The Labour Party has stated that should it win the next General Election, it will remove the current exemption from VAT and business rates for independent schools.

It is estimated this would raise around £1.6 billion a year in extra tax revenue, although this figure is open to debate and will be determined by numerous factors, including the extent to which pupil numbers in independent schools would decrease and the cost of educating additional pupils in the state sector.

Here we take a look at the potential implications of introducing VAT at the standard rate of 20% on independent school fees and address some of the many questions arising from the proposal.

Current VAT position

Under VAT law in the UK, the provision of education by ‘an eligible body’, which includes provisions ‘in a register of independent schools’ is exempt for VAT purposes.

Goods or services closely related to the supply of education are also VAT exempt, and consequently, independent schools cannot usually recover the VAT incurred on related costs.

Proposed scope of the introduction of VAT

There are several ambiguities to the removal of the VAT exemption from the independent sector:

  • Will it apply to groups of children with special needs, that cannot be catered for within the state sector?
  • What about pupils with an educational healthcare plan?
  • Will nursery education within independent schools also be subject to VAT, or will the retention of charitable status enable continued exemption?
  • Will private tuition remain exempt from VAT?
  • What about the liability of closely related supplies of goods and services, such as transport? Could these be exempt from VAT at the standard rate when supplied separately?

This all points to a potentially complex VAT position for independent schools, with the possibility of continuing partial exemption calculations year after year if only some pupils and scenarios meet the exemption criteria.

Recovering VAT on related costs

If the standard rate of VAT is imposed on independent school fees, a resultant countermeasure would be for schools to recover VAT on related costs.

Independent schools may see some value in recovering the (previously irrecoverable) VAT on costs such as:

  • Utility bills;
  • Telecommunications;
  • Repair and maintenance; and
  • Equipment and furnishings.

There may also be other opportunities for absorbing the VAT levied on fees, including

  • Capital expenditure – savings could be made on upgrading or improving facilities if the VAT can be recovered as input tax. With this in mind, it may be worthwhile deferring large capital expenditure projects until it is known whether this legislation will come into effect;
  • Capital Goods Scheme – recent works carried out within this scheme may benefit from recovery of the VAT if there is sufficient documentation to verify the scheme calculations; and
  • External letting activity – consider if a future option to tax will be required to preserve recovery of the VAT.

Each of these opportunities for recovering VAT, and the extent to which they can offset the 20% VAT on fees, depends on the individual circumstances of the school and professional advice should be sought.

Prepayment of fees

Another area of ambiguity is the prepayment of fees. Would this mean no additional VAT charge is liable under the ‘time of supply’ rules?

VAT is due at the time of supply, or the tax point. When services are ‘continuous’ in nature, which it could be reasoned education is, the tax point is created when a payment is received or a VAT invoice issued.

If a tax point is created by a prepayment of fees, before any change in VAT liability from exempt to standard rated, then should the supply still be exempt from VAT?

It is possible that anti-forestalling measures will be introduced to prevent any change in behaviour to avoid the payment of VAT due. Any new legislation may be effective from the date the change is announced, as opposed to when the law is actually passed, which, in turn, has an impact on any retrospective payments.

There should be caution around the prepayment of fees, as any government response to their VAT treatment and the timing of new legislation is conjecture and upfront payments may still incur VAT at the standard rate.

Preparing for the change

What is clear, is that any changes to VAT will have complicated repercussions and careful consideration is required to effectively manage any new tax burdens.

At present, with no confirmed detail as to how the policies will be put into practice, it is too early to advise on the precise implications. Despite the uncertainty, preparation is key when it comes to mitigating any potentially detrimental impact the changes may initiate.

Schools may look to review their current contracts and terms and conditions to ensure they have the contractual means of charging VAT, in addition to their fees, should the standard rate of 20% be introduced.

How M+A Partners can help

M+A Partners will work with independent schools to help them make the right VAT decisions, providing specialist advice on VAT and tax responsibilities. We can help you to clarify your exposure to VAT, determining how much VAT could be potentially offset against the payment of VAT on fees.

Our team of experts advise on the categorisation of different types of supply, identifying any costs that are exempt from VAT or zero-rated.

If you would like further information on how we can assist in meeting your VAT obligations or are seeking specific advice on the potential removal of the current exemption from VAT for independent schools, please get in touch with us using the details below.

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