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VAT

VAT and private schools 

VAT and private schools 
Richard Staunton

By Richard Staunton

12 Feb 2024

VAT recently made the headlines with the Labour Party announcement that they will consider removing the VAT exemption from private school fees if they win the next election. 

As is often the case with these announcements there was some confusion about how this could be achieved, and many commentators assumed that charitable status would be removed. However, this does not appear to be the case with schools possibly retaining charitable status but still charging VAT.  

How will the VAT exemption be removed? 

Removing the VAT exemption from private schools will require a change in UK legislation.  

The Directive is contained within VATA 1994, Schedule 9, Group 6. Item 1, which states that exemption applies to::    

The provision of an eligible body of  education   

There are a number of definitions of an eligible body within that piece of legislation but the two most relevant are contained in note 1 (a): 

  • (a) school within the meaning of the education act (split depending upon which part of the UK is relevant) including   
  • (i)Provisionally registered …….in a register of independent schools  

Secondly an eligible body is also defined under note 1(e) as, a body which  

  • (i) is precluded from distributing and does not distribute any profit it makes; and  
  • (ii) applies any profit made from supplies of a description within this group to the continuance or improvement of such supplies   

Any changes or adjustments to the above legislation could have far reaching detrimental effects on other education providers. 

An alternative would be to provide an exception from the exemption for private schools, with the removal of note 1 (a))(i) and an amendment to note (e) that excludes private schools. 

What about boarding schools? 

 School boarding facilities are generally seen as being ancillary to education and therefore follows the VAT liability of the supply. In that case, any change in the education exempt will also impact on boarding costs which will move from being VAT exempt to being taxable at the standard rate. There may be attempts to separate the accommodation so that it becomes exempt in its own right, being long-term living accommodation. However, there is then an argument that if the accommodation includes meals and other services it could be seen as hotel or similar accommodation which would attract VAT at 20%, albeit with a reduced value after 30 days. This is a great example of how other supplies made by private schools may be affected by the change in legislation.  

What about advance payments or invoices? 

Generally, when a tax point is generated the VAT treatment will be the percentage that is in place at the time of the tax point.  

This means that if an advance payment is made for school fees before any amendment to the legislation, then that payment should be exempt from VAT. 

Often when there is a major change in the VAT treatment of a supply, HMRC introduces anti-forestalling legislation. This typically attempts to limit tax planning to mitigate against any VAT change. This legislation could state that advance payments will fall out of the general tax point rules. However, this would be almost unprecedented as anti-forestalling legislation is generally not retrospective, so any advance payments made before the legislation is unlikely to be affected.  

Invoices are a little more complicated. An invoice only creates a tax point when it is a VAT invoice, and an invoice that only includes zero or exempt supplies is not a VAT invoice. Therefore, if an invoice is raised for school fees only, this will not assist in avoiding VAT on school fees. If the invoice also included other supplies that were taxable then this could be a solution. However, care is needed here as HMRC could view artificially including taxable items as being abusive.  

Agreements  

It is also recommended that any contracts for education are examined to determine if VAT can be legally applied to fees, after all VAT on school fees is not an area that is likely to have been contemplated particularly when the UK was within the EU. Similarly, if advance payments are requested then schools should include a provision that VAT can be charged should retrospective anti forestalling legislation be introduced. 

Capital Goods Scheme  

It may not be all bad news for schools. Charging VAT on fees would mean that VAT will be recoverable on any expenses relating to the making of those supplies which would not have been reclaimable in the past. This would include teaching aids, fuel and power and building works.  

In addition, there may be claw back of VAT that historically had been blocked. The most likely area affected will be major building works. Any expenditure relating to buildings which attracted VAT and where the net expenditure was in excess of £250,000 falls within the Capital Goods Scheme (GS). The use is monitored over a 10 year period and is clawed back or paid back if that use changes.  

For example, if a school incurred £1.2 million on major refurbishment works on its main school building, £200k of VAT charged by the builder would have been blocked. If VAT was charged on school fees five years later, £20k of VAT would be recoverable every year of the remaining five meaning that £100k would be recovered. 

There is a possibility that the CGS legislation could be re-drafted to exclude such expenditure but that is very unlikely.  

Spirit of legislation  

Without wishing to sound too political, the removal of the exemption on school fees is clearly a political act(!) I say this because some of the normal rules such as anti-forestalling legislation and the operation of the CGS mentioned previously may be amended to ensure that any proposed legislation will be effective; for example if most private schools do collect fees in advance that is likely to trigger further legislation.  

I have touched upon the re-working of the VAT Act and there may well be further complications with re-working law; as mentioned at the beginning, this article is meant as an opinion piece rather than a factual guide and I suspect the reality of any amendments are likely to be a little more complicated than set out here. 

What’s next? 

While we can normally rely on two things in life – death and taxes – in respect of VAT and education we need to wait for the outcome of the general election to see if VAT is charged on education and how that will be introduced. In the meantime, it seems sensible for private schools to request advance payments for school fees. 

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