Education and VAT on private education

By introducing VAT on private school fees the UK government has confirmed on 29 July 2024 that it will introduce legislation to remove the VAT exemption from private education fees from 1 January 2025. This covers private schools providing full-time education for pupils that are of compulsory school age. Draft legislation was published for Finance Bill 2024-25 for the Autumn Budget. Private schools are also to lose their charitable status in 2025 and therefore loose Business Rates relief.

This results in introducing VAT on private education fees at 20%. Whether VAT be added to the private school fees or be absorbed by the schools will be a matter for each school.

Anti-forestalling blocks advance payments to avoid VAT from 29 July 2024 for 2025 services

Some private schools were already launching options to try avoid or mitigate the inevitable price rises that will be passed onto parents and guardians. To block such further avoidance, the UK will include anti-forestalling provisions or 20% VAT on any pre-payments of fees from 29 July 2024 for services starting from 1 January 2025.

There are no retrospective VAT obligations for anyone who made advance payments before 29 July 2024.

When does VAT on private schools start?

VAT on private education fees must be charged for terms starting on or after 1 January 2025. This is disappointing news for those who were hoping that the change would not come into force until the new academic year in September 2025. Affected schools must therefore act quickly to get their accounting systems ready to cope with the change in VAT treatment, a task made particularly challenging by the mid-year switchover.

Registering for VAT

VAT on private education will mean that such schools not currently registered for VAT will need to determine whether to register voluntarily if they already make VATable supplies and, if not, determine the date from which they will be obliged to be registered for VAT.

Given the two standard turnover threshold tests that need to be applied to determine the deadline for compulsory VAT registration, it is likely that for VAT on private education, on the basis of the ‘look forward’ test, most affected providers will be required to register for VAT before 1 January 2025. The normal tests apply meaning that the educational provider must register for VAT if its total taxable turnover:

exceeds £90,000 for the last 12 months; or
is expected to exceed £90,000 in the next 30 days.

HMRC plans to accept registration applications from 30 October 2024. Those schools that do not currently make any taxable supplies must wait until that date to apply. It remains to be seen whether HMRC’s already overstretched registration teams will be able to cope with the spike in applications and process all such new registrations in time following the introduction of VAT on private education.

Schools that already make taxable supplies are entitled to voluntarily register for VAT straightaway. This might be advantageous for some that have incurred significant amounts of VAT on costs recently, although a careful balance will need to be struck between potential VAT recovery and the need to account for VAT on existing taxable supplies.

Those schools that are already VAT registered need not submit an application. These schools will have to update their accounting practices to ensure that VAT is accounted for correctly going forward. They may also need to renegotiate any VAT treatments they have previously agreed with HMRC, such as their existing partial exemption method.

HMRC information on VAT registration.

Boarding fees and supplies ‘closely related to education’

It has been confirmed that boarding services related to a VAT on private education supply and will also be subject to VAT at 20%. However, charges made for other supplies closely related to education, such as school meals, transport, and books and stationery, will remain exempt after 1 January 2025.

Although no VAT on private education will be due on charges for ‘closely related’ supplies, this continuing source of exempt income may prove to be a mixed blessing for private schools. Such schools will still face the additional administrative burdens that VAT exemption brings. Determining which income streams qualify for exemption under the ‘closely related’ category is currently a complex task, and it will still be necessary to carry out partial exemption calculations before recovering the VAT incurred on costs.

Recovery of VAT on costs

Removing VAT exemption on private school fess results in VAT on private education fees will at least allow independent providers to recover most of the VAT they incur on costs, although they may still need to carry out partial exemption calculations to deal with income from some related supplies that will continue to be exempt from VAT.

With VAT on private education there may also be scope for VAT refunds for private schools that have undertaken significant capital expenditure in the past ten years, for example on school buildings or computer equipment. All such independent providers should check their records to identify qualifying expenditure and associated supporting evidence so that they are able to prepare a capital goods scheme adjustment for inclusion in the appropriate VAT return in autumn 2025. Also, those whose capital projects have not been completed should take VAT advice on what adjustment should be made and when.

VAT will not apply to certain fees for education provided at state sector schools, further education colleges, academies, non-maintained special schools and private nurseries (whether standalone nurseries or those attached to a private school). These fees will remain exempt from VAT.

Nurseries and Universites

VAT on private education does not apply to nursery classes provided by private schools. The guidance states that only “classes made up wholly of children below compulsory school age remain exempt from VAT”, and that “if the nursery contains children of compulsory school age who you receive a fee for, the whole of the class will be subject to VAT”.

For state universities, the guidance states that “education that is normally targeted at students over 19 years old (for example, undergraduate and postgraduate education) will not be affected by these changes”.