The VAT rules for private schools changed substantially at the end of 2024, with the imposition of VAT at the standard 20% rate on tuition and boarding fees for pupils aged between 4 and 18. The changes took effect for terms beginning after the 1^st of January 2025.

Such charges had previously been exempt from VAT which meant that private schools did not charge VAT on their fees. Parents of pupils cannot recover the VAT that now has to be charged to them by the school, so the VAT increases the cost of the children’s education.

Private schools retained their not-for-profit charitable status and eligibility for many VAT reliefs along with the ability to exempt supplies ‘closely related’ to education. So, there is now a real shift in the VAT profile of many schools, bringing with it a huge amount of VAT complexity.

Many schools that had not previously been required to be registered for VAT are now faced with difficulties understanding the complex VAT system and how charging and accounting for VAT impacts them.

We are now a number of months into the new rules and the purpose of this article is to cut through the complexity and to summarise the key VAT rules impacting private schools.

We have been working within a large private school over the last 3 months to help them implement VAT systems and processes to manage VAT risk, so we think we are well placed to have a good understanding of the challenges you are all facing.  NB it is important that you consider the particular circumstances of a school in relation to the areas below – subtle differences in the arrangements can change the VAT position, so we are aiming here to give an overview of the most likely position.

HMRC have promised a ‘light touch’ in the early days of the new rules where VAT errors are made, but it is fair to say that they are unlikely to have a good grasp of the breadth of different areas of VAT legislation applying to many schools.

 

VAT on fees

There are lots of sub-sets within ‘fees’ and each needs to be looked at separately as there are conditions and nuances attached – all of which may differ depending on how a particular school deals with such things.

Tuition fees for children aged 4 to 18 are subject to VAT from 1^st of January 2025. This is true regardless of whether they are paid by the parents, by a local authority (eg where there is an ECHP in place for a pupil), or by some other means where the person paying is making a payment towards the fees for an individual child (more on this below).

Bursaries provided by 3^rd parties for named pupils are subject to VAT as above, as the donor is seen as receiving something in return, ie the educational services provided to a named pupil.  If the school has arrangements where an individual donor provides a bursary for an unnamed pupil (ie they aren’t aware of how the school will allocate the bursary), it is outside the scope of VAT (it is treated as a freely given donation in this case as the bursary is not linked to any specific services).  In contrast to these bursary scenarios,  where the fees are fully absorbed by the school no VAT is due because the bursary amounts are effectively treated as a discount.

Advance Fees There was some confusion around the liability of fees paid in advance when the changes were announced. The bullets below summarise the treatment of fees paid before the changes which relate to school terms beginning after the 1st of January 2025:

• Fees paid before the 29th of July 2024 which specified on the invoice to which term the payment relates can be VAT exempt
• Fees paid on or after the 29th of July 2024 are subject to 20% VAT

Nursery Fees for nursery aged children (up to 3 years old) remain exempt from VAT.  The VAT rationale here is the school is regarded as providing ‘care’ services rather than educational services for VAT purposes.  The relevant area of the VAT legislation and guidance is the ‘VAT and welfare services’ exemption.

After School Clubs charges made for after-school and holiday clubs fall into the same area if the care given is merely supervisory in nature.  If the club provides sports coaching/training, there is a sporting exemption available for schools that are registered charities. However, where the purpose of a club is to provide tuition (that is not sport related) as opposed to ‘care’, the income from the club will be liable to VAT.

School Trips are subject to VAT where they are included as part of the overall school fee. Separate charges for trips may be seen as exempt closely related services unless the trip has no relevance to the school curriculum (e.g. a trip to a theme park).

Where the school contracts with various parties to arrange supplies such as transport, accommodation, admission tickets etc. and sells those services on to parents in its own name, the school will likely have to use the Tour Operators Margin Scheme (‘TOMS’) to account for VAT on trips. Where the TOMS applies to non-educational UK trips, VAT is due by reference to the gross margin made on the trip by the school. So if the trip runs at cost, there is no margin and thus no VAT to pay.  At the same time, VAT cannot be reclaimed on direct TOMS costs eg the hotels.  For overseas trips, no UK VAT is due on the margin because the trip is considered zero-rated for VAT.  There is a degree of confusion around things like Duke of Edinburgh activities (HMRC have stated these are regarded as exempt) and Combined Cadet Force (CCF) activities which they regard as VATable.  The logic here is not clear – both involve similar skill sets and are either ‘closely related to education’, being part of the extra-curricular offering, or are VAT exempt under the ‘sports and physical recreation’ VAT exemption.

 

Boarding Fees for boarders that cover their education along with lodgings, food, trips, activities etc. are also liable to a 20% VAT charge from the 1^st of January 2025.

A top tip is to split any amounts for school time lunches from boarding and ‘tuition only’ income because the lunches can still be treated as exempt ‘closely related’ supplies if they are shown on a separate line on the invoice to the parent.

 

Other Income including ‘closely related to education’ activities

As above, charges for goods and services separate to tuition and boarding which are considered ‘closely related’ to the provision of education remain exempt from VAT. In addition to the aforementioned lunches and school trips, supplies such as stationery, books and transport etc. may also fall within the exemption here but only if provided by the body providing the education (so not if provided by the trading company).

