As widely reported in the press, the Labour Party intends to remove the VAT exemption for education provided by independent schools. Labour has indicated that it would introduce the changes to raise tax revenue to improve standards in state schools by recruiting more teachers.
With a number of articles and publications on this topic, some of which raising more questions than answers, we’re answering some of the frequently asked questions. Any change in the law in this area, and when it would apply from, would be complex and therefore we’d recommend that schools, and possibly even parents or guardians, seek advice ahead of any new law coming into force.
Labour proposes to levy VAT on independent school fees. Supplies of of related goods and services (which are closely related to education and currently treated as exempt from VAT), such as catering, boarding fees, school trips, could also become subject to VAT.
Currently, boarding accommodation is usually exempt from VAT under the exemption for goods and services, which are closely related to the principal supply of education.
It’s likely that under the proposed changes, VAT will become due on boarding. However, under a different part of existing VAT law, “welfare services” are exempt from VAT and potentially these rules could apply to accommodation provided to children who board at school even if there is a change to the education exemption. This will largely depend upon how the new law is drafted (and the extent of any anti-avoidance legislation introduced) and how boarding fees are charged.
Where two or more elements (eg education, catering and boarding) are treated as a single supply, education is likely to be viewed as the principal supply and boarding and catering would likely be seen as ancillary. Therefore, it would be expected that VAT would be due on the entire fee.
It may be possible for a school to charge separate fees for education and boarding, which could then mean that the boarding is exempt from VAT (as a supply of welfare services). However, at this stage it’s difficult to predict how this will be dealt with and whether legislation will be introduced to prevent “supply splitting”. We’d recommend that schools take specific advice once the detail of any new law is known.
If education provided by independent schools becomes subject to VAT, in accordance with the general rules of VAT recovery, VAT should be recoverable on expenditure incurred in connection with such education.
Under existing VAT law, where £250,000 or more of capital expenditure has been incurred which was subject to VAT, either at the standard rate or reduced rate, and no VAT was originally recovered, VAT can be recovered over a number of years.
For example, if a capital project was completed in August 2020 and the project cost was £5 million plus VAT of £1 million, where VAT becomes due on supplies of education with effect from September 2025, £100,000 would be recoverable each year for 2026 through to 2030 where solely taxable supplies of education are made. If exempt supplies are also made, the VAT recoverable each year will be less.
It should be noted that some media coverage has suggested that new rules will be created to prohibit this form of capital VAT recovery for schools.
The time of supply, often referred to as the ‘tax point’, determines the time at which a supply is treated as taking place for VAT purposes.
There are two types of tax points, basic tax points and actual tax points. Under the basic tax point, VAT is due on a supply of services on the date services are performed, which is the point at which the services are completed. It’s unlikely that the basic tax point would apply to independent schools, as payment of fees are received before the end of the final term.
An actual tax point occurs when an invoice is issued, or a payment is received ahead of the performance of the service, and therefore we’d expect that this will apply to independent schools.
There are also specific rules that apply to continuous supplies of services, but it’s our view that these rules are unlikely to apply as the nature of the services is clear and the education is likely to be viewed as ending at the end of each academic year.
Many schools have existing fees in advance schemes. As explained above, payment of fees in advance would normally trigger a tax point. Therefore, any payments made in advance (before a change in law is announced) for supplies of education in future, may not be subject to VAT. It should be noted that it’s the payment date that is relevant and not the invoice date.
However, based on previous changes to VAT and HMRC’s guidance, it’s anticipated that anti-forestalling provisions will be introduced, which would mean that any payments made in advance after the change to the VAT treatment of education is announced, but before the new law is effective, would become subject to VAT. It has been reported in the media that Labour believes it will be possible to retrospectively tax advanced payments. It’s not yet clear how this would be achieved under current VAT law principles.
The place of supply for supplies of education provided to consumers (ie not businesses) is where the education actually takes place, irrespective of the parents’ location. Therefore, VAT would be due on supplies of education which take place in the UK.
Whether or not bursaries are affected would depend on if these cover the full cost of education or part of the cost, or whether they’re funded by third parties rather than the school directly.
Where school funded bursaries cover the full cost of education, no VAT should be due as no payment is involved. If the school funded bursary funds part of the cost of the education, it’s likely that VAT would only be due on the fee paid. Similarly, for discounted fee arrangements, VAT would only be chargeable on the discounted amount paid.
Where a bursary is provided by a third party, it would need to be considered whether this is grant to the school or consideration for a supply of services. This would need to be reviewed on a case-by-case basis.
How we can help
We can help you with reviewing the relevant contracts from a VAT perspective, determining the correct VAT treatment for each supply, estimating the net VAT exposure, analysing input tax recovery, and also advice on the accounting software changes required to be able to report the input and output tax correctly under the new law.
We can also provide our school clients with advice on pricing setting for future years, taking into account both the VAT payable and VAT recoverable as a result of these potential changes.
If you’d like to discuss this further, please get in touch with Callum Richards.