How could a Labour government impact VAT for independent schools?

The independent schools sector is facing possibly one of its biggest recent changes. The next General Election could bring the Labour Party to power on a manifesto that includes removing the VAT exemption for independent school fees. Whether this occurs, and the precise changes to legislation that would enact it, are yet unknown.

Just how much money this change would generate for the public purse is also unknown, and we leave others to undertake the detailed economic modelling required. What’s clear is that the sector needs to start planning for this potential change and to understand the implications going forward.

Current position

Currently, UK law exempts the provision of education by an ‘eligible body’. An eligible body includes an organisation, that is a not-for-profit body, which reinvests any surplus it makes from providing education, back into education – most independent schools sit here. Therefore, charities that are ring-fencing their education operations aren’t able to charge VAT on education income; instead it’s VAT exempt.

As education income for these organisations is exempt, they can’t recover any of the VAT costs that they incur. Although the largest outgoing will be staffing costs of employees which doesn’t bear VAT, capital expenditure on new buildings and on maintenance of existing buildings bears VAT and this becomes an additional cost to the school.

Assuming that VAT at the current standard rate of 20% becomes due on fees, schools will need to VAT register (if they aren’t already) and consider how much of this tax charge to pass on to families.

Future position

As with all other VAT registered businesses, schools will be charging VAT on income and so will be able to recover VAT that is incurred on their related expenditure as well as a proportion of overhead costs (under the partial exemption rules). This means an improvement in the VAT recovery position of capital expenditure for teaching space, overseas services bought in, maintenance costs etc.

It’s important to recognise that schools are likely to still have VAT exempt income from, for example, after school provision, examination fees etc, unless any changes made by a new Labour government extend further. Depending on how bursaries are structured and the level at which these are given, fees that are subsidised with a bursary may also be subject to VAT (meaning the bursary needs to increase) or where a full bursary results in entirely free education, the school may need to consider whether it needs to undertake a non-business calculation to restrict the VAT on costs it recovers.

Actions to consider

1. As well as modelling the financial impact on budgets and fee levels, some schools may be encouraging upfront payment of fees now before any change in the law takes effect. Probably unaffordable for many families, but this may protect any fees paid ahead of a legislative change under the ‘time of supply’ rules. Importantly, the fees must be actually paid and the monies available to the school for its use. There are suggestions that legislation will be introduced to prevent fees in advance payments from benefitting from exemption, but this won’t be certain until the law is drafted.

2. It’s likely that the terms and conditions currently in place with families don’t mention VAT. If they don’t, it would be sensible to think about amending them to allow VAT to be charged as applicable by stating prices are ‘VAT exclusive’. The timing of such a change is probably most logically ahead of the start of the 2024 academic year.

3. Capital projects that can be deferred until after the General Election, or when there is more certainty of timing of this change, could benefit from better VAT recovery. Where that is not possible, capital expenditure on property projects of £250,000 or more plus VAT, will still benefit from some VAT recovery but this will be given under the ‘Capital Goods Scheme’ and will not provide full recovery unless the project can be deferred.

4. Start looking at whether your finance processes and systems can manage VAT including reporting data for VAT returns, applying the correct rate of VAT on all of your income streams, and guidance to staff who need to understand the VAT profile of your school. If you already have a trading subsidiary in place to operate your commercial activities, consider whether you would be better to VAT group register it with the charity.

It’s important to note that VAT on fees would not be recoverable by an employer or company, so moves to change invoicing arrangements for school places are unlikely to be successful. In addition, salary sacrifice for school fees does not give rise to any tax benefits and will potentially create payroll and benefit in kind issues – specialist advice should always be taken if this is being contemplated.

Next steps

This period of uncertainty is unsettling for schools but taking action now to understand how your school might be affected will enable decisions to be taken as soon as necessary.

I discuss the implications in more detail with tax partner Dominic Carter on our recent episode of the Larking Gowen Insights podcast, you can listen here or through the usual platforms such as Spotify or Apple Podcasts.

Larking Gowen is here to support you through this process, do get in touch with your Larking Gowen contact if you would like to arrange an initial discussion, alternatively our VAT Director, Gillian McGill, is available to you on gillian.mcgill@larking-gowen.co.uk

You can also download our brochure on VAT for independent schools here.

Gillian McGill