Understanding the VAT changes for independent schools

As Larking Gowen’s VAT director, I’ve been talking about the potential for change around VAT and independent schools for some time. Most recently, the announcement on 29 July from Chancellor Rachel Reeves confirms the significant tax changes that will impact both independent schools and the families they serve. What is the Labour government’s tax policy for private schools and what does it mean for you?

The big announcement

The Labour Party had been hinting at this change during pre-election talks, and now it’s official: starting 1 January, 2025, VAT will be applied to independent school fees. This date was a bit unexpected, and schools will need to adjust their plans accordingly.

Additionally, anti-avoidance legislation has been introduced. This means that any fees paid on or after 29 July, 2024, for terms starting on or after 1 January, 2025, will be subject to VAT. So, attempts to pre-pay fees now to avoid VAT will not be successful.

Key dates and details

The critical date to remember is 1 January, 2025, when VAT begins to apply. Schools need to register for VAT before this date, but HMRC are saying to wait until after 30 October, 2024, when the Budget is announced. However, if there’s good reason, early registration is possible.

Who's affected?

The VAT changes apply to private schools charging fees for education, including sixth forms. Nursery fees, however, will remain exempt. For students with special educational needs and disabilities (SEND), there is some relief. If a local authority fully funds a child's placement at a private school due to SEND needs, they can recover the VAT. But for families paying out of pocket, VAT will still apply.

Financial impact

Parents should prepare for a fee increase. Mostly, it won’t be a full 20%, as many schools are estimating around a 15% increase. This is because schools will now be able to recover some VAT on costs, but since salaries (the largest expense) don’t incur VAT, the VAT recovery increase will not be on the majority of costs.

Another significant change is the removal of business rates charity relief for private schools, which could have a more considerable financial impact than the VAT changes for some schools.

Boarding fees and more

Boarding fees will now also be subject to VAT. However, items closely related to the supply of education, like schoolbooks and equipment, will retain their current VAT treatment. Catering is tricky: lunch in the dining hall remains exempt, but food for boarding pupils will be subject to VAT.

State boarding schools, however, are excluded from these changes and will maintain their current VAT status.

What should schools do now?

Schools should make sure their fees are advertised as VAT-exclusive and start communicating with families about the changes. They’ll also need to engage with accounting system providers to ensure systems can handle VAT correctly.

Schools not currently VAT registered should start recording VAT on expenses now to maximise recovery once registered.

Advice for parents

Parents should be cautious of schemes claiming to avoid or recover VAT through employers. These schemes do not work and could be fraudulent.

Final thoughts

Schools with trading subsidiaries, which are probably already VAT registered, are in a better position to handle these changes. They should consider group registering with the school to avoid VAT leakage.

The VAT introduction will significantly impact independent schools and families. Staying informed and prepared is essential.

Need help?

You can find out more about VAT fees for independent schools on our recent podcast here.

If you have any questions or need personalised advice, please get in touch. We're here to help you navigate these changes smoothly. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Gillian McGill