Private Schools and VAT:
Labour Publish New Details on Policy
Labour has today published new details on it's oft-controversial plan to change the way VAT is applied to private schools. Perhaps not coincidentaly following on from the news that there is a "£20 billion black hole" in the country's finances, the policy is intended to generate significant revenue but has in turn, been met with significant backlash. Labour intends to remove the current VAT exemption for private school fees, including both tuition and vocational training, subjecting these fees to the standard VAT rate of 20%. The change is part of a broader effort to redistribute educational funding and improve state education services.
Key Elements of the Proposal
Removal of VAT Exemption
- Effective Date: From 1 January 2025, all fees paid for private school education and vocational training will be subject to VAT at the standard rate of 20%.
- Scope: This applies to all private schools across the UK, including those in Scotland, Wales, and Northern Ireland. The business rates relief removal is specific to England due to devolved governance on this matter.
- Definition of Private School: The legislation defines a private school as any institution providing full-time education for pupils of compulsory school age or younger, and where fees are payable. This includes sixth form colleges but excludes nursery schools and non-maintained special schools.
- Board and Lodging: Boarding services closely related to education will also be taxable, ensuring comprehensive coverage of VAT on all major services provided by private schools.
Anti-Avoidance Measures
- Connected Persons Rule: To prevent avoidance of VAT through outsourcing, the legislation treats supplies by closely connected bodies as if made by the private school itself. This includes bodies with financial, economic, or organizational links to the private school.
- Pre-payment Rules: Parents cannot avoid VAT by pre-paying fees before the legislation comes into effect. Payments made between 29 July 2024 and 30 October 2024 for services provided after 1 January 2025 will be subject to VAT.
Impact on School Fees
- Fee Increases: While schools will charge VAT, the government expects schools to mitigate the impact through cost management rather than passing the full 20% increase to parents. Strategies may include reducing surpluses, cutting non-essential expenditures, and minimal fee increases.
- VAT Registration: Private schools not currently VAT-registered must register and comply with VAT requirements, including charging VAT and submitting returns.
- Input VAT Recovery: Schools can reclaim VAT on their expenses (input VAT), potentially offsetting some of the VAT they charge (output VAT).
Support for SEND Pupils
- Exemptions: Local authorities (LAs) will be able to reclaim VAT on fees for pupils with SEN placed in private schools when their needs cannot be met in the state sector.
- Funding: Government bodies responsible for funding these placements will be compensated for the VAT, ensuring parents are not impacted.
- Details by Nation: The approach varies by region:
- England: Local authorities will fund and reclaim VAT on SEND placements named in Education, Health and Care Plans (EHCPs).
- Scotland: Coordinated Support Plans (CSPs) or local authority assessments will guide placements and VAT recovery.
- Wales: Individual Development Plans (IDPs) and Statements of SEND will be used for placements, with local authorities reclaiming VAT from 2028/29.
- Northern Ireland: The Education Authority will use the Section 99 VAT Refund Scheme for VAT recovery on SEND placements.
Business Rate Changes
- Charitable Rates Relief: From April 2025, private schools in England with charitable status will no longer be eligible for the 80% mandatory charitable rates relief.
- Legislation: This change will be legislated through a Local Government Finance Bill, impacting school finances but expected to have a minimal effect on average fees.
- Special Educational Needs Consideration: The government will assess the impact on private schools providing for SEN pupils through an EHCP to mitigate adverse effects.
Administrative Measures
- HMRC Guidance: HMRC will provide guidance and support to private schools for VAT registration and compliance, including bespoke guidance products, updated registration systems, and additional resources.
- Partial Exemption Calculations: Specific guidance on how private schools should perform partial exemption calculations for mixed supplies will be issued.
Expected Outcomes
- HMRC Guidance: HMRC will provide guidance and support to private schools for VAT registration and compliance, including bespoke guidance products, updated registration systems, and additional resources.
- Partial Exemption Calculations: Specific guidance on how private schools should perform partial exemption calculations for mixed supplies will be issued.