VAT on private school fees – a guide

VAT will be charged on private school fees for education and vocational training. Supplies of goods and services which are closely related to education which are currently treated as exempt from VAT (eg catering,  school trips) will continue to be exempt with the exception of boarding fees which will 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. However, from 1 January 2025, board and lodging charged to pupils at private schools will also be subject to VAT.

From 1 January 2025, when education provided by private schools becomes subject to VAT, in accordance with the general rules of VAT recovery, VAT will be recoverable on expenditure incurred by the school in connection with the supply of 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, 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, there could now be a basis to recover a proportion of the VAT incurred.

For example, if a capital project was completed in December 2019 and the project cost was £5 million plus VAT of £1 million, where VAT becomes 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.

VAT will be 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 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 the change in the law was announced on 29 July 2024) 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. HMRC have indicated in their detailed guidance 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.

The statement also including specific provisions which  mean that any payments made in advance after the announcement on 29 July 2024, but before the new law becomes effective on 1 January 2025, will be subject to VAT.

Previously, private schools have not able to issue VAT invoices as their supplies of education are 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 providing services to VAT registered business.

The 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 will 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 would be 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.

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 that nursery classes made up wholly of children below compulsory school age remain exempt from VAT. However, where the nursery contains children of compulsory school age for which a fee is paid, the whole of the class will be subject to VAT. At this stage, it is difficult to see how this will apply when some children below compulsory school age receive early years funding. As education is devolved, it is unclear what “compulsory school age” means in the various jurisdictions in the UK as there are differing approaches to early years funding. We are expecting further clarification on this point in the Budget.