VAT on private school fees – the current position

One of the few specific tax policies put forward by the Labour party before the general election campaign, and included in their 2024 election manifesto, is their proposal to charge VAT at the standard rate (currently 20%) on private school fees (and also to require private schools to pay business rates).  

Analysis published by the Institute for Fiscal Studies (IFS) earlier this year ( Tax, private school fees and state school spending | Institute for Fiscal Studies (ifs.org.uk) ) indicated that this VAT change might raise about £1.6 billion.  That figure was based on estimates that about half a million children (around 7%) attend private schools, and that the average fees charged private schools is about £15,000 per year, which is about twice the average per pupil funding at state schools.  On those figures, adding VAT at 20% would increase the typical fees by £3,000, which is similar to the real-terms increase in private school fees since 2010 according to the IFS.  The figure of £1.6 billion takes account of the ability of schools charging VAT to recover VAT on their input supplies of goods and services, which might reduce the effect to around 15%.  

The annual census published by the Independent Schools Council ( Annual Census - ISC ) shows that the types of schools are quite varied, and many bear little resemblance to the well-known “public schools”.  About 1,000 of their 1,400 member schools are charities but the other 400 are not.  Most are co-educational day schools, and about half of them are primary schools.  Many are quite small: the median size is 300 pupils (perhaps one or two small classes in each academic year) and a quarter have under 150 pupils (perhaps one form of up to 20 or 30 per year).  Many have an explicit religious affiliation or ethos, and around 40% of students are from ethnic minorities, substantially above the proportion in the general population.  About a tenth of pupils have parents who are not UK nationals, about half of whom reside in the UK and half overseas. 

Faced with the prospect of potentially 20% higher school fees, what might parents do?  

It all depends on when and how a new Labour government, assuming one is elected, implements the change, and what if any transitional or anti-forestalling measures are included.  For example, the change could be implemented relatively simply by amending the long-standing exemption in Group 6 of Schedule 9 to the VAT Act 1994, which applies to supplies of education made by an “eligible body”.  The definition of an “eligible body” includes bodies that cannot and do not distribute profits to their members (such as charities) and also schools within the meaning of the Education Act 1996 (which may or may not be charities).  At its most simple, a line could be added which says, in terms, “but a private school is not an eligible body”. The change could also include specific transitional or anti-forestalling rules, although Rachel Reeves has recently indicated that the policy will not come into force until 2025, and won’t be applied retrospectively, so it seems unlikely it would be applied to all educational services delivered on or after say 5 July 2024. 

Many private schools offer an ability to pay school fees in advance, often with a discount or “commutation” reflecting a modest implicit investment return on the amount paid early over a period of months or years until the school term when the fees would otherwise fall due.  This sort of discount is not subject to tax. 

Could a pre-payment of this sort be sufficient to help with the VAT on school fees?  If a parent pays a year’s fees in advance – say on 1 July 2024 – it seems fairly clear that the payment will remain free of VAT, if the change does not take effect until 2025 and is not retrospective.  

But what if the parent pays say five or seven years of fees in one lump?  Or, under a more sophisticated early fee payment scheme, an amount that is sufficient to reduce the termly fees by say £3,000 in each of three terms for the next five years? 

The rate of VAT applicable to a supply of services is governed by the law applicable at the “time of supply” determined under section 6 of the VAT Act 1994.  The basic time of supply for services under section 6(3) is when the services are actually performed.  It seems fair to assume that educational services are provided over a period of time, as and when the child attends the school, term by term, say.  But the time of supply can be moved to an earlier date by section 6(4) of the VAT Act if a VAT invoice is issued early (unfortunately, as their fees are currently exempt, private schools do not issue VAT invoices) or if an early payment is made.  The payment needs to be a genuine pre-payment for the services to be provided: the amount paid must then belong to the school, which entails a credit risk if the school might become insolvent, and the amount must not be a deposit, so for example arrangements for refunds (if, say, the child leaves the school) could be problematic.  There are also specific rules around pre-payments for continuous services, such as rents, under which services are treated as supplied each time a VAT invoice is issued or a payment is made, but these usually act to bring forward rather than defer a time of supply. 

For parents or grandparents of children at private schools, there might still be a window of opportunity to decide whether or not to pay a chunk of school fees in advance. 

When exactly a change takes place, and how it is implemented, remains to be seen. 

UPDATE, 29 July 2024: Any window of opportunity to pay school fees in advance has now closed.  The new Labour government has announced that VAT will apply at the 20% standard rate to supplies of education delivered by private schools from 1 January 2025, with anti-forestalling provisions that will apply VAT to payments made on or after 29 July 2024 for education services delivered by private schools from 2025 onwards.