VAT on Private Schools: 4 Key Considerations

The UK government has confirmed significant changes to the taxation of private school fees, set to take effect from 1 January 2025. This applies to all fees paid after 29 July 2024 when they relate to school terms after 1 January 2025. This move aims to raise additional revenue for public services, including state education, by applying the standard 20% VAT rate to private school fees.

What does the addition of vat on private schools mean?

The government has clarified that this change is not intended to impact pupils in private education with special educational needs. If a pupil is placed in a private school and the Local Authority funds their place, the Local Authority can reclaim the VAT charged. This ensures that the addition of VAT will not affect the ability of such students to attend private schools based on their needs. However, if parents send a special needs child to a private school without Local Authority funding, this will be treated the same as any other child.

As such, from 1 January 2025, education and vocational training provided by a private school or a “connected person” for consideration will be subject to VAT at the standard rate. However, other supplies closely related to education will continue to be exempt from VAT when charged separately for direct student needs (such as catering, art, and craft supplies), except for boarding fees which will also be standard-rated.

Additionally, nursery provision and other welfare-type services (such as breakfast and after-school clubs) will remain exempt under the welfare exemption, and VAT will only be charged for children from their first year of primary education. Consequently, many private schools may find themselves making both taxable and exempt supplies from 1 January 2025. As such, it will be important for schools to consider the different types of supplies they will be making, and the associated VAT liability to ensure that they are getting the VAT treatment correct.

Is this change to VAT on Private Schools significant?

Given the current VAT treatment of private school education, this may be the first time a school will have to register for VAT. This not only comes with the additional burden of charging VAT on school fees and ensuring their systems can handle VAT charges but also with complexities on how the schools can meet their Making Tax Digital (MTD) obligations. Schools will need to maintain digital records and use compatible software to submit VAT returns.

Managing VAT recovery will also be complex, particularly if schools provide both taxable and exempt supplies. Schools will need to carefully navigate these complexities to ensure compliance. They should start preparing now to understand the new VAT obligations, update financial systems, and train staff to be ready for the changes by 1 January 2025.

These changes are significant, and private schools need to prepare thoroughly to ensure compliance and manage the financial implications effectively.

We have set out some of the key considerations for schools in advance of the VAT changes.

1. VAT Registration

1. Threshold for Registration: Private schools must register for VAT if their taxable turnover exceeds the VAT threshold, which is currently £90,000. This includes income from tuition fees, boarding fees, and other taxable supplies. From 30 October 2024, schools must ensure they monitor the income they receive which relates to terms from 1 January 2025 so that they register from the correct date and submit their application in time.
2. Registration Process: Schools can register online through the HMRC website. The process involves providing details about the business, including turnover, business activities, and bank account information. Schools which already make some level of taxable supplies can apply to register for VAT now on a voluntary basis (understanding that these supplies will then be subject to VAT at 20% from the date of registration rather than from 1 January 2025). Schools which do not currently make taxable supplies will be able to VAT register from 30 October 2024.

2. Administration and Compliance

1. VAT Returns: Once registered, schools must submit VAT returns, usually quarterly. These returns detail the VAT collected on fees and other taxable supplies, as well as the VAT paid on purchases. Consideration should be given to the VAT return stagger which best suits the flow of income in and out of the school to best manage cash flow and the impact of these changes.
2. Record Keeping: Accurate record-keeping is essential. Schools must maintain detailed digital records of all transactions, including invoices, receipts, and VAT calculations. These records must be kept for at least six years.
3. Compliance: Schools must comply with all VAT regulations. We have identified key pressure points below:

• Issuing VAT invoices – ensuring the relevant information is held and that the system is capable of generating invoices containing all of the required information for the invoice.
• Charging the correct VAT rate – where there are a mix of supplies with differing VAT treatments, ensuring the correct VAT rate is applied to each line item (school trips, before and after school clubs, sporting classes etc.).
• Ensuring VAT is declared at the correct time – tax points need to be considered where there are different invoice and payment dates covering several terms/the payments are on a set schedule to ensure that VAT is not declared late.
• Complying with Making Tax Digital requirements. This includes:
  • keeping and maintaining the records specified in the regulations
  • preparing VAT Returns using the information maintained in those digital records
  • communicating with HMRC digitally through our Application Programming Interface (API) platform

Non-compliance can result in penalties and interest charges.

