Larking Gowen formal response to HM Treasury on VAT on Private School Fees

Applying VAT to Private School Fees and Removing the Business Rates Charitable Rates Relief for
Private Schools

We write in response to the Government's consultation on proposed implementation of VAT on Private
School Fees draft legislation published on 29 July 2024.

About Larking Gowen LLP

Larking Gowen LLP is a firm of chartered accountants and business advisors, based in East Anglia with a total
of 6 offices across the counties of Suffolk and Norfolk. Larking Gowen have total staff of 372 and 24 partners.
Included within the firm we have a specialist VAT department, that provides tailored VAT advice to sole
traders, partnerships, large businesses, and not for profit organisations, including schools.
As part of our service to clients, we have posed the questions in this consultation to the sector, to gather their
thoughts and opinions on the draft legislation published as well as considering any practical issues that may
come to light from our own experience.

General comments
This consultation period seeks views and comments on the draft legislation published in respect of VAT being
applied to private school fees. The new legislation being introduced is intended to generate additional income
for the Treasury, which will be used in public finances to improve education and outcomes for young people.

The additional revenue from the VAT will fund public services, including education.

The Treasury comment that they expect schools to absorb this VAT increase, which will have a negative impact on their net income, reducing operating margins. Any VAT passed on to parents/guardians will mean an increase in school fees to the end consumer, which may not be affordable or practical. This may mean that
children will be moved to state schools, further increasing the burden on publicly funded schools.

Consultation questions

Question 1: Does the above definition of private schools capture all private schools in the UK?

We believe the definition does capture all private schools in the UK.
However, the reference to schools approved under section 342 Education Act 1996 introduces an element of
uncertainty for some non-mainstream special schools who are unsure whether this applies to them or not.

We understand that obtaining clarity on this point is not quick or simple, and would request that Treasury
issues a list of such schools that it believes will remain exempt.

There is uncertainty as to whether, and to what extent, the legislative changes will apply to schools that have
students over the age of 19 on roll and who are therefore not of compulsory school age. We assume these
pupils will revert to being in receipt of exempt education but clarity would be welcome.

The draft legislation does not mention Wales or Northern Ireland. Presumably this means that VAT on Private
School Fees will be legislated separately.

Question 2: Does this definition inadvertently capture any organisations that this policy does not
intent to capture?

We received limited responses to this question but would note that the legislation as drafted does not
distinguish between private schools raising invoices for payment wholly by a Local Authority and those
education providers that are wholly grant-funded, but arguably following the case of Colchester Institute still
“in business”.

Question 3: Does the “connected persons” test capture the relationships that exist between private
schools and third parties?

We have no comments on this question.

Question 4: Does this “connected persons” test inadvertently capture any relationships that it is not
intended to capture?

We have received a mixed response in relation to this question indicating some uncertainty here, with
practicalities and application of the law, specifically as charities have an ethical commitment to the wider
community to engage and to support. The implications for funders and donors with respect to their
interaction with schools will need to be mindful of these requirements.

Question 5: Does this approach achieve the intended policy aims across all four UK nations?
We have received responses largely indicating that the policy aims will not be met, or at least there is no
certainty that they will be met.

All private schools provide a quality education (reflected in the inspection regime applicable to them), and
some follow a curriculum which is alternative to that which is offered in mainstream state schools.
In a February 2024 debate on the proposal, Helen Hayes, then shadow minister for education, said:

"The Labour Party believes in parental choice, but the conversation today has to take place with
fairness in mind. In 2022-23, average independent school fees were £15,200, but average state school spending per pupil was £8,000."

In the responses that we have received, it is clear that the average figure is wholly unrepresentative of the
majority of schools, with some reporting spending per pupil being less than within the state sector where
fees are kept at an affordable level.

A number of respondents commented that the approach taken to raise tax revenues is financially unproven,
and does not answer the question as to why recruitment of teachers and retention is challenging in the
mainstream state sector.

