Current position
The provision of education in schools, academies, colleges and universities is not subject to VAT.
Education funded directly from local or central government is not a business activity and outside the scope of VAT. Education funded by making a charge is a business activity and is within the scope of VAT. However, the provision of education by way of business is covered by a VAT exemption.
Establishments which normally provide education in return for fees and are, therefore, in business include:
- independent fee-paying schools
- universities
- institutions teaching English as a foreign language.
The trouble with exemption is that any VAT incurred on related costs is not recoverable whereas there is no such restriction for local and centrally funded schools.
Probable change
We know that the Labour party wants to restrict the scope of the exemption and independent schools are in the crosshairs. Should it win the forthcoming election, Labour intends to impose 20% VAT on independent school fees.
Time of supply
The time of supply (or tax point) rules determine when VAT (if any) is due on supplies made by way of business. The supply of education tends to be continuous in nature meaning that the services are treated as separately and successfully supplied each time a VAT invoice is issued or payment received.
In the light of what inevitably appears to be on the horizon and having regard to the tax point rules, many schools are encouraging parents to pay future fees in advance to preserve exemption. Payments in advance of any liability change should avoid VAT on future education at least to an extent. The dilemma for parents is whether it’s worth making a pre-payment.
There was a fear that Labour (assuming it wins next week’s election) would make the threatened change straightaway with retrospective effect. However, the Shadow Chancellor, Rachel Reeves, has recently confirmed that this will not happen. Instead, the intention is for any changes to be announced in Labour’s first budget, which will not take place before September. Any change would then come in after that and not retrospectively. Undoubtedly, there will be anti-forestalling rules designed to reduce the scope for avoiding VAT by way of advance payments. A cap on the extent to which any advance payment would achieve its objective would likely be imposed by Labour.
As it stands, it does appear that a prepayment now to cover the 2024/2025 academic year would be ‘safe’, but the odds of prepayments ‘working’ for subsequent years are longer.
VAT recovery on costs for schools
A change in VAT liability from exempt to standard rated would mean that independent schools would be able to recover more VAT post any change.
Where effective advance payments ahead of a liability change are received, though, great care needs to be taken to ensure that there is no significant damage the other way. A VAT registered school might currently recover 10% of any VAT incurred on costs attributable to both exempt education and taxable income from other sources under a turnover based method (with exempt income accounting for 90% and taxable income accounting for 10% of total income) and see that percentage substantially reduced were it to receive a large slug of exempt income under a prepayment arrangement before the change. In such circumstances, consideration would need to be given to a possible change of method.
Schools need to crunch the numbers to see how any liability change will affect them, but this isn’t easy with so many factors to take in account and possibilities to bear in mind:-
- How far will the loss of exemption extend (to what extent will education related income, such as catering and accommodation, be affected)?
- What capital projects has a school carried out recently and have planned for the future?
- What method of recovery is currently used by a school to calculate its VAT recovery entitlement on costs and does that need to change?
- If a school were to offer parents the ability to pay in advance, what discounts could be offered?
- What might a school realistically expect to receive in advance if it were to offer a pre-payment scheme?
- What will be the overall position if any prepayment arrangement turns out to be fully or partly ineffective?
Conclusion
It appears inevitable that Labour will win next week’s election and soon impose VAT on private school fees. The extent to which advance payments can be made to save VAT depends on the timing of any change and anti-forestalling rules introduced. There can be no guarantee that any advance payments made will save VAT to the extent that might ordinarily be expected by reference to the normal application of the tax point rules.
Each school needs to consider its own position and the best course of action having regard to the likely timescale, probable anti-forestalling provisions and VAT recovery position. Parents contemplating making advance payments should ensure that payments are affordable and be realistic in their aspirations.
If you’d like to know more about the points raised above, speak to a member of our VAT team.
This article was correct at time of publication.
