Planning ahead: VAT on school fees update 

The possibility of VAT being applied to school fees has been a newsworthy subject for the past 18 months, as a result of the ongoing political instability, and the Labour Party’s current manifesto.

The potential changes could bring a number of challenges to the independent schools’ sectors' ability to ensure that they remain financially viable in future, without reducing the quality of the education provided to students. From a VAT perspective, there are actions that independent schools can take to minimise the financial impact should the changes occur.

1. Modelling

We would expect that the current standard rate of 20% would be applicable to fees should this change be made. Of course, many schools will not be in a position to pass this charge on to parents and consequently some of the financial burden will need to be absorbed.

Currently schools make exempt supplies therefore VAT recovery is extremely limited, but this would change at the point that the supplies were made taxable. Many school costs such as wages, do not attract VAT. However, significant amounts of VAT are charged on costs such as maintenance, building works, agents fees, and legal and professional costs. It is important to consider additional VAT that would become recoverable on costs, when looking at the financial impact of the change. With this in mind we have devised a simple calculator that can be used to make some initial calculations, which can be accessed by contacting our VAT team and referencing ‘VAT calculator’.

The calculator will provide schools with an initial view of the VAT recoverable on both day to day costs, and ‘capital items’, such as VAT bearing capitalised building works or buildings upon of a value of more than £250,000. Some of this VAT can be clawed back if the item is less than 10 years old. More information on this topic is available from our webinar Navigating the Capital Goods Scheme.

Based on models seen from various clients, it would appear that around 65-75% of the VAT cost would need to be passed on to parents in order for the school surpluses to remain unaffected. However, this does vary and so schools should model based on their own projected costs and revenues.

In summary, a modelling exercise at this point should be able to give schools a picture of the financial position taking into consideration the above points.

2. Would VAT impact all school fees?

Should the changes be made, VAT would be due on all school fees irrespective of where the pupil lives. This is because the VAT liability is determined by the place of supply, i.e. where the education takes place which is the UK.

Although, schools that offer free places (100% bursaries) should also consider adding a further restriction of VAT recoverable. This is because free supplies are considered ‘non-business’ and VAT can only be recovered on taxable business transactions; a simple pupil head-count apportionment should provide a reasonable restriction for these purposes.

3. Current VAT Structure

The current structure of independent schools should be reviewed especially considering the possibility of VAT being claimed on capital building projects under the Capital Goods Scheme.

Some schools hold properties and pay for building expenditure in separate entities that are not registered for VAT, either individually or as part of a VAT group. This could potentially make it more difficult to recover VAT under the capital goods scheme. Instead you could look into other options such as:

1. opting to tax buildings post any change of VAT rules and registering individually or
2. looking at whether the entity can be included in a VAT group with the school operator.

It is important that independent schools have the correct structure in place to ensure maximum VAT recovery where it is available.

4. Fee Structuring

Without draft legislation we cannot predict the extent of any changes, but it is reasonable to expect that should the Labour Party make these changes it would only relate to the education exemption (VAT Act 1994, Group 6). Other exemptions do exist that apply to services provided by schools, for instance letting land, buildings and domestic property (VAT Act 1994, Group 1) and childcare services (VAT Act 1994, Group 10).

Therefore, schools should consider if certain services could be contractually separated and provided for a separate price, to ensure they still qualify for the exemption. For instance, it may be possible to provide boarding separately so the exemption can still apply. Although, this would have an effect on the schools’ VAT recovery and the modelling mentioned above. Of course, if a separate entity was used to make the supply, VAT grouping should be considered to ease administration.

5. Fees in Advance Schemes – VAT

Many schools already operate fees in advance schemes whereby parents can effectively pre-pay for education. These schemes have the additional benefit of crystallising the point at which VAT would be applied, providing the school has unfettered use of the funds received. Therefore, schools should consider the possible VAT benefits of using fees in advance and ensure that the terms and conditions of the scheme give the best chance of achieving VAT exemption.

Upon any announcement of the new legislation, we would expect that anti-forestalling measures would be introduced to negate the effect of fees in advance.  However, it is unlikely that this legislation would have retrospective effect and so any fee in advance paid prior to any announcement would appear to be VAT exempt. More details on fees in advance is available here.

Before you consider a fees in advance scheme or altering your current approach to VAT on school fees it is important to consider all of the wider commercial risks as well as the possible VAT opportunities.

If you would like to discuss this article further, please get in touch with either Robert Warne or Kieran Smith or your usual Crowe contact.