A Taxing Education

Given the current domestic political climate many businesses and individuals are taking particular note of proposals by the Labour Party should it form the next government.

One of the recent notable policy announcements is a pledge to remove the VAT exemption from private school fees. This would make these fees subject to VAT at 20%, and so likely to result in a noticeable increase in the private school fees payable by parents. This additional cost could of course lead to potential reductions in demand for private school places.

Under current UK VAT legislation, the supply of education by an ‘eligible body’- which includes private schools, is exempt from VAT. The proposal would remove ‘eligible body’ status, resulting in the VAT position being similar to that currently applicable for profit-making education providers.

Mitigating measures

Given the likely negative impact of such a change for private schools, many are considering how the impact of this potential change can be mitigated.

One option is for private schools to offer advance payments of school fees to parents whilst VAT exemption status remains applicable.  Many schools already have existing schemes for payment of fees in advance (often with the incentive of a discount).

Under UK VAT rules, the ‘tax-point’ determines both the date any VAT falls due and the relevant VAT rate applicable to the supply at that date. For a ‘continuous’ supply of services (such as education) the VAT date is determined by the earlier of when a VAT invoice is issued or when payment is received. As such, where fees are paid ‘up front’ before any changes to the VAT status of private school fees, in principle VAT would not be due on these sums paid.

If this option is considered, thought should be given to the potential impact of annual fee increases, scholarships or bursary awards.

It is important to note that any VAT legislative changes may be made effective from the date the change is first announced following any change of government, rather than from any later date that the law is passed. This means private schools should consider the options well in advance of any potential change of government.

VAT recovery by private schools

One likely benefit of the proposed changes is that it will permit private schools to increased recovery of VAT costs incurred. Currently, as a VAT exempt supply, associated VAT costs incurred are irrecoverable and must be borne by the private schools. As well permitting VAT recovery on general expenditure, this could have a particular benefit for any large capital projects such as building construction or refurbishment (which would likely incur significant VAT costs) . Private schools therefore may wish to consider the timing of any such planned projects and to consider whether deferring until the VAT position is certain is a viable option.

In addition, where private schools have incurred VAT bearing capital expenditure on land or buildings within the last 10 years it may be possible for it to recover a proportion of this VAT cost from HMRC.

Other supplies by private schools

Goods and services that are ‘closely related’ to education, such as transport, boarding accommodation and school trips are also exempt from VAT. It remains to be seen whether the proposed changes to school fees would also impact the VAT liability of such supplies. Advice should be sought following any such changes to determine the VAT implications which arise.

It is important that private schools carefully consider the potential impact of these changes and potential options that can be taken, in order to ensure where possible that the VAT position is optimised whilst considering the wider operational requirements.