VAT on Private School Fees : Risks of Advance Payment Schemes

06 June 2024

Sectors:

Education

Services:

VAT & Customs Duty,

Wealth planning & Private client,

Personal Tax Planning

Haines Watts VAT Consultant Julie Green looks at the implications of VAT on private school fees and the risks of advance payment schemes

As the debate around Labours plans to impose VAT on private school fees intensifies, independent schools are exploring ways to mitigate the impact of potential VAT changes.  Now is the time to consider the options and seek expert advice on the implications. 

One approach gaining popularity among private schools is the use of advance fee schemes. The basic idea is that by doing so, parents can "lock in" today's VAT rules and avoid any subsequent imposition of VAT on school fees.  Here's how it works:

  • When parents pay fees in advance, the time of supply (i.e., the point at which VAT is charged) is now, not when the actual service (education) is provided.
  • By paying in advance, parents effectively “freeze” the VAT rules applicable at that time, shielding themselves from any future changes in VAT rates.

This approach assumes that VAT would be charged at the point of payment, based on the rules in force at the moment. 

While this strategy may seem appealing to parents, it is essential to understand the risks and potential pitfalls associated with advance payment schemes. For example:

  • Labour could introduce retrospective legislation that would make payments made before the party came to power for education supplied after the new VAT policy is introduced subject to VAT.
  • HMRC could challenge schemes where the amount parents pay is placed on deposit with the school, and then used by the school to satisfy each term’s fees on the basis that the payments are not actually deemed to be fees paid in advance of a supply of education.

Most schools offering advance fee schemes explain that if either of these circumstances arise it is parents that would be required to pay the VAT. In relation to the latter, legal challenges by HMRC are notoriously slow and this could result in schools pursuing parents for VAT after their child has left the school.

Fees paid by parents in advance could also be permanently lost if the school enters into financial difficulties.

Parents should therefore make informed decisions based on their individual circumstances and seek professional advice if needed. If you would like to discuss any of the above in more detail, please do get in touch for a chat with our VAT advisers

It is also worth noting that it is not only school fees that may be brought within the scope of VAT.  Supplies of related goods and services (which are closely related to education and currently treated as exempt from VAT), such as catering, boarding fees, school trips and school transport could also become subject to VAT.

Seek Guidance from Our Specialists : Renowned for our excellence in VAT consultancy, our team boasts a distinguished reputation. With a wealth of experience drawn from former senior HMRC roles, our specialists possess unparalleled technical prowess and a profound understanding of the intricate labyrinth of value added tax regulations. Let us navigate you through with ease. Connect with one of our experts today.

 

Author

Julie Green

VAT Consultant

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