This legislative change will also restrict access to private education for many children, including those with
SEND or learning difficulty requirements, those who receive bursaries, and those in receipt of scholarships.

Very many children with SEND will not have been able to obtain an Education Health and Care Plan (EHCP)
due to the huge delays within that system.

The position for armed forces families is still to be legislated and we would assume that a similar approach is
taken for Continuity of Education Allowance payments as for Local Authority funded SEND places. In this case, a change in the operation of CEA will need to be implemented so that the Ministry of Defence is invoiced, rather than parents.

The policies being introduced will also place further strain on public owned schools, a number of fee charging
schools have reported that they are experiencing withdrawals of children already. This means that these
children will be placed in state schools, further adding burden to an overstretched sector, with the timing of
this change forcing families to take a decision to move their children perhaps midway through the academic
year.

Practical issues and further comments

The introduction of VAT part-way through the academic year has created a high level of anxiety and
uncertainty amongst parents and children. The main reason for this is because the typical contract between
the school and parents requires a full term’s notice to give up a school place. The 29 July 2024 announcement
for implementation on 1 January 2025 means there is no ability now for parents who cannot afford increased
fees to give adequate notice to move their children.

Due to their new VAT registration, schools are now unexpectedly having to fund Making Tax Digital compliant
software, provide training and hire additional staff to undertake these administrative roles. None of these
items will have been included within budgets for the year, resulting in a direct effect on the funds available
to educate children. The administrative burden of the new legislation will have a hugely disruptive effect on
schools particularly those that are smaller in size.

The overlaying of state school structures to the independent school sector means that the starting point for
the application of VAT is by reference to compulsory school age which will be difficult for schools that operate
a kindergarten system for children aged 3-6. The legislation as drafted means that in classes of children
where one child may reach school age in a class, the whole class then becomes chargeable to VAT regardless of whether some of those children are, say, aged 3. The legislation as drafted has unfair consequences for children in mixed age classes. Confirmation as to whether this is the intended implication of the legislation would be welcome.

The stated legislative intention to continue exempting “closely related” supplies introduces a further element
of complexity with respect to valuing these supplies without any certainty as to what HMRC will find
acceptable. Will lunches provided by a boarding school remain exempt, whilst breakfast and supper will be
taxable? Will consumables used by children in their learning be able to be charged separately without VAT?

As charities, independent schools provide a number of bursaries to their children (including free places to
children fleeing Ukraine); we would therefore welcome confirmation on HMRC’s treatment of these activities,
specifically with respect to partial bursaries and when these will be viewed as “non-business”.

Requests to assist implementation

We would strongly recommend that a delay in implementation, even by a matter of months, be considered.
Given further time before the imposition of VAT, we would suggest that a sector-wide partial exemption
framework agreement could be drawn up and communicated by HMRC. This would provide all independent
schools with clarity as to how HMRC will treat the sector and ensure that all schools are on a level playing
field when it comes to VAT.

Mindful that any delay is unlikely to be palatable, we would nonetheless request that a school specific
registration portal, or dedicated team, is put in place by HMRC to assist with this process. It is imperative that
these schools are registered on time, to avoid the delays that we have seen arise with many VAT registration
applications.

The further impact of rates relief removal is yet to be fully understood as this is not implemented by central
government, however, the double impact of VAT and rates hitting independent schools in the same financial
year cannot be underestimated. Given that the rates relief removal has not been fully communicated as yet,
a delay to its implementation to 2026 would be very welcome so that schools can assess the impact and
budget accordingly.

Schools need certainty in order to make reasoned financial decisions for their children; the current absence
of information hampers their ability to function properly with respect to cashflow forecasts, making
recruitment decisions, commencing capital projects etc with wide-reaching implications throughout society.

Do these changes impact you?

To discuss any of the above, please get in touch with our VAT Director Gillian McGill. Call 0330 024 0888 or email gillian.mcgill@larking-gowen.co.uk.