Private schools, VAT and tax – time for class?
29 November 2022
Dating back to 2017, the addition of VAT to private school fees has been a clear part of Labour’s manifesto and policy – a measure which Labour has claimed could raise £1.7bn in VAT. Further still, it is also Labour’s policy that private schools would lose their charitable status. Such changes could have a significant impact for private schools. But how can private schools plan ahead when the changes may never come and if the full impact of the potential changes can’t be known?
Changing the VAT liability of private school fees sounds simple enough – one day they could be VAT exempt, the next they would have VAT applied. However, in VAT there is often a domino effect resulting in other VAT considerations which private schools need to be aware of. For example, having private school fees be subject to VAT means that VAT incurred on expenditure becomes recoverable and there is a potential windfall for a private school where there has been large capital expenditure in the past ten years.
A change in VAT liability also brings into consideration the tax point rules and when a supply takes place – would this be deemed to be before or after private school fees have become liable to VAT? Could a VAT charge on private school fees be mitigated or removed by parents paying for their child’s entire school education in full before VAT became applicable?
The same domino effect could happen with the loss of charitable status. Many private schools reinvest their profits so this in itself might not have a significant impact. However, the loss of charitable status could also result in the loss of mandatory relief on business rates (currently up to 80% in England), which would likely have a more significant impact.
There is clearly a lot which would need to be considered and analysed before these changes could be implemented. Not least, research for the Independent Schools Council published in 2018 suggests that with VAT reclaims and the movement of pupils into the state sector, the introduction of VAT to private schools’ fees would cost the government more than £400m by its fifth year. However, there are concerns that the changes could be brought in quickly and not provide private schools the time required to prepare.
There are too many unknowns to confidently plan for VAT and tax changes but the matter should be included on risk registers for a start. Changes to VAT have commercial considerations, including if any VAT liability would be passed on to parents, and communications on these points can start to be managed, even if there are not any answers yet.
What would support private schools now is if a timeline could be put in place for the implementation of changes to VAT and loss of charitable status if there is a change of government. That if will likely need to come first though.
Changing the VAT liability of private school fees sounds simple enough – one day they could be VAT exempt, the next they would have VAT applied. However, in VAT there is often a domino effect resulting in other VAT considerations which private schools need to be aware of. For example, having private school fees be subject to VAT means that VAT incurred on expenditure becomes recoverable and there is a potential windfall for a private school where there has been large capital expenditure in the past ten years.
A change in VAT liability also brings into consideration the tax point rules and when a supply takes place – would this be deemed to be before or after private school fees have become liable to VAT? Could a VAT charge on private school fees be mitigated or removed by parents paying for their child’s entire school education in full before VAT became applicable?
The same domino effect could happen with the loss of charitable status. Many private schools reinvest their profits so this in itself might not have a significant impact. However, the loss of charitable status could also result in the loss of mandatory relief on business rates (currently up to 80% in England), which would likely have a more significant impact.
There is clearly a lot which would need to be considered and analysed before these changes could be implemented. Not least, research for the Independent Schools Council published in 2018 suggests that with VAT reclaims and the movement of pupils into the state sector, the introduction of VAT to private schools’ fees would cost the government more than £400m by its fifth year. However, there are concerns that the changes could be brought in quickly and not provide private schools the time required to prepare.
There are too many unknowns to confidently plan for VAT and tax changes but the matter should be included on risk registers for a start. Changes to VAT have commercial considerations, including if any VAT liability would be passed on to parents, and communications on these points can start to be managed, even if there are not any answers yet.
What would support private schools now is if a timeline could be put in place for the implementation of changes to VAT and loss of charitable status if there is a change of government. That if will likely need to come first though.
Ian Brown
Associate Director, VAT Planning & Advice
AUTHOR
Ian Brown
Associate Director, VAT Planning & Advice
