The Labour Party’s VAT Plan on Private Schools: An Updated Overview
With the Labour Party now in power, the government has confirmed its plan to remove the VAT exemption on independent school fees, starting in January 2025. This policy, first announced in Labour’s 2019 manifesto, is expected to significantly impact parents, financial contributors and both private and state schools.
Implications of the Policy
The removal of the VAT exemption on private school fees could lead to higher costs for parents, potentially making private education less affordable for many families. This increased financial burden may result in decreased enrolment in private schools, potentially placing additional pressure on the public education system as more students transfer to state schools. Furthermore, the uncertainty surrounding the policy’s implementation complicates planning and budgeting for schools, potentially affecting the quality of education and resources available to students.
Current Status and Tax Considerations
Under UK VAT law, education services provided by an “eligible body” (including registered independent schools) are an exempt supply for VAT purposes. This exemption also applies to goods and services closely related to education, such as catering, transport, school trips and boarding accommodation.
Additionally, charities and not-for-profit entities supplying education or vocational training enjoy a separate VAT exemption if they do not distribute any profit and use any arising profit solely for the continuation or improvement of such supplies. If schools are required to charge VAT on their services, they can offset the VAT paid on goods and services used for business purposes, such as utility bills, repairs, maintenance, and professional fees. VAT on capital expenditures for new buildings or major projects may also be recoverable.
Financial Impact on Parents and Schools
The government does not expect private schools to increase fees by the full 20 percent due to the VAT policy. Schools might not need to charge VAT on the entire amount of school fees. Fees for after-school activities, boarding fees, and transport costs should remain exempt. Bursaries might also be exempt if there is no charge, with VAT applying only to the reduced amount in cases of reduction. The government believes that private schools will take steps to minimise fee increases and that the number of students transferring to state schools will be minimal, with no significant impact on the public education system.
Challenges and Further Considerations
Parents and schools have a few potential avenues to challenge this policy. One option is a judicial review against the government, though this approach has a high threshold and limited grounds. Alternatively, schools may consider making VAT challenges to the First Tier Tax Tribunal over time.
The government has also stated that pre-paid fees from 29th July 2024 will be taxed retrospectively to prevent parents from avoiding VAT by paying fees in advance. HMRC will scrutinise these payments to ensure correct VAT collection and tackle tax avoidance.
For pupils with Education, Health and Care Plans (EHCPs) specifying private school placement, local authorities can reclaim the VAT on these fees through a government refund scheme, ensuring these parents are not impacted. However, parents of SEND pupils choosing private schools without state sector needs identification will face VAT charges.
From April 2025, private schools that are charities will lose their charitable rates relief and must pay full business rates. The government will engage with schools before finalising this policy to address the potential impact on SEND pupils requiring private school education.
Conclusion
As the government continues to develop its policy on VAT on independent school fees, it is crucial for both parents and schools to stay informed and seek expert legal and accountancy advice to navigate the complexities of VAT regulations and their implications. Further updates and articles on this topic, including the implications for universities, will follow.
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*This article is provided for general information purposes only and does not constitute legal or any other professional advice.