Sean Douglass, Audit Partner at Bates Weston considers the issues of VAT on private school fees and business rates on private schools.
The Government has introduced 20% VAT on education and boarding services provided by private schools from 1 January 2025. VAT will also apply to pre-payments of fees for terms starting on or after 1 January 2025 made on or after 29 July 2024.
In addition, the Government also announced that private schools will no longer be eligible for charitable rates relief under business rates in England. Around 50% of private schools in England are registered charities and benefit from up to 100% charitable rates relief.
What do these VAT changes mean for private schools? Sean considers some of the issues.
What is a tax point – and why does it matter?
The tax point for services is the date when the service is performed, but it can be overridden by either the payment for the service being made, or a VAT invoice being issued before the date at which the service is performed. The Tax Point matters because VAT treatment will follow the policy in place at the time of the tax point.
For private schools, this means that after the 29 July 2024, prepayments for future terms starting on or after 1 January would be subject to 20% VAT.
But what of prepayments made before 29 July?
Surely, they would be subject to the VAT treatment in place before 29 July? In other words, no VAT would be applied. It is not that simple.
The Government is aware that many private schools have always offered prepayment schemes, but in many cases the structure of these schemes means that the tax point has not yet passed. For example, if the scheme involved paying a lump sum to the school in advance but it did not relate to specific term’s fees that had already been set, HMRC expects to challenge the validity of the payments and to collect VAT on those fees.
When do private schools have to register for VAT?
Schools who do not currently make any taxable supplies (such as the hiring out of their facilities) will be able to register with HMRC from 30 October.
Schools who do currently make taxable supplies can voluntarily register for VAT ahead of 30 October.
HMRC has given assurances that it will be putting in place a number of measures to ensure that all private schools can be registered ahead of 1 January 2025, including publishing bespoke guidance products on GOV.UK ahead of 30 October, updating registration systems, and putting additional resources in place to help process applications.
HMRC intends to help private schools through the VAT registration process and to correctly charge and pay VAT and will be contacting schools directly about when these support sessions will be taking place.
Sean Douglass, Audit Partner at Bates Weston comments:
“A technical consultation on draft VAT legislation is underway and will conclude on 15 September. We can expect more clarity from the government at this point with regard to the VAT registration process, partial exemptions and the retrospective treatment of prepayments made before 29 July 2024.”
“It is worth pointing out that once an entity is VAT registered it has to charge VAT on eligible supplies but it can also reclaim VAT on expenditures. Typically, many private schools will have paid VAT on big ticket items such as new buildings and it is possible that an element of this VAT can be reclaimed. VAT treatment of private schools is further complicated, as many already undertake taxable supplies, such as hiring out facilities, meaning partial VAT exemptions are already in place for some.”
If you would like to speak to Sean Douglass regarding your school’s audit, whether you are an academy or a private school, please do get in touch.
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