Nearly 18 months have passed since 1 January 2025, when supplies of education by private schools became liable to VAT. Following what has been a challenging period for schools getting to grips with complex liability issues, capital goods scheme adjustments, partial exemption methods and maximising VAT recovery, there remains uncertainty with some aspects but there are new opportunities to consider certain matters in a different light.
Saffery reflects on three points in particular.
VAT recovery on pre-registration expenditure
In Aspire in the Community Services Ltd [2026] UKFTT 263 (TC) the First Tier Tribunal (“FTT”) ruled against HMRC’s approach to impose a further restriction on VAT incurred before an entity became VAT registered. This may be of interest to private schools as the case concerned an entity which primarily previously made exempt supplies but then transitioned to provide a mixture of taxable and exempt supplies. The court found HMRC’s approach of applying a restriction based on historic use rather than current and future intended use, was incorrect. Schools who reclaimed VAT on pre-registration costs, when they registered for VAT in October 2024 (or around that time) should review their position to see if Aspire provides an opportunity to apply an alternative approach to the method to calculate recoverable VAT on the first VAT return.
VAT liability of government issued grant funding for education
In Colchester Institute Corporation [2026] EWCA Civ 363 the Court of Appeal dismissed HMRC’s appeal and confirmed that government funding paid to a further education college can amount to consideration for supplies of education and vocational training provided free of charge to eligible students.
The court found a clear connection between the funding and the education delivered. In particular, the funding was paid under detailed agreements requiring the college to deliver approved courses to eligible students, with amounts calculated by reference to student numbers and course characteristics and subject to adjustment or clawback if delivery fell short. Schools receiving any form of grant funding should consider whether the decision in Colchester Institute Corporation (which HMRC is not appealing) means access to certain VAT reliefs in the future will be impacted.
Liability of income and VAT treatment of expenditure connected with pupil bus transport
Private schools following the introduction of VAT since 1 January 2025 typically treated the provision of pupil bus transport services as zero-rated (0% VAT) where the supply of transport in a vehicle that seats more than 10 people.
Arguments have emerged that where schools use a bus/coach operator to provide transport to and from school at the start and end of the day, the supply to the pupil by the school, is either subject to the Tour Operators Margin Scheme (TOMS), treated as closely related to the supply of education (ie exempt) or zero-rated. The specific set up and facts in each case will determine which liability and VAT recovery treatment applies. HMRC has not specifically commented on this point.
Schools are advised to review their treatment of bus transport since VAT registration to ensure whichever VAT position is being adopted has a reasonable basis.
Closing remarks
Saffery’s VAT team continues to work closely with schools helping them to successfully navigate through VAT complexities, through the provision of practical and proactive advice, and a collaborative approach.
Please get in touch with Nick Hart, VAT Partner to discuss the VAT matters covered here or any others that are causing concern.
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