With new VAT rules set to take effect soon, many parents are wondering how these changes will impact school fees. To help clarify what to expect, we've answered some of the most common questions, starting with how VAT will apply to fees paid in advance for terms beginning after January 1, 2025.
Q1. What is the VAT Treatment of fees for terms starting after 1 January 2025 which are paid in advance?
The issues will depend on when any advance payments were made:
Payments received before 29 July 2024
In principle, such payments can remain VAT exempt. However, HMRC’s Technical Note refers to the upswing in advance payments during the period immediately before the new legislation was published, and to their view that some of the longstanding advance payment arrangements offered by fee-paying schools may not establish a tax point, i.e. that the receipt of funds may not have crystallized the VAT liability of the education.
HMRC specifically refer to the fact that they believe some of the arrangements operated by fee-paying schools are simply lump sum payments for supplies which are not specifically identified at the time payment is received, i.e. the families are simply paying a sum of money towards the child’s education in general, rather than paying specific fees for identifiable individual terms.
We anticipate HMRC will look very carefully at any prepayment arrangements, including those which have been in place for many years, and that HMRC will seek to challenge any such arrangements which in their view do not create a tax point when funds are first received.
Payments received after 29 July 2024 but before the new legislation comes into force
The legislation contains specific provision for such payments to be subject to VAT. It’s also important to understand that the test here is around the date schools received the funds, and not the date on which families committed to make the payment. So, if for example a family committed to payment in advance shortly before 29 July 2024, but funds were not passed to the school until after 29 July 2024, they will automatically be subject to VAT.
Payments received on 29 July 2024
The draft legislation applies VAT to payments received on or after 29 July 2024 therefore even if funds were received on the morning of 29 July, i.e. before the draft legislation was published they will automatically be subject to VAT.
Q2. What will be the VAT treatment of catering at fee-paying schools?
This is a complex area of the new legislation, and it seems that the proposed legislation provides for two, somewhat contradictory provisions for different types of catering.
Historically, the provision of catering to pupils (boarding or otherwise) during school hours, has been treated as VAT exempt, not under the main exemption for the provision of education and vocational training, but rather under a related provision covering items closely related to the provision of education.
Surprisingly, the draft legislation still allows fee-paying schools to use the exemption for goods and services closely related to education. Which based on the long-accepted treatment of school lunches would allow these to continue to be treated as VAT exempt for all pupils.
However, the draft allergisation applies VAT both to fees for the provision of education and to any associated supply of board and lodging. While the term board and lodging is not defined in the legislation, we anticipate the courts to apply an accepted everyday meaning to the phrase, which would include the normal provision of standard daily meals.
Therefore, school catering now appears to follow different VAT rules depending on the context, and timing of the meals:
- School day lunches provided to all pupils remain VAT exempt.
- Other meals provided to boarding pupils as part of their board and lodging will now be subject to VAT.
The other area of catering which remains potentially VAT exempt are breakfast clubs, and similar after school provision, which depending on the type of provision offered can be exempt as childcare rather than education. For breakfast provision where borders and non-boarders share the same facilities, these seem to result in the rather uncomfortable position where different VAT rates will apply for boarders (plus VAT) and day pupils (VAT exempt).
VAT treatment of Optional Extra Charges
Many fee-paying schools offer a range of optional extras which families can choose to buy for a separate fee. These include things like music lessons, school trips, before school breakfast clubs, summer camps, sports coaching, sale of school photo’s or branded items and unusual charges such as visual screening tests.
The VAT liability of these will depend on the nature of the services, and in some cases who is providing them. For example, a piano lesson provided by a fee-paying school, using either an employed tutor, or a self-employed tutor engaged by the school will now be subject to VAT. However, a similar lesson provided directly to the pupil by a self-employed tutor, with the school acting as agent in arranging the lesson, might still qualify for exemption depending on the structure used by the tutor, or might simply not be subject to VAT because the tutor is trading under the VAT registration threshold. However, any fee or commission the school earns for arranging such a lesson will be subject to VAT.
Dividing fees into separate elements
As discussed above, the draft legislation provides some scope for fee-paying schools to continue to treat part of their fees as VAT exempt, although the sums involved may be relatively small.
However, this approach runs counter to the considerable body of VAT case law which has developed the concepts of composite and multiple supplies. In very simple terms a composite supply happens when a business sells a package of two or more things which would individually attract different rates of VAT, but where one element is predominant, in which case the VAT treatment of the predominant element applies to the whole price. For example, in buying a ticket for a single price on an overnight sleeper train to Scotland, as well as a place on the train, a passenger may get breakfast, use of a lounge at the station and Wi-Fi during the journey etc. If sold individually these items would be subject to VAT at 20%, however the predominant element of the supply (i.e. the thing the passenger really values) is the train journey so the whole ticket price is zero-rated.
The read across to fee-paying schools is obvious. While schools may be supplying a package of things, some of which may continue to be exempt when supplied individually, these are minor parts of the package supplied by the school, and it would be very difficult to argue that the predominant element of that package is anything except for the provision of education.
HMRC make no mention of this concept in their Technical Note, but it may well be something HMRC will seek to use, if, in their opinion, fee-paying schools engage in any form of aggressive tax planning in this area. For example, adopting any form of value shifting where the value of the remaining exempt elements of the fee are increased to reduce the overall amount due to HMRC.
Q3. What is the VAT recovery on costs incurred before 1 January 2025, including capital spend?
The draft legislation only covers the new treatment of VAT on fees and makes no reference to any special rules for schools in relation to the recovery of VAT on costs. Therefore, our current belief is that the normal legislation relating to the recovery VAT incurred before any business starts to make taxable supplies will apply to those schools which are not currently VAT registered.
This provides schools with the ability to recover VAT on some costs incurred before 1 January 2025, although for most day-to-day expenses that will be limited to costs incurred within six months of VAT registration; and would be further limited to reflect the extent to which those costs were used in making exempt supplies of education before 31 December 2024.
For schools who are already VAT registered the position is more complex, and will depend on their existing taxable activities, and any agreements they have in place with HMRC regarding partial exemption.
There is a wider opportunity for schools, both those who are currently VAT registered and those who will become VAT registered shortly, to recover some VAT on larger capital projects undertaken in the last 10 years.
If you have any further questions about how the new VAT rules will affect your school fees or need additional support, please don’t hesitate to contact our VAT specialists. We’re here to help you navigate these changes and ensure you have all the information you need.