by Meera Rajah
5 October 2023Newsletters and Updates
by Meera Rajah
The Labour Party has this week reaffirmed its commitment to remove the VAT exemption from independent school fees if elected at the next general election.
The UK’s VAT treatment of different education providers is complex. Independent schools which are charities or not-for-profit bodies, unable to distribute profit, are currently classified as an ‘eligible body’ so that school fees and other closely related supplies are VAT exempt. The Labour Party, rather than challenging charitable status of independent schools, has said it that it would simply remove that ‘eligible body’ status. School fees would become VAT standard rate rather than VAT exempt, which is likely to cause fees to increase.
Of course, the Labour Party will need to win the next general election to implement its proposals.
Despite its promise to remove that ‘eligible body’ status within the first year of office, it is not possible to put a firm timeline on the proposals, meaning VAT on school fees may not be chargeable until 2026 or even later.
Independent schools should not, however, ignore the Labour Party’s promise and should take time to fully understand the consequences and plan for possible change.
Currently independent schools that are eligible bodies will have a significant restriction on the recovery of VAT on costs and expenses. Once fees become subject to VAT, this restriction will end or will greatly improve, so the net value of school costs will fall. Consequently, an independent school will not have to increase fees by a full 20% to remain with the same net surplus or “profit”.
Schools will recognise the impact that a significant increase of school fees will have on parents, many of whom make significant sacrifices to educate their children. But mitigating that increase is an option to explore.
UK VAT rules are guided by the ‘time of supply’ that determines when the tax is to be paid to HMRC. A “basic tax point” is created when a service is complete, but an “actual tax point” is created when payment is received or an invoice issued before the basic tax point.
It may be possible for a school to invoice and take payment of school fees up-front and before the VAT status of school fees changes to avoid the additional VAT charge for parents. Many schools already offer parents incentives to pay early and upfront, and an effective 20% pre-VAT discount might prove a powerful incentive.
There is however a note of caution. A Labour government could potentially choose to make the change effective not just from the date when law is adopted but from when first formally announced or alter the existing arrangements for deposits when a VAT rate changes. Schools need to consider well in advance fee increases, scholarships and academic bursaries, and the timing of fee payments.
A Labour government may proceed with these changes by way of consultation and school leaders should watch closely for further announcements and guidance.
Labour Party MPs and the Institute of Fiscal Studies have calculated that charging VAT on school fees would generate an additional £1.7bn in additional tax revenues, but that is only part of the picture.
The Labour Party’s proposals allow schools to reclaim much more VAT that currently, as these costs would in future relate predominantly to their taxable supplies. If recent major capital expenditure has taken place in the last 10 years that have cost more than £250,000, the Capital Goods Scheme will probably allow some additional recovery of the original VAT charged at the time of purchase. Any future capital expenditure that incurs significant VAT charges could also be reclaimed. It could provide a welcome windfall for many schools.
When independent schools are planning major capital works they may wish to consider deferring the start date until the VAT landscape is a little clearer.
For more information, please contact our Indirect Tax Services team.