Following the original announcement by the Chancellor on 29 July 2024, that VAT exemption for education provided by private schools would end, VAT became chargeable on the provision of education supplied from 1 January 2025 onwards.
Since the measure was introduced, HMRC has published some guidance although many questions remained as schools grappled with the impact of the changes, and the many complexities those changes created. We answer some of the frequently asked questions here and recommend schools continue to see professional VAT advice as many areas are subject to a degree of uncertainty and interpretation.
VAT is charged on private school fees for education and vocational training. Supplies of goods and services which are closely related to education (eg catering, school trips) continue to be VAT exempt with the exception of boarding fees which are also subject to VAT. What constitutes supplies which are closely related to education remains a complex area.
The change in legislation meant that from 1 January 2025, board and lodging charged to pupils at private schools is subject to VAT.
As VAT is now chargeable on school fees, in accordance with the general rules of VAT recovery, VAT is recoverable on expenditure incurred by schools in connection with the supply of such education. Given schools continue to make VAT exempt supplies, which in of themselves do not entitle VAT recovery, schools should not expect to reclaim all of the VAT they incur. The actual recoverable amount is determined by the partial exemption position, which a relatively complex mechanism incorporating principles such as cost attribution, annual adjustments, override adjustments, and whether certain income can be disregarded from outputs-based calculations.
Subject to general principles, VAT incurred on capital expenditure can be reclaimed in full or in part, as appropriate. There have also been opportunities for schools to reclaim VAT on qualifying capital expenditure incurred before the VAT changes were implemented.
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, VAT can be recovered over a number of years. Therefore, if no VAT was originally recovered due to private schools making exempt supplies of education, a basis to recover a proportion of the VAT incurred, emerged.
For example, if a capital project was completed in December 2019 and the project cost was £5 million plus VAT of £1 million, as VAT is due on supplies of education with effect from January 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.
Many schools have benefitted from sizeable capital goods scheme reclaims, on this basis.
VAT became due on all payments made on or after 29 July 2024 in respect of education or vocational training to be supplied after 1 January 2025. Further comments are below in respect of advance payments.
Many schools had existing fees in advance schemes. Payment of fees in advance would normally trigger a tax point (the point in time when a supply crystallises for VAT purposes. Therefore, any payments made in advance (before the change in the law was announced on 29 July 2024) for future supplies of education, may not have been subject to VAT. It should be noted that it’s the payment date that is relevant and not the invoice date.
HMRC have indicated that in some circumstances they may challenge the VAT treatment of advance payments, and the terms and conditions of the pre-payments will determine whether there has been a tax point. This has indeed been the case and HMRC have been reviewing fees in advance arrangements closely, and continue to have an interest in this area. The statutory period of limitations for VAT corrections is four-years so payments received just prior to 29 July 2024 are still in time if HMRC believes those arrangements were applied incorrectly.
The implementation of VAT included specific provisions which meant that any payments made in advance after the announcement on 29 July 2024, but before the new law became effective on 1 January 2025, were subject to VAT.
Previously, private schools were not able or required, to issue VAT invoices as their supplies of education were exempt from VAT. However, schools which are registered for VAT can now issue VAT invoices for supplies of education taking place on or after 1 January 2025. It’s important to note that schools are not obliged to issue VAT invoices as they are not typically providing services to VAT registered business (although in instances where they do, and the underlying supply is subject to VAT at any rate, VAT invoices must be issued).
The VAT tax point is earlier of the date that payment is received or the issuance of a VAT invoice (ahead of the performance of the education services). Where a VAT invoice is raised within 14 days of receipt of the payment, the date of the VAT invoice becomes the tax point. Schools need to consider whether they should issue VAT invoices as this could make their VAT accounting more straightforward.
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 is due on supplies of education which take place in the UK.
Whether or not bursaries are affected will 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. It is also a determining factor if bursaries are provided to specific named pupils, by the donors, or whether they form part of a general pool of funding available for qualifying individuals.
There have been suggestions HMRC believe schools are undertaking non-business activities when providing education to pupils which is fully funded by bursaries, which would impact VAT recovery on costs. HMRC has not published guidance which articulates this view and our opinion is that it would not be a valid argument.
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 a grant to the school or consideration for a supply of services. This would need to be reviewed on a case-by-case basis.
HMRC has stated where at least 90% of a class is below compulsory school age, fees for nursery classes within private school remain exempt from VAT. There have been challenges in applying this, as schools have many arrangements which are unique to themselves, with regards to mixed settings (above and below compulsory school age) and how the term ‘class’ should be interpreted has been debated.
How we help our clients
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 accounting software implementation or digital transformation.
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 the changes.
We regularly represent our clients during HMRC interventions and assurance events, and have achieved success at agreeing favourable VAT outcomes for our clients, with respect to matters of potential uncertainty or with respect to how the relevant law should be interpreted.
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