3. VAT Recovery

1. Input VAT: Schools can reclaim VAT paid on purchases related to their taxable activities. This includes goods and services used directly in providing education and boarding. Schools can also reclaim a portion of the VAT they incur on overheads (costs which relate to both their taxable supplies and exempt supplies – see partial exemption). In practice, determining the amount of VAT that can be recovered is often one of the most complex aspects of the new rules. Schools frequently incur costs which support a range of taxable, exempt and non-business activities, requiring careful analysis before recovery can be determined. Examples include premises costs, professional fees, IT systems, marketing expenditure and shared administrative costs. 
2. Capital Goods Scheme: The Capital Goods Scheme allows schools to adjust the amount of VAT reclaimed on high-value capital assets over several years (10 for land, buildings and engineering works and 5 for computers/computer equipment). This applies to assets like buildings and expensive equipment, ensuring that VAT recovery reflects the actual use of the asset over time. The introduction of taxable education can also create opportunities to revisit historic capital expenditure. Where schools have undertaken building projects, refurbishments or significant IT investments within the last 5 or 10 years, additional VAT recovery may now be available through the Capital Goods Scheme (“CGS”) adjustment process. Therefore, if schools have undertaken capital projects in the last 5/10 years, there is now the opportunity to revisit this and make adjustments for the remaining intervals. However, CGS calculations can be complex and require detailed analysis of historic expenditure, original VAT recovery positions and the current use of the assets. Schools should therefore consider reviewing any significant capital projects undertaken during the relevant adjustment periods. 

4. Partial Exemption Methods

1. Partly Exempt Businesses: If a school provides both taxable and exempt supplies (e.g., education and fundraising events), it is considered partly exempt. This means it can only reclaim VAT on purchases related to its taxable activities, as well as a portion of the VAT it incurs on overhead costs (such as audit fees). Whilst VAT on tuition fees itself is relatively straightforward, many schools generate significant amounts of ancillary income from a wide variety of activities. In our experience, determining the correct VAT treatment of these income streams has been one of the most complex areas arising from the VAT changes and is often where schools seek VAT advice. Activities that frequently require detailed VAT analysis include school trips, overseas visits, transport arrangements, catering, boarding, clubs and societies, extra-curricular activities, holiday clubs, fundraising events, donations, bursaries, sponsorship income, facility hire and educational resources. The VAT treatment can vary significantly depending on the precise facts. For example, a supply may be standard rated, exempt, zero rated, outside the scope of VAT or subject to the Tour Operators Margin Scheme (TOMS). Small differences in how an activity is structured can result in very different VAT outcomes. Getting the correct VAT treatment is important not only from a compliance perspective, but also because it can have a significant impact on VAT recovery. Incorrect classification of income streams can affect the amount of input VAT recoverable, the school’s partial exemption position and whether a special method should be considered. As schools often have a mixture of taxable, exempt and non-business income streams, a detailed review of all sources of income should be undertaken rather than focusing solely on tuition fees.  
2. Standard Method: The standard method for partial exemption involves calculating the proportion of VAT that can be reclaimed based on the ratio of taxable to total supplies. Before applying the standard method, schools must first directly attribute costs to taxable and exempt activities where possible. Only costs that support both taxable and exempt activities should be included within the residual partial exemption calculation. 
3. Special Methods: Schools can apply to HMRC for a special method if the standard method does not accurately reflect their VAT recovery. This might involve a more tailored approach to calculating recoverable VAT. In some cases, the standard turnover-based calculation may not produce a fair reflection of the actual use of expenditure, particularly where exempt income is relatively small but consumes a disproportionate amount of resources. In these circumstances, a special partial exemption method may be worth considering. Depending on the mix and nature of supplies made by schools, and the value of any exempt supplies vs the actual use of those costs, it may be worthwhile considering whether a special method is more appropriate.

How can AAB help?

We can provide VAT assistance as follows:

• Use of our bridging software should your systems not be capable of submitting the VAT return to HMRC. Given most schools use a Sage system which is not MTD compatible, we can  utilise our software which allows the return to be submitted in an MTD compliant way, without the need for huge system changes.
• VAT registration assistance. Given the complexities around the effective date of registration, we can advise on the date of compulsory registration and assist with the application process.
• VAT advice in respect of the liability of the supplies you make. Given items closely related to education can still benefit from the exemption, we can assist  by providing advice on the VAT treatment of the variety of supplies being made where they are identified separately to the school fees/boarding element.
• VAT-specific training for staff responsible for coding invoices/making tax decisions.
• VAT recovery advice, including support with partial exemption calculations, business/non-business apportionments, special method reviews and retrospective capital goods scheme claims. We have assisted numerous schools with reviewing complex income streams such as school trips, extra-curricular activities, transport, catering and bursary arrangements to ensure the correct VAT treatment is applied and that maximum VAT recovery is achieved. 

The introduction of VAT on private school fees requires careful planning and administration. Schools must ensure they are registered for VAT, maintain accurate records, comply with VAT regulations, and understand the methods for VAT recovery and partial exemption. By doing so, they can manage the financial impact of these changes effectively.

If you have any further questions or need specific advice, we are happy to provide additional assistance, please do not hesitate to get in contact with Gabrielle Bird, a member of our Indirect Tax Team or your usual AAB contact.