With the removal of the long-standing VAT exemption for private education, the UK’s independent school sector has entered a period of rapid change. Since 1 January 2025, education and boarding services from independent schools have been subject VAT, creating operational, financial and compliance implications across the sector.

The financial impact is significant, and the operational impact should not be underestimated. Some schools were already VAT registered (for example, due to hiring out facilities). Many finance teams, however, are navigating VAT for the first time while also implementing cost efficiencies and exploring new revenue streams.

Complex VAT accounting in schools has put the sector firmly in HMRC’s spotlight. Inexperienced or underprepared schools may be exposed to greater risk.

This article outlines what HMRC VAT enquiries typically involve, what they mean for independent schools, and practical steps to manage compliance effectively.

VAT enquiries: what independent schools should expect

HMRC can inspect premises and records and will generally review the last four years of VAT accounting records, the statutory period for retrospective assessments (with longer look-back in cases of fraud).

HMRC usually gives notice by letter confirming an intention to visit. VAT officers do not open a fixed ‘enquiry window’ like direct tax colleagues. If the proposed date is not practical, perhaps due to key staff availability or a busy point in the school year – you can request an alternative.

The frequency of HMRC VAT enquiries varies by organisation size and activity. Increasingly, HMRC uses a targeted, risk-based approach: many reviews start remotely, with requested records provided digitally and follow-up as needed.

HMRC is likely to focus on the following areas:

• Income streams and activities: HMRC will check the correct VAT liability and of remaining VAT exemptions, especially fees-in-advance arrangements and review any non-business activities. Beyond core income, many schools have miscellaneous income with complex VAT treatments; these should be documented clearly.
• Expenditure and VAT recovery: HMRC will review direct attribution and the partial exemption calculation, including whether the capital goods scheme applies. They may check reverse charge procedures on services purchased from overseas (e.g., digital subscriptions or agents’ fees) and the correct use of charitable VAT reliefs (advertising and fundraising). Remember the general input VAT block on entertainment and motor cars.
• VAT processes and controls: HMRC will assess partial exemption methodology and timelines, including whether the standard method override applies. Where a partial exemption special method (PESM) is used, they will expect to see HMRC approval and periodic review of fitness-for-purpose. For non-business activities, apportionment should be demonstrably fair and reasonable.

HMRC is likely to scrutinise strategies that are sought to optimise the previous education exemption via fees-in-advance arrangements, an area of media interest. Expect challenge where arrangements appear artificial. Review the robustness of any schemes and how they differ from historic discount-led arrangements. Key checks include whether payments were received before 29 July 2024 and whether fees are allocated to a specific pupil and academic term.

Strategies to manage VAT compliance

Schools can take practical, proactive steps to prepare for a VAT enquiry:

Before the visit

Prepare your school in advance to ensure the HMRC review is efficient, accurate, and manageable. Consider these steps to get organised and mitigate risk:

• Sense-check HMRC’s request: is it reasonable or overly onerous? Where appropriate, offer a representative sample of documents.
• Critically review your processes and consider a pre-emptive VAT healthcheck.
• Disclose any errors at the outset. While this may not avoid an inaccuracy penalty, transparency can help mitigate it.

During the visit

Make the HMRC visit as smooth as possible by ensuring key personnel, documents and support are in place. Key actions include:

• Ensure key personnel are available.
• Prepare VAT workings and summaries, including partial exemption calculations.
• Use professional support, either with an adviser attending (common practice) or being available by phone.

Post-visit actions

Critically review any issues arising from the enquiry, identifying areas of weakness or risk.

• Check whether staff are adequately trained and have access to specialist resources where necessary.
• Ensure school governors are aware of the required controls and accountability.
• Update process notes if required and confirm contingencies are in place if key personnel are unavailable.

Next steps for independent schools navigating VAT compliance

In summary, VAT on private education marks a significant shift for the sector. Beyond the financial impact, independent schools face heightened compliance obligations and risk. With robust systems and targeted expert support, schools can navigate HMRC’s renewed focus with confidence.

To discuss how we can support you in navigating VAT compliance or preparing for HMRC enquiries, please contact Audrey Fearing.

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