The Government had announced on 29 July 2024 that VAT would be charged at the standard rate of 20% on school and boarding fees for school terms starting on or after 1 January 2025. The measure was confirmed in the Autumn Budget 2024 on 30 October 2024. VAT will not be added to fees charged for classes where all children are below compulsory school age. In addition, it was confirmed that business rates charitable rate relief will be removed from private schools in England from April 2025 through the introduction of new legislation.
The Autumn Budget 2024 measures confirmed that any pre-payments of fees or boarding services made on or after 29 July 2024 that relate to terms starting after 1 January 2025 will also be subject to VAT at the standard rate.
These measures will have significant impact on private schools, with not only an additional tax costs, but a new administrative burden. There will also be an impact on local authorities and devolved governments if they fund any private school places as these places will also be subject to VAT. However, the Government has said these authorities will be able to reclaim this VAT from HMRC or the Government will increase the funding to where the authorities fund a pupil's place at a private school because the pupil's needs cannot be met in the state sector.
HMRC issued guidance on 10 October 2024 in relation to the charging and reclaiming of VAT on goods and services related to private schools.
HMRC has indicated that VAT will be chargeable on the total value received, including amounts paid by parents and external bursaries, and will cover all goods and services provided by the school. The guidance covers where education is supplied with other elements such as school meals and transport, welfare services, bursaries, grants, charities and supplies provided in classrooms or closely related to the supply of education. There is also guidance on schools buying in travel services and operation of the Tour Operators Margin Scheme.
Some schools have already indicated that the removal of the VAT exemption and changes to charitable business rate relief, together with the increased employers' national insurance contributions, will result in severe financial difficulties with the possibility of school closures, especially for smaller specialist and religious schools. In addition, concerns have been raised by boarding and international schools with many warning international pupils schools will not attend without financial support.
While the addition of VAT to fees is disappointing for many schools and parents, we have also been considering whether there will be any benefits for schools, and specifically whether schools will be able to make claims to recover VAT input tax they incur, not only on new capital projects but also on historic capital projects (generally those incurred within the last five to 10 years) and to recover pre-registration input tax.
HMRC's guidance confirms that there will be the possibility of belated recovery of VAT in respect of earlier capital projects and also recovery of input tax on goods and services purchased prior to VAT registration. HMRC anticipates that private schools are likely to be making both taxable and exempt supplies and so will fall within the partial exemption rules and any associated recovery will be subject to these rules. Capital expenditure recovery will be subject to the Capital Goods School rules and the partial exemption rules where applicable.
What is clear is that the VAT charging and recovering position of private schools will be complicated and private schools, like other commercial businesses, will be subject to the full breadth of the VAT legislation and will need to review their own individual positions and take proper advice. There may be some opportunities for schools to consider its fee structures and specifically what goods and services are covered by the fees to maximise their VAT liability and recovery positions.
