VAT and private school fees - lessons to learn

This week, Leo Donovan Associate Director (VAT) at Shaw Gibbs, delves into the potential issues that may arise for anyone engaged in the financial organisation and management of private schools in the event the Labour party come into power.

Given the current political climate and upcoming electoral events in the UK, the debate concerning VAT and private school education has been thrust into the foreground.

Without wishing to dwell on the political aspects of this Labour Party manifesto policy, there will clearly be significant financial impacts should this policy come to pass. Anyone that is engaged in the financial organisation and management of private schools needs to be aware of the potential issues that may arise in the event that the Labour Party come to power and this policy is enacted. Whilst we do not have the specifics and details as to exactly how this will be implemented, some observations can be made at this stage.

It is difficult to see how a private school can absorb a VAT levy without passing on some or all of the cost to parents. Schools may choose to simply ‘add 20%’ to their fees, or they may attempt to do some costing analysis as to VAT recovery potential before determining just how much fees need to rise by to cover the additional VAT cost. A particular area of interest to school finance managers should be the Capital Goods Scheme, especially where large capital build projects such as new classroom blocks, sports facilities, or refurbishment works have been undertaken in recent years. Subject to any policy implementation and changes to the law, there could well be an opportunity to recover some significant sums of VAT under the CGS adjustments rules.

There has been much discussion amongst VAT practitioners as to exactly ‘how’ Labour will achieve their desired result to tax private education. The education exemption (VATA1994, Sch.9, Grp.6) provides the framework for schools, colleges and universities as well as other ‘eligible bodies’ to treat fee income as exempt from VAT. ‘Eligible bodies’ also includes charities and not-for-profit organisations that are precluded from distributing profits, and any whereby surplus profits are used for the educational aims and objectives and their continuance or improvement.

It is unclear at this stage exactly how private schools would be extracted from the VAT exemption, but one would hope that any changes to the legislation do not impact other charities or organisations that deliver educational supplies. We must await the finer detail on this point.

The potential changes to the VAT position have resulted in two specific topics coming into the spotlight, that of ‘advance payments’ and ‘single vs multiple supply’:

‘Advance payments’

We are aware that some schools are considering or have implemented processes whereby parents can pay fees in advance, perhaps covering several years in advance, in an effort to beat the introduction of VAT on such supplies. At face value this kind of approach could work based on the current time of supply rules, provided the necessary contractual steps are taken, and that there are no ambiguities for HMRC to challenge.

But this approach is not without risk for a number of reasons. HMRC/Treasury could enact some form of anti-forestalling legislation to override situations whereby payments are made or invoices are issued in advance of the supply taking place. Although unlikely, retrospective legislation could be enacted to catch current arrangements only recently established. They wouldn’t need to go back years, but rather months, and this could set aside all the planning efforts to alleviate the issue. And even if neither of these options were adopted by HMRC, contracts or agreements between schools and parents would need to be carefully worded to ensure they stand up to the inevitable scrutiny by the tax authority.

From a parents perspective, what assurances are there that the school will not simply ask for the VAT later, even if advance payments have been made? And what if the school runs into financial difficulty, how secure is your advance payment? Careful consideration must be given before entering into any agreement of this nature.

‘Single vs multiple supply’

Historically, fees paid to private schools have included amounts for additional services such as boarding, transport, school trips, catering etc. The position generally adopted has been one of treating these additional elements as being ‘closely connected’ with the supply of education, therefore benefitting from the educational exemption.

However, now that the tuition fees may become subject to VAT, there have been suggestions that each component element should be judged individually on its own as a distinct supply with its own VAT treatment. For instance, boarding fees for 9-10 months of the year would likely qualify as an exempt supply of residential accommodation, bus or coach transport services would typically be zero rate.

The difficulty here relates to the rules and established case law concerning single and multiple supplies, and whether or not there are distinct individual supplies with their own aims and objectives, or if these are simply ancillary to the primary supply and are just a means of better enjoying that main supply. These arguments still persist in other trade sectors most recently with the case involving takeaway food and dips (Queenscourt Ltd v HMRC [2024] UKFTT 00460 (TC)). Clearly a very different scenario, but nonetheless provides insight into judicial process and how these matters are viewed from a legislative stand point. In that case, it was ruled that there was a single supply – but perhaps more importantly serves to demonstrate that HMRC will robustly challenge any arrangement they see as being artificial or abusive, or outside the spirit of what the law intended.

The irony of such an approach should not be lost, especially given that the historic position has been to accept/argue that this was a single supply for the purposes of the exemption, only to now present the assertion that these are actually multiple discreet supplies. This alone could give HMRC cause to challenge any such arrangements.

Given the uncertainty of the situation it is difficult to offer solutions to this conundrum, especially as there is precious little detail at this stage. We would strongly advise any organisation to carefully consider the pros and cons of changes in approach, and weigh this against the potential risks in the event of subsequent challenge.

The Labour Party have offered some additional commentary concerning implementation, in that they suggest that retrospective legislation would be unfair on schools and parents. It has also been suggested by the Shadow Treasurer that the introduction of these VAT changes could be delayed until the Autumn 2025 school year – but this of course might be subject to change.

If you are a bursar or finance manager at an independent fee-paying school and would like to discuss any of these matters further, please do get in touch with Leo Donovan .

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