VAT
VAT
VAT on private schools and connected educational services
How private schools and their accountants should prepare for removal of the VAT exemption
Words: Santhie Goundar FCA Illustration: Jonathan McHugh/Ikon
Private school and boarding fees for on or after 1 January 2025 will be taxable at the standard rate of VAT of 20% from 30 October 2024.
After the UK general election took place, the new Labour government announced on 29 July 2024 their intention to remove the VAT exemption from British private schools, and published a technical consultation and draft legislation that day setting out the changes. Education providers that charge school and boarding fees must check if they need to register for VAT as a result of the proposed changes.
On a brief non-VAT note, the government also plans to legislate to remove eligibility of private schools in England to charitable rates relief on business rates – but has said it is still considering how to address the impact of that policy on institutions providing special educational needs (SEN) support.
An entity legally cannot charge VAT, or produce VAT invoices, until it has registered for VAT. However, payments that have been received by an education provider before 30 October 2024 may be subject to VAT depending on a number of conditions.
What counts as a private school
HMRC says that, for VAT purposes, a private school is defined as any school or institution that provides full-time education for a fee to either:
• pupils of compulsory school age, or
• those aged 16 to 19 where that institution is “primarily concerned with providing education suitable to that age range”.
Therefore, this includes private schools, independent schools and private sixth-form colleges. These institutions will need to register for VAT from 30 October 2024, if they meet the conditions for VAT registration set out below.
Children’s classes for those under compulsory school age (for example, nursery classes for the under-fives) will remain exempt from VAT – so those schools that only provide these classes will not need to register for VAT.
How to register for VAT
An entity needs to register for VAT here if it is a private school or a connected person that supplies education services, vocational training or boarding services, and either:
• has total taxable turnover over the VAT threshold of £90,000 for the last 12 months; or
• expects total taxable turnover to go over the VAT threshold of £90,000 in the next 30 days.
According to HMRC, a “connected person” is a person, entity or body that is closely bound to a private school by financial, economic and organisational links. The connected person can also be connected for the purposes of section 1122 Corporation Tax Act 2010.
HMRC’s guidance also states that “taxable turnover” is the total value of sales that is not classed as either VAT-exempt, or ‘out of scope’ for VAT.
Anyone needing to register for VAT who does not do so may have to pay a late VAT registration penalty. HMRC says that those who do register for VAT should enter ‘Private Education Provider’ in the ‘Business activity’ section of the online application, and use the guidance in the online application to help select the Standard Industry Classification (SIC) code that applies to the institution.
If a school has more than one business entity (for example, a business providing education and a shop selling school sport equipment) it may be able to register as a VAT group. Further information on this is in the guidance on registering groups, divisions and joint ventures for VAT, and in the HMRC notice on group and divisional registration (VAT Notice 700/2).
Children’s classes for those under compulsory school age will remain exempt from VAT – so those schools that only provide these classes will not need to register for VAT.
When to register for VAT
As stated above, education providers will be able to register for VAT from 30 October 2024.
However, the exact date when they should register for VAT will depend on the value of school fee payments they receive for terms starting on or after 1 January 2025, and the date they receive these payments (which include registration fees paid during the application process to attend a school). An entity receiving payments in advance may need to register before 1 January 2025 depending on when they received the payment.
Those who have registered for VAT due to exceeding the threshold of £90,000 in the previous 12 months must register within 30 days of the end of the month in which the threshold was exceeded – and the effective date of registration will be the first day of the second month after going over the threshold, according to HMRC.
Those registering because they expect to exceed the VAT threshold in the next 30 days must register in the next 30 days – and the effective date of registration will be the date they realised they will exceed the threshold.
Filing VAT returns and paying the tax liability
Once an education provider has registered for VAT, it will receive a letter from HMRC confirming its VAT registration number and explaining what to do next.
The entity’s obligations will include keeping VAT records as well as sending a VAT return and paying the entity’s VAT bill when these are due. However, a VAT-registered entity will also be able to reclaim VAT on business expenses, which can often be set off against the VAT charged on sales of goods or services.
HMRC has also provided details of software that’s compatible with Making Tax Digital for VAT that one can use to keep VAT records and submit VAT returns online/digitally to HMRC. An education provider must fill in and submit their VAT returns by the due date – HMRC has published guidance called ‘How to fill in and submit your VAT Return’ (VAT Notice 700/12) that may help.
A VAT-registered entity must pay the VAT bill due (using that link) by the deadline shown on the VAT return, and if this is paid late may have to pay a surcharge or penalty. The entity will need its nine-digit VAT registration number in order to pay, and HMRC can be paid online by a debit card or corporate credit card, by direct debit or through the entity’s own internet bank account.
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VAT on payments received before 30 October 2024
As stated above, education providers who have received payments (for example, private school fees paid in advance) before 30 October may find those payments subject to VAT depending on certain conditions.
Payments received before 29 July 2024
HMRC’s guidance states that how payments made before 29 July 2024 will be treated will depend on the specific terms of any agreement for the payment.
Where a payment creates a ‘tax point’ for VAT purposes when the payment is made, then according to HMRC, no VAT is due. HMRC explains that a 'tax point' is usually created when a service is performed, or when a payment is taken for a supply of goods or services. More information about tax points can be found in section 14 of VAT Notice 700, and in VATTOS3000 of the HMRC’s internal manual about the VAT ‘time of supply’.
Payments received from 29 July 2024 to 29 October 2024
If an education provider receives fee payments between 29 July 2024 and 29 October 2024 for school terms starting from 1 January 2025 onwards, HMRC says this will be subject to VAT from the later of either:
• the first date of the school term that the fees have been paid for, or
• 1 January 2025.
An entity cannot include VAT on its invoices until it receives its VAT registration number from HMRC, but it is allowed to increase its prices to account for the VAT that it will need to pay to HMRC.
