As the campaign rhetoric intensifies and manifestos are published, the Labour party has proposed applying the standard 20% VAT rate to independent schools, which were previously exempt. This change is expected to be directly passed on to students' school fees.
Under Labour’s plan, independent schools would need to pay 1/6th of their fee income in VAT to HMRC. However, there needs to be a careful balance to ensure that this fee increase does not drive students away from independent schools, leading to more students relying on an already burdened public school sector. The independent schools sector has warned that a 13% contraction could end up costing the public sector more than it generates in additional revenue.
According to the Institute of Fiscal Studies (IFS), adding VAT to school fees could raise an estimated £1.6 billion annually for HMRC. This estimate assumes an effective VAT rate of 15%, considering input VAT deductions.
While the proposal depends on the election outcome, there are ways to mitigate the impact for those affected.
Parents/Carers
Remuneration Planning:
Choosing private education is already a significant expense, often funded from income taxed at rates up to 48%, depending on earnings and residency. Parents likely won't be able to avoid VAT on fees if it is introduced, but careful remuneration planning can help minimise the tax paid on income used for education. Specialist tax advice should be sought to optimise tax positions.
Paying in Advance:
Parents who can pay in advance might benefit from doing so. However, schools offering advance payment options are expected to include a clause allowing them to charge VAT on top of payments if new legislation requires it. Parents should carefully review the terms of any agreements and be prepared for possible additional VAT charges.
Considerations for Independent Schools
VAT Exemption Before Implementation:
Schools allowing advance payments before any VAT status changes aim to secure VAT exemption on those payments. The VAT rules regarding tax points are complex, and schools should be cautious in such arrangements since it’s uncertain how new legislation will be implemented if Labour wins the election.
Partial Exemption:
Determining if parts of the services provided will remain VAT-exempt is complex. Currently, services supporting children with special needs or offering charitable or welfare services like pre-school education can qualify for exemption. Changes in legislation could complicate these exemptions further, and specialist advice may be needed.
Recovering VAT on Capital Development:
Schools that have recently undertaken significant building projects may benefit from recovering VAT on capital development works from the last 10 years. While this might improve cash flow short term, it is not expected to have a long-term positive impact. Labour has also suggested it might legislate against recovering VAT on historical capital works.
Performing VAT Calculations:
Although the change is uncertain and election-dependent, schools can perform simple VAT calculations now to assess the financial impact of the proposed change.
Boarding Schools:
Reports indicate that 32 boarding schools have been excluded from this potential VAT charge, but the specific definition of this exemption remains unclear.
We Are Here to Help
- Whether you work in the private education sector or are a parent/carer paying independent school fees, this proposed change could have significant effects. Our specialist personal tax, financial planning, and wealth management teams can assist individuals with remuneration planning to manage any fee increases efficiently.
- For organisations, our VAT specialists with expertise in the education sector can help fee-paying schools estimate the financial impact of this proposal.
- If you have any questions, please get in touch.