Some closely related supplies may qualify for zero-rating (e.g. separate sales of books, transport on school buses etc.) so, the school may continue to apply the zero-rate to these sales. In either case, the customer is not charged VAT, but zero-rating is preferable for the school because it is considered a taxable supply that enables recovery of input VAT.  NB arrangements for the to and from school transport of pupils should be considered carefully – if the school contracts in its own name for the coach transport and invoices the parent in its own name, the activities are taxed under TOMS.  The margin if any is subject to UK VAT @ 20%, even though the underlying transport itself is zero rated.

If the school has a uniform shop and café, the VAT rules applying to young children’s clothing come into play, as do those for VAT and food and take away food.  These rules are detailed and overly complex but there are zero rating reliefs within so this is an area where some focus is required if relevant.

 

VAT and Charity Fundraising

Subject to certain conditions, charities may benefit from VAT exemption for income generated from the holding of fundraising events. This is a useful relief because it allows all income generated from an event (including admissions, sponsorship, merchandise, catering/bar income etc.) to be relieved from VAT. If goods or services sold as part of the event would qualify for zero-rating (e.g. the sale of donated items, cold takeaway food etc.) then that income may be zero-rated, similarly to above.

An event will qualify where its primary objective is the raising of funds for the charity, and it has been advertised as such. It is important to note that a charity may hold up to 15 events of a particular type (eg dinners, quizzes, fairs – each is a separate type) in a single year. If more than 15 events of the same type are held then exemption is lost for all such events, even those that have already taken place.

It is fundamental that schools review all income streams to ensure the correct VAT treatment is being applied. The accounting system will also need to be updated with new tax codes and line items which may now be subject to different VAT rates.

 

VAT Invoices

Where charges are made to parents for fees etc, as this is a B2C transaction, there is no requirement to issue a valid VAT invoice.  If a VAT invoice is not raised and fees are paid prior to the term the fees relate to, the VAT is due when payment is received.

Schools my however find it helpful/easier to issue VAT invoices showing the VAT treatment of specific charges (perhaps to reduce the number of parent queries).  In this case, where a valid VAT invoice is issued, and where this is issued prior to the term the fees relate to and prior to payment being received, VAT is due per the invoice date, not the payment date.

 

VAT registration

Schools with annual sales subject to VAT exceeding the registration threshold of £90,000, should’ve ensured that they were registered for VAT by the 1^st of January 2025.

Where the school has trading subsidiaries that receive income outside of the normal charitable objectives of the school, the potential to form a VAT group should be considered. This can shield charges between the entities from VAT.

 

Input VAT on costs

Because VAT is now chargeable on a considerable proportion of a school’s income, a newly registered school may be able to be recover input VAT for the first time on some of the costs it incurs. Even a school that was previously registered will be entitled to a significantly higher recovery of input VAT.

Newly registered schools should consider whether they are entitled to recover any input VAT on goods and services which was incurred before it was registered for VAT.

Generally, input VAT is recoverable under the pre-registration rules on goods purchased up to 4 years before registration which the organisation still has on-hand at the date of registration, and on services purchased up to 6 months prior. However, because these goods and services may have been used to make exempt supplies of education in the past, there are some complex rules in this area.

 

Partial exemption and non-business restrictions

As it has exempt and taxable (standard and zero rated income), a school is unlikely to be entitled to recover all the input VAT on all its costs.

This is because the school will still make some supplies that are exempt from VAT and a restriction will apply unless it is within the very small de-minimis limit.

A further restriction will also apply if the school carries out any activities (such as services of research for no fee etc.) which are considered non-business or in some cases receives grant income to fund such non-business activities.

HMRC prescribes methods by which restrictions should be arrived at and invites proposals for special and combined methods where the school’s arrangements are more involved. This is a complex area; it is not always evident which income, and which costs should be brought into the restrictions. It is recommended that specialist VAT advice is taken to ensure calculations and restrictions are accurate.

 

The Capital Goods Scheme

A further complication for a VAT registered organisation that has taxable, exempt, and non-business activity, albeit with a silver lining, is the Capital Goods Scheme (‘CGS’).

Where land and buildings are purchased, constructed, or refurbished/extended etc. and the related VAT’able costs exceed £250,000, the recovery of input VAT on the project must be looked at over a deemed 10-year lifespan of the asset rather than on a one-off basis.

Again, this results in onerous record keeping requirements and problematic annual calculations necessary for the appropriate adjustments. However, one advantage for private schools due to the changes is that projects within the CGS may now be eligible for a higher recovery of input VAT, or indeed some recovery for the first time.  This is because the % of taxable use is likely to increase significantly.

It is clear to see how it is crucial for schools to review all the input VAT incurred in each expenditure area so that the correct amount of VAT is being recovered.

 

Managing VAT risk going forward

The obligation to charge VAT on school fees is still in its infancy so many schools have highlighted the challenges involved in meeting reporting requirements.

Even once the accounting system has been configured, and the first returns submitted, it is recommended that schools review their VAT return process and controls at least on an annual basis to help manage risk.

Schools should continue to track HMRC updates and guidance to understand and implement any legislative or policy updates in relevant areas.

Due to the complexity in switching from a largely exempt to largely taxable environment and the publicity that the changes attracted, it is expected HMRC will begin to concentrate resources in its VAT enquiries teams towards private schools over the next few years.

 

The VAT Consultancy’s team of dedicated experts would be pleased to discuss your school’s past, current, and on-going VAT reporting procedures to ensure that the school is protected as far as possible from a risk perspective.   We also have a membership subscription to My Virtual VAT Team which gives you access to easy to use VAT decision trees, VAT training courses, templates for process notes etc which may help you get VAT under control and reduce the risk of errors.  To discuss how we can help contact us today.