VAT on private school fees – technical consultation
By Susan Cattell, Head of Tax Technical Policy
7 August 2024
We examine the details of the technical consultation on the implementation of the new government’s decision to charge VAT on private school fees.
The King’s Speech on 17 July included the expected confirmation that the government will impose VAT on private school fees. However, we had to wait until 29 July and the publication of a technical consultation for the details of how the policy will be implemented.
Broad outline of the new rules
From 1 January 2025, the fees charged for all education services and vocational training provided by a private school (or a ‘connected person’), will be subject to VAT at the standard rate of 20%, as will any fees for ‘closely related’ boarding services. The provision of other services, such as school meals, transport, and books and stationery will remain exempt from VAT, but the consultation makes it clear that HMRC will challenge any schools that try to use ‘value shifting’ (ie artificially assigning greater value to the exempt fees, rather than education and boarding fees) to avoid VAT.
Nurseries (both standalone nurseries and those attached to a private school) will remain exempt from VAT, as will non-maintained special schools (approved under section 342 of the Education Act 1996).
The five consultation questions focus on the definitions of ‘private schools’ and ‘connected persons’ set out in the draft legislation (also published on 29 July), and on whether the proposed approach achieves the intended policy aims (outlined in the first chapter of the consultation) across all four UK nations. The deadline for responses is 15 September; the short consultation period and limited scope of the consultation suggest that the government is unlikely to make any significant changes.
Definitions
Private school
The draft legislation provides that:
“A “private school” means— (a) either— (i) a school at which full-time education is provided for pupils of compulsory school age or, in Scotland, school age (whether or not such education is also provided for pupils under or over that age), or (ii) an institution at which full-time education is provided for persons over compulsory school age but under 19 and which is principally concerned with providing education suitable to the requirements of such persons (for example, a sixth form college), and (b) where fees or other consideration are payable for that provision of full-time education.”
The first and second consultation questions ask whether this definition captures all private schools across the UK – and whether it inadvertently captures any organisations that should not be caught (given the policy intentions).
Connected persons
The government was clearly concerned that private schools might contract out the provision of some supplies, in order to continue to benefit from the VAT exemption. To prevent this, the draft legislation sets out that services provided by a body closely connected to the private school by financial, economic and organisational links will be treated as provided by the private school. They will be ‘connected’ if they are connected within the meaning of section 1122 Corporation Tax Act 2010 (connected persons); or if the provision of services by the other body is a result of arrangements (including any agreement, understanding, scheme, transaction, or series of transactions, whether or not legally enforceable) the main purpose, or one of the main purposes, of which is to secure that the provision is an exempt supply.
The third and fourth consultation questions ask for views on whether this ‘connected persons’ test captures the relationships that exist between private schools and third parties – and whether it inadvertently captures any relationships that should not be caught.
Pupils with special educational needs
Before the election, there had been speculation that fees charged for the education of children with education, health and care plans (EHCPs), or the equivalents to EHCPs in the devolved nations, would not be subject to VAT. However, this is not the approach that the government has adopted.
Where a pupil’s place in a private school is funded by the local authority (rather than parents and carers), because the pupil’s needs cannot be fully met in the state sector, or are best met elsewhere, the authority will be able to reclaim the VAT charged on the fees of these pupils via the section 33 VAT Refund Scheme.
As noted earlier, non-maintained special schools (approved under section 342 of the Education Act 1996) will remain exempt from VAT.
Paragraph 2.28 of the consultation explicitly sets out that VAT will be charged on fees for pupils with EHCPs (or the devolved equivalents) whose needs could be met in the state sector but whose parents have chosen to use private schools instead. This is in line with one of the main policy aims, set out at the beginning of the consultation, to: “Be fair, with all users of private schools paying their fair share, whilst ensuring that pupils with the most acute needs are not impacted.”
The final consultation question asks whether this approach achieves the intended policy aims across all four UK nations.
Anti-forestalling
The new VAT treatment comes into effect from 1 January 2025. The government states in the consultation that it is aware that “whilst many schools have always offered schemes enabling pre-payment of fees, there have been reports of increased numbers of parents utilising such schemes recently in an attempt to avoid these fees being subject to VAT.”
The draft legislation includes anti-forestalling measures to ensure that pre-payments made on or after 29 July 2024 will be subject to VAT. Additionally, the government also indicates in the consultation that HMRC ‘stands ready’ to challenge the validity of payments (and will seek to collect VAT) where payments were made before 29 July, but the details of the supplies that were being purchased were not determined when the money was paid (ie if the payment did not relate to specific terms’ fees that had already been set). It appears that the basis of HMRC’s challenge in these cases would be that the ‘continuous supply’ regime rules are not applicable.
Let us know your views
If you have any feedback on the five questions in this technical consultation, email tax@icas.com to share your views. We also welcome input from members on other tax consultations and calls for evidence or on HMRC service levels, systems, delays and other issues (which we raise with HMRC at regular stakeholder meetings).
