On 29 July 2024, the Chancellor, announced that from 1 January 2025, the new government intend to charge standard rate VAT of 20% on all education services – including closely related education services, and vocational training supplied by private schools and connected persons in the United Kingdom.
So what does this mean in practice? In this blog, we'll cut through the jargon and answer some of the most frequently asked questions about VAT and private schools.
What are "closely related services"?
As stated in the draft legislation, closely related services to education, include, boarding, school meals, transport, and books and stationery, which are integral to children accessing education. These services will remain exempt, except for boarding or lodging services which will charge 20% standard rate VAT.
Who is a "connected person"?
According to the draft legislation, where an eligible body provides education or vocational training at a private school, it is considered connected to the school if they arrange the education or vocational training with a goal of securing an exempt supply, or if they are closely bound by financial, economic, and organizational ties. These connected persons must charge the 20% standard rate VAT.
What if I offer an education package?
When an education package is provided by a private school for a single fee, it is generally considered a single supply for VAT purposes and standard rate VAT of 20% will apply, regardless of the additional elements included alongside the primary education service. However, if the school charges separate fees for education and other services, these will be treated as separate supplies, and different VAT rates may apply.
What about bursary payments for school fees?
VAT will be charged on the total amount received for education, regardless of any bursary provided to the student. However, if the school provides the bursary to itself (e.g., an internal scholarship), VAT will not apply to that portion.
How about grant payments for school fees?
The VAT treatment of grant payments depends on the nature of the grant. If the grant is a block payment that does not relate to specific pupils, it will generally be outside the scope of VAT. However, if the grant covers a specific student's school fees, the full amount will be subject to VAT at the standard 20% rate.
Will this policy affect charities?
If a charity operates schools with the aim of generating income, VAT will apply, even if there is no explicit profit motive.
Are nurseries included in this new VAT policy?
Nurseries (both standalone nurseries and those attached to a private school) will remain VAT exempt. The new VAT policy will only cover the fees of children in private primary schools. Any before/after school childcare, or childcare-based holiday clubs, that just consist of childcare will generally remain exempt from VAT because welfare services are exempt from VAT.
Does this policy affect standalone private sixth form colleges?
This policy will also cover the education and vocational training provided either at sixth forms attached to private schools or standalone private sixth form colleges, meaning that these services will be subject to the 20% standard rate VAT. However, education and vocational training provided by further education colleges, which are classified as public sector institutions, will remain VAT exempt.
Pupils with Special Educational Needs (SEN)
Pupils placed in private schools because their needs cannot be fully met in state schools will not be affected by this policy change. This is because their private school placements are funded by their local authority, a devolved government (for post-16 pupils in Wales), or the Education Authority (for pupils in Northern Ireland). Each of these funding bodies will be reimbursed for any VAT incurred on these pupils.
What if I pay my child’s school fees in advance?
The government will legislate in the Finance Bill with retrospective effect, specifying that fees paid from 29 July 2024 for the term starting in January 2025 onwards will be subject to VAT.
When can private schools VAT register?
Private schools that are not currently VAT-registered will need to register with HMRC in line with the normal VAT rules from 1 January 2025. 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, which is when the Budget will be taking place. Schools who do currently make taxable supplies can voluntarily register for VAT ahead of 30 October.
Can I reclaim my input VAT?
Registering for VAT allows private schools to reclaim VAT incurred on goods and services used to make taxable supplies. However, since many private schools will have purchases used for both business and non-business purposes, the amount of VAT that can be reclaimed will be subject to partial exemption rules.
Additionally, VAT on goods purchased up to 4 years before VAT registration, if still in stock, can typically be reclaimed. VAT on services received up to 6 months before registration can also generally be recovered.
Paschal Okonkwo
View my articlesTags: VAT
