Starting from January 2025, private schools in the UK will no longer be exempt from VAT, a significant shift in the way school fees are taxed. This new policy will affect private school fees, potentially raising costs for parents and impacting how schools manage their finances. If you’re a parent, guardian, or school administrator, it’s essential to understand these changes and how to prepare for them. Here’s a comprehensive guide on VAT on school fees in the UK and what you need to know about the new rules.
Removal of VAT Exemption for Private Schools
Beginning January 1, 2025, private schools in the UK will be required to charge VAT at the standard rate of 20% on most of their services. This change, announced in the Autumn Budget 2024, will impact around 2,500 private schools, including those operating under the Charity Commission. While these schools will lose their VAT exemption, they will still retain their charitable status.
This policy is part of the government’s plan to generate additional revenue, which will be used to fund the recruitment of 6,500 new teachers for state schools. While the change affects only private schools, it does not apply to public institutions or schools under the Department for Education.
What Does VAT on School Fees Cover?
From January 2025, a range of school-related services will be subject to VAT. These include:
- Education fees
- Vocational training fees
- Boarding and lodging fees for students in residential schools
While many of the services provided by private schools will be taxable under the new rules, there are still some areas that will remain exempt. See below for more details on what is not affected.
What the New Policy Does Not Cover
Certain services and supplies related to education will remain VAT-exempt, including:
- School meals (e.g., catering)
- Transport services for students
- Examination fees
- Books and stationery if provided separately from educational services
- Educational trips, depending on how they are classified
- Nursery services, whether standalone or attached to a private school
Certain services, such as school trips or technology provisions like laptops, may require further clarification from HMRC. Schools should seek guidance to determine what is eligible for VAT exemptions, as attempts to manipulate fee structures could result in penalties.
VAT Relief and Partial Exemptions
Some private schools may qualify for VAT relief or partial exemptions, which will be assessed on a case-by-case basis. Here are some key points:
- Bursaries and Scholarships: Bursaries funded by third parties will be evaluated to determine whether they are grants or payments for services. Payments made by the school for bursaries are not subject to VAT, but half-funded bursaries will incur VAT on the discounted fee amount.
- Special Educational Needs (SEN): VAT relief for SEN students will not be available through the new VAT exemptions. Instead, local authority schemes will apply to help parents cover the cost. Private school fees for SEN students will not be eligible for VAT relief.
How the VAT Changes Will Affect Schools and Parents
For schools, the removal of VAT exemptions on school fees could present challenges. Smaller schools with tight budgets may face difficulties, including potential closures or an increased burden of compliance. For parents, the most significant impact will be a rise in fees, as schools pass on the VAT costs. The government estimates a 10% increase in school fees, although some schools may raise their fees by less than this amount.
How Schools Can Adapt to the New VAT Policy
To comply with the new VAT rules, schools will need to make adjustments to their financial systems and processes. Here’s what they need to do:
- VAT Registration: Schools that aren’t already VAT-registered should prepare to register and start charging VAT once they receive their VAT number. This includes reviewing and updating finance systems to track both net and VAT-inclusive sales.
- Employee Training: Schools should provide training for their finance teams to ensure smooth implementation of the new VAT requirements and ensure compliance with Making Tax Digital (MTD) regulations.
- Record Keeping: Schools should assess all sources of income and ensure accurate records are kept for capital expenditures and miscellaneous income. Additionally, schools should identify any VAT recovery opportunities for past expenses.
- VAT Advisory: It’s highly recommended that schools appoint a VAT adviser to navigate the complexities of the new VAT system and to optimize VAT recovery.
Tips for Parents and Guardians
With the VAT changes set to increase school fees, it’s important for parents to plan ahead. Here are a few tips:
- Check with Your School: Different schools may adjust their fees in various ways, so be sure to check with your child’s school about potential increases in fees. Prepare to budget for a 20% increase, but some schools may raise fees by a lesser amount.
- Avoid Pre-Paying Fees: Due to anti-forestalling measures, any advance payments made after July 29, 2024, will be subject to VAT. To avoid triggering VAT on future term fees, it’s advisable not to pre-pay fees for future terms.
- Fees Paid Before July 29, 2024: Any school fees paid before this date will not be subject to VAT, even if they are for terms starting after January 2025. These fees are governed by the tax rules in place at the time of payment.
Conclusion
The upcoming VAT changes on school fees in the UK represent a significant shift in the way private schools handle their finances and charge for services. While it may result in higher fees for parents, understanding the new rules will help you plan better. Schools need to adapt by updating their VAT registration and financial processes, while parents should stay informed and adjust their budgets accordingly. By preparing in advance, both schools and parents can navigate these changes smoothly.
