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VAT impact of advance payments for school fees

21 June 2024


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Many parents are considering making advance payments of their children's private school fees, in order to avoid the risk of VAT being added if the Labour Party wins the next election. The Labour Party election manifesto confirmed that it would remove the current VAT exemption for private school fees, so that the fees would become VAT standard rate.

The tax point for advance payments received by a school is the date when the monies were received or an invoice issued (whichever is earlier) and the VAT rate on this date applies, even though the education service is not provided until sometime in the future. Many schools already routinely offer a pre-payment option for fees, but apparently some schools have responded to this potential change in the VAT rate, by allowing parents to pay in advance for seven years of fees.

However, when a VAT rate is changed by legislation, it typically includes "anti-forestalling" provisions, which act to prevent a business from artificially moving sales in response to the rate change. Usually the anti-forestalling provisions apply from when the government formally announced the change, or a bill was presented to Parliament. It would be exceptional if the Labour government backdated the start of the anti-forestalling provisions to a current date for example before it was elected. 

If a newly elected Labour government does attempt to backdate the introduction of VAT on private school fees to an earlier date, it could generate tax disputes with schools. Some schools have clauses in their fee agreements that if the VAT rate subsequently changes from exempt to taxable, that the school has the right to charge an additional fee equal to the VAT.

If you wish to discuss this issue further, please contact the James Cowper Kreston Indirect Tax team.