VAT update for independent schools

Following the release of HMRC’s guidance on 10 October 2024, we are highlighting the main areas of consideration for independent schools regarding the imposition of VAT on school fees.

In the draft legislation and published guidance, independent schools are referred to as ‘private schools’ so we have used this terminology for consistency.

VAT registration position

In the draft legislation, the tax point for payments received on or after 29 July 2024, in relation to school terms starting on or after 1 January 2025, is as follows: 

• For payments received between 29 July and 29 October 2024, the tax point is the later of: 
  • the first day of the school term, or 
  • 1 January 2025 
• For payments received between 30 October – 31 December 2024 HMRC’s published guidance determines that the tax point is the date that you receive the payment.

Applying these tax point rules, if you are not currently registered for VAT, you may need to be before 1 January 2025.

For further information, please see HMRC’s examples in the published guidance.

Fees received before 29 July 2024

Provided the terms and conditions of your fees in advance agreement have been correctly adhered to, and payment has been received before 29 July 2024, a tax point for the supply of exempt education is created on the date that the payment is received.

HMRC’s interpretation of bursary payments

In HMRC’s published guidance, donations are outside the scope of VAT where these are freely given, do not entitle the donor to any specific benefit, and there are no specific terms and conditions attached to this funding. This, we believe, will cover the majority of bursary and charitable payments currently received by schools.

In addition, HMRC indicate that where grant and/or bursary funding is available, but the payment being made is linked to a specific pupil, then this constitutes a supply for consideration which is subject to VAT. We expect that this refers to the situation whereby a family endowment fund is used to pay for a child’s education. We agree that this would constitute third party consideration for a taxable supply of education.

Contrary to this fact pattern, some schools have for many years used separate charities that raise funds and make donations to fund bursaries for specific pupils. In some circumstances where bursary funding is withdrawn, these pupils will continue to be educated by the school. Under this model, payments are freely given and cannot be subject to VAT. Schools should consider their own bursary arrangements to determine whether these constitute business supplies to the donors.

VAT liability for nursery classes

HMRC’s published guidance has confirmed that any nursery classes containing one pupil of compulsory school age, will be subject to VAT.

We are aware of current practices in independent schools whereby pupils of compulsory school age are sometimes ‘held back’ in nursery, to assist in their development.

We are seeking clarification from HMRC on whether this constitutes a supply of education in the nursery class, or whether this a supply of welfare and therefore exempt from VAT.

Non-business restriction

We previously received an informal communication from HMRC stating that it does not intend to restrict VAT recovery for schools which offer full bursaries, provided that most pupils are paying fees. This was outlined in a recent email alert. Despite requesting that this be formalised in guidance, HMRC have not included this in the published guidance.

Standard method override

HMRC’s published guidance refers private schools to VAT Notice 706 (Partial Exemption) which looks in detail at the standard method override. Given that a number of private schools have received significant numbers of fees in advance and considering that the threshold for the standard method override being triggered is low, we expect this to have considerable impact for a number of private schools.

For further information on the standard method override, see our recent article on this here.

Pre-registration input tax

For schools who are registering for VAT, HMRC’s published guidance on pre-registration input tax differs from its own internal guidance presently available.

HMRC’s existing internal guidance on pre-registration input tax (see VIT32000), states that “the tax which can be recovered is the amount that would have been deductible had the business been registered at the time the tax was incurred”. However, there is now an indication in the published guidance that VAT incurred on assets still on hand at the time of registration can be apportioned over a 5-year period.

Other areas for consideration

There are areas of the technical note (published on 29 July, alongside the draft legislation), which have been excluded from the draft guidance.

For instance, the provision of education to SEN pupils appears to have been largely overlooked in the published guidance, other than to confirm that Local Authority funding in relation to SEN will be subject to VAT (which is ultimately recoverable by the Local Authority).

Whilst some areas of uncertainty have been clarified by HMRC in this published guidance, there are still many areas which remain ambiguous.

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