Private school taxation: new year, new fees

Private schools in the UK have faced significant VAT changes as the government removed the VAT exemption for education provided by these institutions. From 1 January 2025, education services as well as boarding services supplied in close connection with educational activities became subject to VAT at the standard rate (20%). This shift required schools to carefully evaluate their operations to ensure compliance while minimizing the financial impact.

Now seems to be a good time to take stock as schools and their advisors are coming up for air. What is clear is that in the lead up to the new rules, school bursars and their teams were really stretched. With changes of this magnitude the devil is in the detail and lots of questions were asked. Whilst HMRC did establish a means of responding, their response often lacked clarity and sometimes contradicted earlier advice. One example where there is HMRC-generated confusion is school meals; some schools will charge VAT on school meals whilst others continue to treat it as exempt from VAT. Transparency on whether breakfast and evening meals are exempt alongside lunch is also needed. 

There is a possibility that in the rush to implement the new legislation, HMRC has failed to really consider whether schools can utilise a valuation rule that would allow many to apply a marginal VAT rate of 4% to boarding services in excess of 28 days. If so, this would represent a significant saving for parents – many of whom have expressed a growing concern about the affordability of providing their children with a private education. To contextualise, if current boarding fees are £5,000 per term, applying a marginal VAT rate of 4% would save parents £800 per term.

HMRC’s stock answer when asked this question is that the new VAT legislation means VAT at 20% is due on boarding services that are closely related to education, and the valuation rules are not in point. HMRC is therefore denying the use of the relief which applies to supplies of accommodation in a hotel, inn, boarding house or similar establishment. School boarding services come in all shapes and sizes, and whilst they are not akin to a hotel or inn, the clue might be in the name ‘boarding services’; in that the provision amounts to bed and board, as well as the use of shared facilities. 

In the lead up to the introduction of VAT, schools and their representative bodies did not have the bandwidth to fully explore the use of the relief, and it is anticipated that this will now be given proper consideration. However, parents may not see an adjustment to fees paid anytime soon as it will be difficult to transition, and the sector may need to litigate. The costs of doing so can also be prohibitive.

Despite best intentions, legislation implemented at pace with limited consultation often results in unintended consequences. It has already been identified that further education colleges will also be caught in the widening of the VAT net. HMRC has confirmed that they expect colleges which have historically exempted their education services to 16 to 19-year-olds to account for VAT on the funding they receive from 1 January 2025, VAT will also be due on vocational income, whereas other colleges have a choice. HMRC’s approach to further education funding has created uncertainty which puts colleges in an almost untenable position. Colleges that choose to account for VAT on educational income will be able to recover VAT on costs. However, colleges should undertake a detailed financial impact assessment in advance and be sure to implement an appropriate mitigation strategy should the VAT landscape change either as a result of ongoing litigation or VAT legislation. Failure to do so could result in a hefty VAT bill in several years’ time.