Budget confirms 20% VAT on private education and boarding services from 1 January 2025
Anti-forestalling provisions to prevent advance payment VAT avoidance from 29 July 2024
The new UK Chancellor, Rachel Reeves, has confirmed in her Autumn Budget on 30 October 2024 that the government will introduce legislation to remove the VAT exemption from education, training and boarding services provided by private schools from 1 January 2025.
In the budget, to protect pupils with special educational needs that can only be met in a private school, local authorities and devolved governments that fund these places will be compensated for the VAT they are charged on those pupils’ fees.
This covers private schools providing full-time education for pupils that are of compulsory school age (so exclude nursery schools). Draft legislation was published for Finance Bill 2024-25 for the Autumn Budget (October 2024?). Private schools are also to lose their charitable status in 2025 and therefore loose Business Rates relief.
This will introduce UK VAT at 20% on fees paid, making the UK one of the very few countries in the world to subject private education to the indirect tax. Under the EU VAT Directive, it is practically impossible for the 27 member states to impose VAT on private education.
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.
Can advance payments avoid imposition of VAT on private education?
The policy, well trailed prior to the Labour 4h July 2024 election win, was already encouraging private schools to promote advance payments and similar schemes to avoid the introduction of VAT. Such early payments seek to exploit the normal VAT date calculation (‘time of supply’ or ‘tax point’) rule which is earliest of:
- payment date;
- invoice date; or
- delivery of service.
By offering payments schemes of a year or more in advance, some schools believed parents may be able to avoid the VAT. However, this will not be permitted from today, 29 July 2024.
School contract terms undermine VAT case – and give rise to VAT on earlier advances for 2025 services
The terms and conditions of schools’ contract may also undermine the case for avoiding VAT via advance payments made even before 29 July 2024. Generally, advaces are not treated as a payment for the service; but as a credit being held by the school with a small discount on future fees as the incentive. Schools retain the right to vary their fees, presumably adding VAT too, if they wish.
This would also put at risk of VAT liabilities any payments made in advance which have still to be matched to invoiced teaching. In theory, this could therefore be challenged by HMRC.
Splitting school services to retain some VAT emption benefits ruled out
To shield at least some of the consideration from VAT, some schools are looking at dividing-up invoicing of their services. Examples could include:
- support around lessons classified as exempt ‘welfare services’
- transport costs to and from school as zero-rated
- boarding, catering, trips for children as exempt if similarly treated as a welfare service
However, the government has specifically included these services so also subject to 20% VAT from 1 January 2025.
