VAT on independent school fees has widely been reported as a policy Labour intend to bring in should they come into power. With Rishi Sunak announcing a General Election on the 4 July 2024 and Labour so far ahead in the polls, there is a possibility that this will be one of the first policies announced. We have highlighted below steps some parents and schools are taking to mitigate the VAT now and their potential consequences.
What are Labour proposing?
Under current VAT legislation, independent schools provide exempt supplies of educational services. Labour are proposing to levy VAT on these fees.
When will VAT be due?
The time of supply, or “tax point” determines the time at which a supply is treated as taking place for VAT purposes. For a supply of service, like education, the basic tax point is when the service has been performed, which would be the end of a term. The basic tax point can be overridden by an actual tax point if a VAT invoice has been issued by the school or a payment has been received in advance. Schools are now more readily advertising payment in advance schemes as a way to mitigate against VAT on fees before a future possible announcement.
Potential risks.
- Some media outlets have reported that Labour intend to retrospectively enact legislation to capture the VAT on school fees paid in advance made before any announcement, possibly with the use of anti-forestalling rules akin to those that have been used for other taxes in recent years.
- Should schools come into financial difficulty and have to close, payments in advance are likely to be unsecured, meaning that there would be only a small chance parents would recover their money.
- Payments in advance may realistically be akin to an advance of credit whereby parents deposit money with the school and then settle each term’s fees with the deposit, until it has been fully utilised. Here, there may be ambiguity to the tax point and VAT may be due on each term’s fees in any event. HMRC may have more of argument for this point if the school has not fixed the fee.
Other parties have stated they do not intend to levy VAT on independent school fees so the above is largely theoretical at this moment in time. It would be prudent however to check the terms and conditions of the payment in advance scheme of your child’s school and consider whether a payment in advance is the appropriate response for you.