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VAT Changes on Independent Schools: What You Need to Know
22 Aug 2024
Starting January 2025, independent and fee-paying boarding schools in the UK will face a significant financial shift as a 20% VAT charge is set to be imposed on private education. This change stems from the Labour Party’s 2021 pledge to eliminate the tax advantages these institutions have and impose business rates. The government estimates this move could generate up to £1.5 billion, earmarked for enhancing state education, including the recruitment of 6,500 new teachers.
This policy has sparked widespread debate, with proponents arguing it will help level the playing field between state and private schools, while critics worry about the financial impact on families and the potential for reduced access to independent education.
Financial Implications for Independent Schools and Parents
For many independent schools, the introduction of VAT could lead to a 20% rise in fees. Schools may face challenges as they attempt to absorb or pass on these costs to parents, potentially making private education less accessible. Families currently budgeting for private education will need to reassess their financial plans in light of this impending increase. Additionally, schools may explore ways to mitigate these costs, such as increasing their fundraising efforts or cutting non-essential expenses.
The Future of Independent Education
As the January 2025 deadline approaches, both independent schools and parents will need to navigate these changes carefully. Schools will likely engage in strategic planning to remain competitive, while parents must consider the financial implications of these changes. The introduction of VAT could reshape the landscape of independent education in the UK, making it more exclusive or prompting schools to innovate in response to the new economic realities.
Details of the Proposed Changes
From 1st January 2025, any supplies of education or boarding made by independent fee paying schools, or by a closely connected person, will be subject to VAT at 20%. A closely connected person is someone connected to the school by financial, economic, or organisational links.
Whilst VAT will apply to the tuition fee and boarding fee (if applicable) charged by the school, it will not apply to supplies closely related to education such as catering, which will remain exempt from VAT. VAT will also not apply to fees charged for nursery children, as this is not a supply of education.
This potential change in VAT liability has been known about for some time prior to the announcement being made. In order to minimise loss to the revenue by parents paying school fees in advance, and thus benefitting from the current VAT exemption in place for these services, the government announced anti-forestalling legislation. This stated that any payments relating to fees for education or boarding after 01/01/2005, made on or after 29/07/2024 would also be subject to VAT at the standard rate.
Some schools have introduced fees in advance payment schemes where payment has been received prior to 29/07/2024. HMRC have stated that they will be reviewing these schemes and challenging them if they do not believe that a tax point was created. In order for the payment to qualify as VAT exempt, the fee paid must have been for a specific term and the cost of that term’s fees must have been clearly known at the time of payment. If the pre-payments do not meet with HMRC’s approval it is likely that VAT will be applied to them retrospectively.
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Get in Touch
We love meeting new, exciting businesses. Get in touch with our team to see how we could enhance and protect your financial position.
Or if you’d prefer to speak to someone directly just give us a call on: 08000 664 664 or email: hello@wrpartners.co.uk.
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