On 29 July 2024, the Government published a technical note, draft legislation and an explanatory note outlining the new 20% VAT charge on private school fees across the UK.
Old rules
Under the current rules, education services supplied by an “eligible body” are exempt from VAT. "Eligible body" currently includes private schools on the basis that they are regulated education providers who are registered with the Government and inspected regularly. Education services also includes services "closely related" to them. In essence, this means private schools do not charge VAT on their fees.
New rules
Under the new rules, from 1 January 2025, all charges for education services and vocational training supplied by a "private school" (or a “connected person”) will be subject to VAT at the standard rate of 20%.
Furthermore, the 20% VAT charge will also apply to related boarding and lodging services. The policy paper also confirms that it will apply to additional supplies of education after school hours and during holidays.
The detail
In the draft legislation, “private schools” are defined as full-time educational providers provided for pupils:
- of compulsory school age (5 to 16 in England, Wales and Scotland and 4 to 16 in Northern Ireland); or
- over compulsory school age but under 19 (such as sixth form colleges – whether standalone or attached to a private school),
where fees or other consideration is payable for that provision of full-time education.
Furthermore, private schools that contract out education and vocational training to “closely connected persons” who are "eligible bodies" will also become subject to VAT. For this purpose, "closely connected" means those that are:
- closely bound by financial, economic and organisational links; or
- "connected persons" within section 1122 CTA 2010 (which is broadly a test of control or mutual control); or
- part of an arrangement whose main purpose is to remain VAT exempt.
What is not covered
There are some exceptions and exclusions, as follows:
- The following will remain exempt:
- Integral "closely related services", other than boarding, such as school meals, transport, books and stationery. In this regard, the policy paper warns that any schools seen by HMRC as attributing too much of their fee to these exempt services will be challenged.
- Nurseries (both standalone and those attached to a private school);
- Education and vocational training provided by further education colleges classified as public sector institutions;
- Education and boarding provided by state schools (including academies);
- Non-educational before/after school childcare, or childcare-based holiday clubs; and
- Private tuition of ordinary subjects.
- For Special Educational Needs (SEN) pupils necessarily placed in a private school because their needs cannot be met in the state sector, and who have their places funded by their Locally Authority, a devolved Government, or a non-departmental public body, their funder will be compensated for the VAT imposed. This is stated in the policy paper.
When will it apply?
The VAT policy change will be legislated for in the Finance Bill, which will be introduced following the Budget on 30 October.
The rules are effective from 1 January 2025. However, anti-forestalling measures have been introduced such that any fees paid from 29 July 2024 (i.e. the date the rules and draft legislation were published) pertaining to the term starting in January 2025 onwards will be subject to VAT.
Parity issues
The Government have extended the 20% charge to extra-curricular educational supplies by private schools to achieve "parity" between "these supplies…made by private schools… [and those] made by other third-party providers who are not eligible bodies". But what about extra-curricular educational supplies made by state schools for a fee? At the moment, from 1 January 2025, state schools would not have to levy VAT on any charges, but private schools would. This seems to conflict with the Government's equality objective.
Drafting issues
There are currently some holes in the drafting that do not marry up with the policy paper, notably SEN schools are not currently in the new definition of "private schools" at all – so regardless of whether the LA arranged the pupil's place there as necessary or not, they would currently remain VAT exempt – which is contrary to the policy paper. In this regard, the legislation itself also makes no mention of how eligible funders are to recover their VAT costs.
Does this change achieve the Government's fundamental objective?
This change is purportedly being imposed to, "[end] the tax breaks on VAT and business rates for private schools… to secure additional funding to help deliver the government’s commitments relating to education and young people."
The policy paper seeks to detail how the change will achieve this – but many of the explanations are grounded on estimation and assumptions, for example:
- "The number of pupils who may switch schools as a result of these changes represent a very small proportion of overall pupil numbers in the state sector". This is stated as a fact, although it is in fact an estimate. Indeed, the footnote to that statement clarifies their expectation that the figure is "likely to represent less than 1% of the total UK state school pupils". What if it's more?
- "Although schools will need to state on their invoices that they are charging 20% VAT on their education and boarding fees, the government does not expect fees to go up by 20% as a result of this policy change. Rather, the government expects private schools to take steps to minimise fee increases. " This last sentence is repeated a few times. It is unclear what will happen if they don't.
Action points
Parents with children at private school, or planning for that, would be well advised to set aside an extra 20%, if possible. Alternatively, this change may lead to employers offering some sort of salary sacrifice arrangement for the fees.
For the private schools themselves, they will need to appoint a VAT adviser. The old rules meant that where they did not charge VAT, equally they could not recover input VAT costs incurred on that supply. This will no longer be the case, and some input VAT recovery will be possible. In this regard, private schools who are not VAT-registered could opt to register in preparation for the change from 30 October 2024 – but if so, they will have to charge VAT from the date they receive their VAT number (although the education and boarding part of that fee will remain exempt until 1 January 2025, unless prepaid). At the moment, the explanatory note explicitly states that such schools should not yet register for VAT, and instead await guidance.
The consultation is open until 15 September. Subject to that, the Government "may make technical amendments to the VAT legislation in order to ensure that it works as intended."