VAT on school fees – what you need to know

Before the 2024 general election, one of the Labour party’s headline policies was a pledge to introduce VAT on school fees. Now the party is in government, it has clarified how the policy will work and when it will be introduced. In this post, we look at how VAT on school fees could affect you.

When will VAT on school fees happen?

VAT on school fees will come into effect on 1st January 2025.

If I pay in advance, can I avoid VAT?

Before the election, the media reported that some parents were planning to pay up to seven years’ worth of fees upfront. In that way, they hoped to circumvent the addition of VAT on school fees.

The government has taken measures to prevent this happening. In a technical note, HM Treasury says that any fees paid ‘from 29 July 2024 pertaining to terms starting in January 2025 onwards’ will be subject to VAT.

This may seem like good news for parents who did pay fees upfront before that date. However, this very much depends on the terms of the payment. It’s worth quoting the technical note at length for clarity:

“The government is aware that, whilst many schools have always offered schemes enabling pre-payment of fees, there have been reports of increased numbers of parents utilising such schemes recently in an attempt to avoid these fees being subject to VAT. In many cases, the structure of these schemes means that the tax point has not yet been passed. For instance, if the scheme involved paying a lump sum to the school in advance, but the details of the supplies that the money was buying were not determined at the time the money was paid (i.e. if the money paid did not relate to specific terms’ fees that had already been set), HMRC stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due.”

In other words, if you’ve paid fees upfront it’s a good idea to talk to an accountant. They can check whether you’re likely to be liable for VAT. Otherwise there’s a good chance that the taxman will come knocking.

Are there exemptions to VAT on school fees?

Sometimes school fees are paid by local authorities. This might be in order to support a child with Special Educational Needs. It might also be as an alternative to foster care. Whatever the reason, local authorities will be able to claim a refund under section 33 of the Value Added Tax Act 1994.

Unfortunately, if your child has special educational needs and you have chosen to send them to a private school – and it is deemed their needs could have been met in the state sector – you will have to pay VAT on school fees.

Will VAT be applied to other services provided by private schools?

The only change will be that VAT will apply to private school tuition and boarding fees. The VAT regime will stay the same for other services. This means that things like school meals, transport, books and stationery, as well as before / after school childcare will remain VAT exempt. Services such as non-educational extra-curricular clubs (e.g. a football club where pupils aren’t formally trained) will continue to attract VAT.

Did you know about business rates?

While VAT on school fees has been in the spotlight for some time, less well known is the government’s plan to make private schools pay business rates. Essentially, private schools that are charities will no longer be able to claim charitable rates relief. Instead they will have to pay full business rates.

This change will apply to England, as it is a devolved matter. Before passing legislation, the government will consult with schools, particularly to determine how this change will affect pupils with special educational needs. However, government plans to make schools pay full business rates by April 2025. This is likely to push fees up further.

Need advice about VAT on school fees?

If you’d like any advice about VAT on school fees, please do speak to a THP accountant. They’d be delighted to help you. Similarly, if you need tax planning advice, get in touch today.