Independent Schools – Possible VAT Exemption Change – Risks & Opportunities



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The media commentary around Labour’s plans to add 20% VAT to private school tuition fees has stepped up a gear recently due to the upcoming elections. With Labour making it one of its flagship policies, if they are elected, it is not a matter of if, but when, they introduce the scheme.  
However, with a lack of written guidance setting out exactly how they intend to introduce these changes, a lot of private schools and education providers are somewhat in the dark about what they can expect. 
Labour have announced that, should they win the election, there will not be a new budget in 2024, therefore, there will be no time to make the changes before the new school year starts in September 2024. They have also stated that there will likely be a consultation before they implement the policy. This is certainly something that will be welcomed by private schools given that there is still uncertainty on the impact the policy will have.

Losing charitable status – is that a risk?

Kier Starmer has confirmed that Labour has no intention of removing the charitable status from the private schools that hold it. Clarifying that it is only the education exemption that will be affected by any changes introduced. This clarification is important – Charities are not exempt from VAT simply by virtue of being charities. Under the VAT exemption, it is the charities’ fundraising income that benefits. Therefore, removing charitable status wouldn’t alone affect the VAT rate applied to the school’s tuition fee income. To connect the two for VAT purposes is misleading.

What could the VAT changes look like?

If it is only the education VAT exemption that Labour plans to make changes to, what will the changes actually look like? Currently, under VATA1994, Schedule 9, group 6, the exemption applies to the provision by an eligible body, of education.  

Private schools have eligible body status provided that they are a school, as defined by the various education acts, and are registered in the register of independent schools. Therefore, at first glance, it would appear that the simplest solution would be for Labour to remove the eligible body status from independent schools. This would certainly have the desired effect of taking their education provision out of the exemption classification. 

However, there are different types of independent fee-paying schools. For example, schools for children with special education needs, privately run faith schools, and schools teaching in languages other than English. Removing the eligible body status from independent schools, will not just affect the schools Labour intends to target and there has been no mention of how they intend to protect independent schools that exist outside of, what is considered to be, the ‘elite school system’.

What could this mean for affected schools?

If independent fee-paying schools are removed from eligible body status and, as a consequence, excluded from the VAT exemption, from a technical VAT perspective, the changes to the VAT profile of fee-paying schools would be dramatic.

The first change is clearly that VAT would be charged on the educational fees (output VAT) where it had not been in the past – adding to the costs for parents.

However, what is equally important to note is that by having to charge VAT on this income the school then can recover input VAT (VAT on their costs) that was previously blocked. The scale of this VAT recovery and how it would affect the pricing model for school fees would vary but it would allow schools to think differently about how they deal with VAT on their costs.

With VAT on previously blocked costs now becoming recoverable, this certainly opens up likely savings to be made when considering capital expenditure and the redevelopment of school buildings. This is important to think about when considering VAT regimes such as The Capital Goods Scheme. This runs for a 10-year period when capital expenditure on assets over £250,000 plus VAT have been incurred – a new school laboratory or sports pavilion for example. Although VAT recovery on the initial costs would have been low, once the exemption is gone, the remaining intervals could result in a much larger portion of the input VAT being recovered.

What other supplies could lose the exemption?

Eligible bodies don’t just supply exempt education. There are other supplies within Schedule 6 that would need to be considered. Take item 4, for example. It allows for any goods or services provided by or to, an eligible body, that is closely connected to the supply of education, to benefit from the exemption. With the VAT exemption gone, would VAT need to be charged on these supplies as well? Accommodation, transport, field trips and catering, could all be caught by the changes. If so, does this mean that there are potentially even more taxable costs being incurred by fee-paying parents? 

Other considerations

Putting aside the financial impact that the removal of the exemption would create, further considerations around the administrative burden currently faced by independent schools should be addressed. 

At present most, if not all schools, would have complex and complicated VAT profiles which result in non-business and partial exemption apportionment calculations. By removing the exemption, most independent schools could cease to be partially exempt and have much easier VAT profiles to administer. 

How Xeinadin can help

The takeaway for independent schools is that the changes would have a significant impact on their VAT profile. Therefore, it will be important to be prepared for what the implications could look like.  

At Xeinadin, we are already discussing the various ways affected schools will be impacted by these changes. How we may be able to maximise the financial benefits through increased VAT recovery should the VAT exemption be removed from school fees, for example. 

Certainly, opportunities to recover additional historic input tax on larger development schemes are a point that should be explored. There may also be more innovative ways to structure the wide-ranging nature of services schools offer, and to access VAT exemptions available from other sections of the UK VAT legislation, outside of the education schedule. 

Taking a proactive stance on reviewing how these changes will affect school budgets for the next 2 to 3 years would be advisable for any institution to consider.  

If you would like to discuss this issue in more detail, call 0203 086 8677 or complete the form below.

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