VAT for Independent Schools

What we learned from the Autumn Budget 2024

Chancellor Rachel Reeves today delivered the highly anticipated Autumn Budget, outlining a series of sweeping measures aimed at addressing the UK’s £22bn deficit. One of the most significant—and controversial—announcements concerned the introduction of VAT on independent school fees.

What was announced in the Autumn Budget?

In an effort to raise funds to plug the growing financial black hole, Chancellor Reeves confirmed that independent school fees will now be subject to VAT at the standard rate of 20%. The change will come into effect from 1 January 2025, with the government introducing legislation to remove their business rates relief from April 2025.

In its detailed document, the government stated that the standard rate of VAT will also apply to any prepayments received on or after 29th July 2024 by schools for future terms.

This decision marks a substantial shift in a longstanding policy. Until now, independent schools have been able to retain their ‘eligible body’ status, meaning they were exempt from VAT. This exemption has been removed with today’s announcement.

Reeves said this policy aimed to provide the 94% of children in the UK who attend state schools with “the highest quality of teaching and support that they deserve.”

Why this change?

The government’s move is part of a wider package of tax measures aimed at shoring up public finances, as well as increasing fairness in the education system. The decision is expected to generate significant revenue for the Treasury, estimated at around £1.7 billion annually, which will be allocated towards funding core public services, including the NHS and state schools.

How will this impact independent schools?

Independent schools will now be subject to VAT at 20%. The increase in fees ultimately will make private education less accessible to many families. The impact of this then being that independent schools will suffer a decrease in pupils and income.

However, it’s important to note that independent schools are not obligated to pass this VAT increase directly to parents and can choose to absorb the cost. If they opt to do so, they may need to explore alternative revenue streams to offset the additional financial burden. Some schools might also consider offering incentives, such as absorbing the VAT on fees paid upfront. Ultimately, each school will decide how to manage the VAT’s impact and where the financial effects will be felt.

Independent schools that choose to increase fees to cover VAT could see families pulling their children out of private education and placing them into already stretched state schools. The implications of this change will become evident in time and we will update this article with further advice as the situation evolves.

Some smaller independent schools, which operate on tight margins, may even face closure. These schools may not have the resources to absorb the additional costs without passing them directly onto parents.

A mass exodus of pupils from private to state education could further strain state schools, which are already dealing with teacher shortages and funding gaps.

Moreover, independent schools often support bursaries and scholarships for lower-income students. Some fear that the additional tax burden will reduce these offerings, limiting access to independent education for less affluent families who rely on financial assistance.

What will the impact be on families?

For many families with children in private education, this VAT change will represent a considerable financial impact. Independent school fees are already high, with the average day school charging more than £18,000 per year, while boarding schools can cost upwards of £40,000—and they’re constantly increasing. In 2021, figures showed that school fees had already grown 20% beyond inflation since 2009. A 20% VAT increase would tip the scales for some families, putting independent education out of reach.

Private education is often seen as a “lifestyle choice” and is a cornerstone for many parents who prioritise smaller class sizes, specialised extracurricular activities and a more tailored educational experience for their children. But with this new tax burden, some parents may now reconsider whether the benefits of private education are worth the additional costs.

How many pupils will be affected?

Only a small proportion of UK pupils attend independent schools. As the Chancellor hinted at, current figures suggest that approximately 6-7% of children in the UK are educated in the private sector, which equates to around 560,000 to 570,000 pupils.

Those in favour of the VAT policy argue that such a small percentage of the population shouldn’t be entitled to tax breaks, especially when the country faces such significant financial challenges. They see it as a necessary measure to create a fairer and more balanced educational system.

The future of independent schools

The introduction of VAT on independent school fees marks a decisive shift in the government’s approach to education funding. It’s a move that will divide opinion—seen by some as a long-overdue step toward equality and fairness, and by others as a punitive measure that could exacerbate issues within the state school system.

As the policy rolls out its long-term effects will become clearer. Will it help close the gap between state and private education, or will it place further strain on an already challenged public sector? One thing is certain: the conversation around the future of independent education in the UK is far from over.

Schools and families alike will need to weigh their options carefully as they navigate this new financial landscape.

If you have any questions regarding VAT for independent schools and how the changes may affect you, please use the form below to contact one of our experts.

Historic details

 As a Labour Government prepares to take office, we discuss one of the party’s major tax proposals: applying VAT to independent school fees. This initiative is part of their pledge to “recruit 6,500 new teachers in key subjects to prepare children for life, work and the future, paid for by ending tax breaks for independent schools.” They estimate the policy will raise around £1.6 billion, which is “urgently needed to improve the state school system”, used by about 93% of students in the country.

