear that any fees received after the date of publishing (29 July 2024) will be taxable where they pertain to 2025 onwards. Schools that have taken large prepayments for more than one year should now look to consider whether that presents risk insofar that the Government has made clear that they will take a dim view of any arrangements that they view to be aggressive.
Between nursery fees and non-educational charges, the vast majority of private schools will be partly exempt. This means that they will be able to recover VAT on a lot of purchases but there will be a need for an apportionment of this. The standard method is a revenue-based proxy, however many partly exempt industries agree a different methodology with HMRC. Private schools should consider the timing of when costs are incurred with reference to VAT registration dates to ensure that efficiencies can be achieved.
