Labour’s plans for imposing VAT on independent schools

 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 advise seeking expert advice to ensure that you are aware of how best you should manage VAT treatment and implement the correct strategies. Should you require advice on how the changes may affect you please use the form below to contact one of our experts.

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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