At present, independent schools (and schools registered as a charity which supplies education) qualify as an ‘eligible body’ and are therefore exempt from VAT. Other exemptions from VAT apply to the provision of services that are ‘related’ to the supply of education, such as school trips, boarding, and transport.

Originally declared in Labour’s 2019 manifesto, and with a Labour Government being announced last week, the proposed changes should be anticipated by independent schools and correct preparation is advised to best mitigate the increased costs associated with the removal of the VAT exemption.

Key dates on the horizon

We understand that the change will be made as soon as parliamentary time allows and will apply to full-time education provided to children of compulsory school age, in line with the Department of Education’s definition of regulated independent schools. It is likely that we will understand more as of the King’s Speech at the State Opening of Parliament on 17 July 2024.

The Chancellor of the Exchequer confirmed that the policy would be included in the post-election budget in the Autumn, with the measure passing into law in the new government’s first finance bill. However, it is “unclear” whether it would come into effect at the start of the new tax year (April 2025) or the start of the new academic year (September 2025). At present, any dates are just speculative.

This article will be updated when we have more details and can provide further clarification as to exactly how, when and what the VAT rate will be.

What have Labour proposed thus far?

The greatest change proposed by Labour is to exclude the supply of education by an independent school (this applies if the school is a registered charity also) from the VAT definition of an ‘eligible body’, meaning that VAT would be due. This VAT would be set at 20% and would be chargeable to all independent school students being educated in the UK due to the ‘place of supply’ rule.

Currently, boarding accommodation is exempt from VAT under the exemption for goods and services. It is likely this will change but it will depend on how the new law will be drafted. It is also likely that services related to the supply of private education, such as school trips, transport, and school meals will be subject to VAT.

Key considerations

Will VAT charges apply to international students?

According to UK law for the supply of services, VAT is charged based on where the education supplier is located, and not the customer, meaning VAT could also be charged on fees for international students looking to study in the UK.

Will the VAT charge affect children with an EHCP?

The Labour administration has previously confirmed that the changes to VAT treatment for independent school fees will not affect children and young people with an Educational, Health, and Care Plan (EHCP). Consequently, applications for EHCPs has risen drastically as according to Census data from 2024 the Independent Schools Council (ISC) shows that 111,154 SEND pupils are in independent schools, and only 7,654 have EHCP’s. The other 103,508 do not.

Fees for those students with additional needs covered by an EHCP will remain exempt under separate VAT provisions. For schools that provide specific, focused, education for these students the VAT change would not apply, but for those with ‘mixed’ cohorts there would be a need to carry out  relevant tax calculations under ‘partial exemption’ to comply with the VAT change.

How would a VAT charge affect the level of school fees?

The increase in school fees may make private education less accessible to many families. However, the actual cost increase for fee payers might not reach the full 20%, as schools can partially offset the higher costs by recovering VAT on expenses. Whilst it is impossible to provide accurate figures, indications are that an additional charge of between 12-15% may be the ‘norm’.

Some independent schools already offer advance payment schemes, allowing fees to be paid ahead for a year or the entire duration of the child’s intended stay. Initially designed for financial planning, these schemes often include discounts for early payment. With the upcoming changes, more parents are opting for these schemes, and some schools are introducing them for the first time.

Paying fees in advance also has the benefit of fixing the tax rate at the time of payment, locking in the current VAT rate. These schemes allow parents or carers to pre-pay term fees for multiple years, rather than just a single term.

Schools should be cautious about restructuring their fees, and on providing any advice to parents on the potential savings, as HMRC might challenge these schemes. Additionally, anti-forestalling legislation could be introduced to ensure that any fees paid in advance for education provided after the VAT is implemented will still be subject to the tax. One potential challenge would be to see the advance payment as a kind of deposit that is ‘drawn down’ each time a supply is made, e.g. at the start of a new term. If that were to be the case then VAT would be applied to that value when drawn down, rather than when the advance payment is made.

What should you be doing to prepare?

Independent schools must stay abreast of evolving tax regulations, leverage expert advice, and prioritise financial sustainability to navigate these challenges effectively and ensure the continued delivery of high-quality education.

“Whilst most schools will already be taking the necessary steps to ensure that their finances and operating structure are as efficient as possible, it is always a good move to review and reflect on a regular basis. This announcement of a forthcoming major tax change to the sector provides an ideal opportunity for those reviews to be carried out now and to make any relevant changes to enhance that efficiency where possible.”

Greg Mayne, VAT Partner

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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