On 29 July 2024, the government published its long-promised plans to apply 20% VAT on private school fees and to remove the business rates relief for charitable private schools.
Here is what you need to know about the plans:
1. 20% VAT on private school fees – who does it apply to?
All education services and vocational training supplied by a private school for a charge will be subject to VAT at 20% from 1 January 2025. Boarding services related to such a supply will be impacted in the same way.
Education services and vocational training provided by “connected” providers to a private school will also be subject to 20% VAT. If they are “closely bound to one another by financial, economic and organisational links”, they are “connected” within the meaning of the Corporation Tax Act 2010 or if the “main purpose” of their arrangement is to avoid paying VAT.
This change will affect private schools across the UK.
Nursery education will remain exempt; VAT only starts from the first year of primary in a private school.
The government said it “recognises that other goods and services closely related to education, such as school meals, transport, and books and stationery, are integral”.
Consequently, these “closely related” goods and services will remain exempt from VAT, as will before or after school clubs that consist of childcare and do not fall within the definition of education.
2. “Retrospective” VAT on pre-paid fees from 29 July 2024 onwards
Forestalling provisions will be introduced which means that fees pre-paid from 29 July 2024 onwards pertaining to the term starting in January 2025 will be subject to 20% VAT.
3. SEND pupils
Where pupils with special educational needs and disabilities (SEND) are placed in a private school by a local authority under an education, health and care plan (EHCP), the local authority will be able to recover the VAT charged on these fees.
4. Only a 15% fee increase?
The government says that it does not expect fees to go up by 20% as a result of this VAT policy change, as it thinks private schools will instead take steps to minimise increases (for example by registering for VAT and reclaiming the VAT they pay on goods and services used in the production of their taxable supplies). As such, the government expects private schools to be liable for VAT amounting to about 15% of their fee income.
5. Removal of business rates relief for charitable private schools
Charitable private schools will be liable to pay full business rates from April 2025. As business rates policy is devolved, this change will only apply to private schools in England.
The government recognises that some pupils have SEND that can only be met in a private school, and so it is still considering how to address the potential impact of this change on SEND pupils with EHCPs. The government will engage with schools before setting out a proposal in due course.
6. Timeline for the changes
Following a technical consultation (running until 15 September) on the VAT changes, the government intends to legislate for this in the Finance Bill following the Budget in October, to take effect from 1 January 2025.
The business rates change will be included in the Local Government Finance Bill, which is intended to take effect from April 2025.
The government’s full plans can be found here. For further advice please contact Jean Tsang, Partner and Head of Education, or Hannah Bignell, Solicitor.