Can parents dodge Labour's VAT on private school fees by paying in advance? HEATHER ROGERS replies
I have questions about the Labour policy to charge VAT on private school fees.
Firstly, what is the legal position? My understanding was that VAT could not be applied to education or the provision of such.
I believe this divisive policy will widen the gap between those that have and those that don't.
If it is implemented, would the Government allow those who qualify (parents not on six-figure salaries) to pay for their school fees via tax-free childcare?
Private schools: Charging VAT of 20% on their fees is one of Labour's key policies
Finally, I understand that Labour will enact a policy whereby they can retrospectively charge VAT on any school fees paid from the date the policy is enacted, giving them time to put a framework around the VAT charging and claw back backdated VAT.
Is this the case? If so how likely is challenging it to be successful?
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Heather Rogers replies: Charging VAT of 20 per cent on private school fees was much discussed during the election as one of Labour's key policies.
After it was included in the King's Speech, we can be fairly confident that this policy will feature in Chancellor Rachel Reeves's first Budget which is on 30 October 2024.
Here, I'll give you an overview of Labour's plans before turning to your specific questions.
First, let's look at the definition of a private school, as this will be relevant.
A private school, also known as an independent school, is one which charges fees for pupils to attend. They do not have to teach the national curriculum at present, but they have to be inspected.
About half the independent schools have charitable status and about half do not.
Some of these schools specialise in teaching children with special educational needs and disabilities, known as SEND.
Sometimes local authorities will fund children who have education, health and care (EHC) plans to attend these special independent schools.
What are Labour's plans for private school fees?
Labour plans to remove the current VAT exemption and also business rates relief for private schools, raising an approximate £1.5billion per year.
This will be spent on 6,500 new teachers, teacher training, delivering work experience and career advice for young people, amongst many other educational projects.
As noted above, most of these plans are paid for by local authorities but the VAT changes will not affect those children whose needs can only be met by a private school.
The Chancellor is permitting local authorities to reclaim the VAT where they pay; if a parent doesn't receive local authority funding, then it is less clear what the position is.
How will removal of the VAT exemption work?
Independent schools, regardless of whether they have charitable status or not, are exempt right now from charging VAT, if they are deemed to be 'eligible bodies'.
Along with fees for education, those for related services such as boarding, trips and catering are also currently exempt.
VAT will in future apply to tuition fees and boarding fees.
It will not apply to nursery care, wraparound childcare (before and after school care), school meals and holiday clubs and part time classes – music, drama, and so on.
The legislation is currently laid down in the EC Directive 2006/112/EC and is implemented in the UK under the VAT Act 1994 (known as VATA 1994), which was retained after Brexit.
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Changes will require careful drafting.
The VAT charge will apply to both UK and overseas students and will apply across the UK.
Will changes be made retrospectively? Can you pay school fees in advance to avoid the VAT?
You asked whether Labour will try to retrospectively charge VAT on any school fees.
The Chancellor Rachel Reeves has confirmed that the VAT exemption would not be applied retrospectively
However, there has been much discussion about whether parents should pay fees in advance for subsequent school years, prior to any VAT legislation change, and therefore avoid the charge - this is known as forestalling.
Unfortunately, it's not that simple and this is why.
Labour had said that the VAT charge will apply from 1 January 2025 but it will catch pre-payments made on or after 29 July 2024.
This would mean that on any fees paid from now for terms starting on or after 1 January 2025 school year onwards, VAT can be recovered.
The Chancellor has stated that prepayments of fees for terms starting on or after 1 January made on or after 29 July 2024 will have VAT applied.
Anti-forestalling legislation has been used before. It was introduced by George Osborne when the VAT rate was raised from 17.5 per cent to 20 per cent in 2011.
It was also used when changes were made to VAT rates and certain loopholes closed in 2012 - including the infamous Pasty Tax, which was eventually scrapped.
Money spinner: Labour plans to use the estimated £1.5billion annual income from VAT on school fees to hire and train more teachers in the state sector and provide work experience
Will there be legal challenges?
You asked about whether removing the VAT exemption will stand up legally. I am not a lawyer, but it is quite possible there will be various challenges depending on the legislation brought in.
Part of the reason why I believe no retrospective VAT charge has been made on fees is due to the legal complexities of doing so.
Tax-Free Childcare and private school fees
Regarding your question on Tax-Free Childcare, which provides up to £2,000 a year to help with childcare, this can be used by parents to cover some kinds of costs but not others.
There is a useful explanation on the Revenuebenefits website, which is a partnership between the Low Incomes Tax Reform Group and Rightsnet, created with support from HMRC.
It says: 'Tax-Free Childcare payments are for actual childcare but there are various situations where the childcare fees also include other items.
'Where the childcare is provided by a private school where the child attends, tax-free childcare can be used to pay for those costs if they:
- Relate to a child under compulsory school age, or
- Do not include any element of compulsory education, or
- Are for childcare provided out of school hours.
'If the costs are partly for qualifying childcare and partly for compulsory education, only the portion which relates to the qualifying childcare can be paid for using the tax-free childcare account.'
Will private schools have to pass on VAT in full to parents?
At the moment, schools are exempt, meaning that they are not VAT registered.
They don't pay VAT but they don't claim it back either.
The Institute for Fiscal Studies expects the average net VAT payable to be around 15 per cent, due to being able to offset input tax on purchases.
Additionally, some schools might be able to reduce the bill by reclaiming VAT under the capital goods scheme, or on capital expenditure that doesn't qualify under the capital goods scheme.
If they are charities they will still be liable to be registered for VAT if they exceed the VAT registration threshold, but they will continue to receive tax beneficial treatment as a charity - Labour is not removing their charitable status.
Many schools, like most businesses that deal with the public, will also no doubt absorb a proportion of the VAT themselves, to avoid a price increase of effectively 20 per cent.
What can parents worried about paying VAT on school fees do now
If you have already paid, you are probably OK, but on payments from (and including) 29 July, VAT applies.
Additionally, business rate relief is being removed from April 2025 and even those schools which are charities will not be able to claim charitable relief.
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