Following its manifesto pledge, the Labour government announced, in the Chancellor's July statement, plans to impose VAT on independent schools' fees across the UK and remove charitable business rates relief for independent schools in England. The full details are set out in a technical note issued on 29 July 2024, and draft legislation was published that same day.
What additional taxes will independent schools now be subject to?
As of 1 January 2025, all fees for education services supplied by independent schools for school-aged children will be subject to 20% VAT. 'Education services' is broadly defined and includes boarding services offered by independent schools, which many had previously thought might be out of scope. The primary mitigation will be for those students with an Education and Health Care Plan where devolved government meets their fees. However, there are also some limited carve-outs, such as excluding nursery provisions (including those nurseries which are part of an independent school), wrap-around childcare, and ancillary services (such as school meals and trips).
Why are these changes being imposed?
The Labour government intends to use the funds raised on education priorities – including opening 3,000 new nurseries, rolling out breakfast clubs to all primary schools, recruiting 6,500 new teachers, and improving teacher and headteacher training. The policy's fundraising success relies on those affected (and potentially affected) not changing their behaviour in sufficient numbers, given the government's obligation to fund a state school education for every child. The UK is an outlier in charging VAT on the full consideration for private education. Greece proposed it back in 2015, but this policy was then rowed back within a few months. While New Zealand does charge 15% VAT, it also applies a direct subsidy – resulting in the VAT having a lesser impact on those attending the more affordable independent schools.
What is the impact on fees which have been prepaid?
The government plans to legislate retrospectively to make fees paid on or after 29 July 2024 — in respect of school terms starting in January 2025 —subject to VAT. The situation is less clear for those who paid school fees in advance before 29 July 2024, with the government stating that HMRC will be carefully scrutinising fees in advance schemes to ensure that schools pay the correct VAT where it is due.
Will school fees automatically increase by 20%?
Not necessarily. While by law, schools will need to charge 20% VAT on their fees, there are various ways they may be able to mitigate the level of 'net' fee they charge. Independent schools will be able to recover VAT they pay on goods and services relating to their taxable supplies. Those schools which have undertaken significant capital projects may also be able to reclaim a proportion of the VAT incurred. In addition, the government's technical note suggests that schools may choose to reduce surpluses or cut back on non-essential expenditures. Each school will need to make a decision based on their financial circumstances whilst also bearing in mind that those paying for independent education do so in the expectation of certain benefits (for example, smaller class sizes or specialist teachers).
Will it definitely go ahead on 1 January?
The government intends to introduce the changes at the Budget on Wednesday 30 October, when the Office for Budget Responsibility will certify the government's costings and impact analysis.
However, the policy is being challenged on legal grounds (with the plan to seek an expedited hearing in the High Court post the Budget – and before 1 January 2025) as contrary to Article 2 of Protocol 1 of the European Convention on Human Rights, which states that "no person shall be denied the right to education". The test case is being brought on behalf of a single parent and her daughter, based on Article 2 and its interaction with Article 14 (the right not to be disadvantaged in education on grounds including sex, race, religion, or, as in the test case, special needs).
In addition, in response to HM Treasury's consultation on the policy, professional bodies such as the Institute of Chartered Accountants in England and Wales, the Association of Taxation Technicians, and Chartered Institute of Taxation have strongly recommended a delay to the implementation from the suggested mid-school year commencement until the beginning of the next academic school year. This would allow schools sufficient time to both plan and register for VAT and give parents the necessary time to make informed decisions.
What should I do, and how can we help?
Notwithstanding the anticipated legal challenge – and assuming that the Office for Budget Responsibility confirms the government's costings (there are conflicting reports as to whether this policy will raise funds or will, in fact, cost the state money, depending upon the elasticity of demand) – it would be prudent to assume that school fees will increase. We recommend that parents review a school's accounts to assess the financial viability of their chosen school, to minimise the chances of disruption for their children should the school suffer an overall decrease in demand. For clients relocating with packages from employers, it will be important to examine these early to consider if they cover the additional VAT and, if so, any knock-on taxation consequences for an employee. Please do contact us to discuss any concerns arising from the above.
