Proposed VAT on independent school fees: Expected knock-on impact

Proposed VAT on independent school fees: Expected knock-on impact

As the campaign rhetoric shifts up a gear and manifestos are released, one area in relation to VAT has seen the Labour party commit to applying the standard-rate (20%) of VAT to independent schools (previously exempt), which is likely to in turn be directly passed on and applied to pupils’ school fees.

Under Labour’s proposals, independent schools would have to pay 1/6th of their fee income in VAT to HMRC. However, a careful balancing act needs to happen to ensure a hike in fees doesn’t just lead to an exodus of pupils from independent schooling, with increased numbers of pupils looking to an already strained public schools sector to provide for their education. The independent school's sector has cited that a 13% contraction in the sector would in effect start to cost the public purse as opposed to create an increased revenue stream.

In terms of monetary value for HMRC, the Institute of Fiscal Studies (IFS) has estimated incorporating VAT to school fees could raise an estimated £1.6bn a year in additional tax revenue. This estimate accounts for an effective VAT rate of 15% - taking into consideration input VAT deductions.

While this proposal is dependent on the outcome of the election, it’s worth acknowledging how any impact could be lessened for the following.

Parents/carers

Remuneration planning - The decision to privately educate children is already costly. The expense is usually met from income that without careful remuneration planning may have already been taxed at up to 48% depending on the level of earnings and place of residence. As it’s unlikely that parents will be able to remove VAT from fees if it is introduced, there are steps that can be taken to minimise the tax that has been paid on earnings used to fund education and specialist tax advice should be sought to optimise their tax position.

Paying in advance - For parents/carers able to pay in advance, there may be a benefit in doing so. However, we would expect all schools offering a payment in advance arrangement to caveat any agreement, allowing it to charge VAT in addition to payment received should any new legislation require it. If you are paying in advance, you should read the small print in any agreement you enter into and its consequences. It’s likely that you will be required to pay VAT in addition to any payments you make if the legislation introduced requires schools to pay VAT on fees paid in advance.

The considerations for independent schools

VAT exemption before any implementation - Likewise for those allowing parents to pay in advance (and before any changes to the VAT status of fees is changed) in an attempt to secure the VAT exemption on payments made before any possible implementation. The VAT rules around tax points, which set the date that VAT must be considered, are complex and, as it is not yet known how any new legislation will be implemented if Labour win the election and whether it will legislate against payments in advance, schools should enter into such arrangements cautiously. 

Partial exemption – From an independent school’s perspective, calculating whether the/any part of the service provided will continue to qualify for VAT exemption is a complex consideration. Currently, where private schools support children with certain special needs, there is an exemption opportunity. Similarly, private schools offering additional charitable or welfare services like pre-school education can qualify for exemption in certain circumstances. It remains to be seen whether any changes will affect these two cases, but if we do see any, it will make any partial exemption calculations even more complicated. However, a specialist advisor can assist with calculating where you stand and identifying your correct VAT status.

Recovering VAT on capital development - In the short term, schools that have undertaken significant building projects in the last 10 years may see some benefit in being able to recover additional VAT incurred on capital development works historically. While this will assist cashflow in the present and near future, it is unlikely to have a long-term positive impact. Another point for consideration is that the Labour party has also suggested that it may take steps to legislate against the recovery of VAT on historical capital works.

Performing VAT calculations - While the change is still very uncertain and dependent on the outcome of the election, simple VAT calculations can be performed now to assess the financial impact of the proposed change. 

Boarding schools – Following calls for clarity and concern from 32 boarding schools, it has been reported that they would not be subject to this potential VAT charge. It is at this point unclear the specific definition of this exemption.

You can also read more on Labour's proposal to add VAT to independent school fees in our FAQ document, which is accessible here.

We are here to help

Whether you are working in the private education sector or are a parent/carer who pays independent school fees, this proposed change will likely have a far-reaching impact.

For individuals, our specialist personal tax, financial planning and wealth management colleagues can assist with necessary remuneration planning to ensure any increase in fees can be managed efficiently.

For organisations, we have a team of VAT specialists with expertise in the education sector that can help fee paying schools estimate the financial impact of this proposal.

If you have any questions, please get in touch.