What is Labour's policy on placing VAT on private school fees?
Jonathan Main · April 11th 2024 · read
Who should read this?
Anyone with an interest in the potential change in the VAT liability of school fees under a Labour administration.
An internet search of the phrase “Labour Party VAT school fees” reveals over three million results. There has been an awful lot of speculation about the extent to which VAT will be imposed on school fees, the definition of a private school, and ways of mitigating the pressure on profits made by schools and the increased cost of paying for private education.
This article focuses on the clear path to changing the VAT liability of fees charged for private education and the ways in which you can mitigate against the increase in VAT costs on your income. As far as possible, this article avoids adding to existing speculation.
Start at the beginning
Exemption from VAT for primary and secondary education was introduced in the Finance Act 1972, when VAT relief was first granted for education “provided by a school”, together with “any goods or services incidental to the provision of education”, and the “provision of any instruction supplemental to the provision of any education”. These core concepts have survived successive Finance Acts and court decisions and now sit in the VAT Act 1994. Although you may not find the same words in statute today, the VAT exemption for private education has remained remarkably consistent in its application for over 50 years from the inception of VAT on 1 April 1973.
What might change?
The Labour Party has announced its intention to introduce VAT on private school fees. A figure of £1.6bn per year is routinely used by both the Labour Party and most media reporting. This figure is supported in a report published by the Institute of Fiscal Studies (“IFS”) in July 2023, entitled “Tax, private school fees and state school spending.” The IFS made the following assumptions in support of its calculations.
- VAT will be imposed on both day fees and boarding fees.
- Nursery fees are excluded on the assumption they are likely to be covered by the free entitlement to early education and childcare.
- Fees paid by foreign pupils should be included, as the service is consumed within the UK.
- 20% of private school costs are subject to VAT at 20%. About £340 million could be deducted when paying VAT across the sector. As VAT would now be paid on school fees, the sector is entitled to fully offset VAT on its costs against the VAT paid to HMRC.
- Specialist provision would remain exempt from VAT, in particular fees for pupils with education, health, and care plans.
We do not seek to test these assumptions from an economic or social perspective. As the Labour Party is happy to use the £1.6bn estimate, we simply assume it is equally comfortable with the assumptions in the IFS report.
VAT
Read more about VATRead moreAny changes must unpick the current VAT exemption.
Private schools secure exemption for education and the provision of related goods and services because they are “eligible bodies”, as defined by the VAT Act.
How would the change be made?
Any changes must unpick the current VAT exemption. Private schools secure exemption for education and the provision of related goods and services because they are “eligible bodies”, as defined by the VAT Act.
A private school may be an eligible body for either or both of the following reasons:
- It is a school. HMRC use various Education Acts to support the use of that term.
- Its constitution may prevent the distribution of any profits on its educational activities. This is most likely to be the case if it is a charity.
To achieve the £1.6bn target, VAT law will need to:
- Remove independent schools from the list of eligible bodies without also removing specialist providers of education for example for pupils with education, health, and care plans.
- Remove the VAT exemption from a defined cohort of independent schools who are restricted from distributing their profits without the unintended consequence of the loss of VAT exemption for other charitable and third sector organisations.
Once these changes are made, private schools can no longer rely on the VAT exemption for the fees charged for the provision of education.
The VAT exemption additionally provides relief from VAT for “closely related” goods and services provided by eligible bodies. To illustrate the point, HMRC accept that the following qualify as closely related:
- Accommodation
- Catering
- Transport
- School trips
- Field trips
Using £1.6bn as a benchmark and remembering that the IFS included boarding fees in its calculations. To achieve the intended outcome, HM Treasury solicitors should specify that closely related goods and services are included in any legislation as specifically liable to 20% VAT.
There is precedent for including supplies within the VAT net that may otherwise be zero-rated or exempt from VAT. For example, publications provided as a linked supply with the provision of education lose the zero-rating which would ordinarily apply.
This additional change matters because a number of closely related supplies may otherwise qualify for VAT relief. For example:
- Boarding fees may be exempt from VAT as the provision of welfare services.
- Coach transport would be zero-rated.
- School trips and field trips could be liable to a reduced rate of VAT as a packaged travel service.
Prepaying school fees
The Labour Party has stated it will backdate the introduction of these measures to frustrate prepayment of school fees for future years and ensure it meets its targets for additional VAT receipts. It cites steps taken in 2011 by the coalition government when the rate of VAT increased to 20%. These are known as “anti-forestalling” provisions.
There is precedent for the introduction of anti-forestalling measures, but not from a date any earlier than an announcement in a Budget introducing the change.
Education
Read more about EducationRead moreThere is precedent for including supplies within the VAT net that may otherwise be zero-rated or exempt from VAT.
For example, publications provided as a linked supply with the provision of education lose the zero-rating which would ordinarily apply.
The Labour Party has stated it will backdate the introduction of these measures to frustrate prepayment of school fees for future years and ensure it meets its targets for additional VAT receipts. It cites steps taken in 2011 by the coalition government when the rate of VAT increased to 20%.
These are known as “anti-forestalling” provisions.
What can I do today to plan for tomorrow?
“Life can only be understood backwards; but it must be lived forwards.” Søren Kierkegaard
In terms of planning, this is a good starting point.
- Change your accounting software to separately record VAT on your costs. This will make it easier to secure full VAT recovery in the future.
- Record all building and renovation work in the last ten years with total spend above £250,000. You can secure partial recovery of VAT on these costs following the imposition of VAT.
- The IFS assumes that 20% of costs incurred by private schools are liable to VAT at 20%. What is the position for your school? Any recovery of VAT mitigates the impact of VAT payable on school fees.
You may also wish to consider the following:
- An offer to parents to prepay fees now for the next academic year. It is hard to see any legislation being backdated beyond the general election. It is not impossible to see legislation which contains a provision barring prepayment further than the academic year in which it is introduced.
- Revisit the timing of major capital works to your real estate. If the building work is above £250,000, in broad terms, VAT recovery is secured by reference to the date the renovation work is completed. It would be sensible to time the completion of works after the introduction of VAT. Although we cannot be certain when the change will be made, we do know Labour sees this as a priority and we also know the election must be in the next few months. We should therefore have a better idea of the timing of any change soon.
We would not recommend:
- Making changes which are not cost free, such as the establishment of separate trading entities. Until we know the form of any changes to VAT law, any changes which seek to ringfence certain business income are inherently risky.
- Using ideas without a thorough understanding of the basis in VAT law. In addition, what is the downside risk to the school in terms of penalties and interest if the idea does not withstand challenge from HMRC?
In conclusion
This article provides you with as much certainty as possible, in the context of an inherently uncertain future. As always, we are here to help you with reassurance on the tax effect on your organisation and to preserve its future profitability and viability.
