Learning to live with VAT

Independent schools are currently exempt from charging VAT on school fees.

They are “eligible bodies” in VAT legislation. Exemption also extends to all goods and services that are “closely related” to the provision of education, such as catering and boarding for pupils, educational school trips, sporting facilities and certain classroom items. In practice this means that most schools are not registered for VAT and are unable to reclaim VAT on expenditure. 

There is a cloud on the horizon which bursars and governors will be well aware of. That is the potential for the addition of VAT to school fees should the Labour Party succeed at the next General Election and implement their intended policy.  

This would ultimately result in a cost to schools, potentially affecting all independent education providers, including small, not-for-profit/charitable organisations, perhaps with a niche focus and even those that hire facilities from schools, such as English as a Foreign Language providers.  Bursars will be thinking about the potential implications of such a change and what they can do to minimise their exposure.   

We are not privy to any revised VAT legislation and there could be a long period of consultation and deliberation, including a period between any announcement and before new legislation receives royal ascent. The government will need to consider inadvertent effects on certain bodies and tweak draft legislation to ensure its policy’s aim is targeted. 

We will need to await the draft legislation before confirming the precise effect of any change, but some of the things to consider are below. 

Advanced fees

It is possible, in theory, to offer parents an ability to pay fees in advance of the forthcoming year/years. Whilst the ‘tax point’ of payment would be when it is made, and so exemption would apply at that time, HMRC may well introduce anti-forestalling legislation preventing such planning.  They have done so before for other rate changes.  Fees in advance of an announcement of a change should in theory not be caught by this, but it would also theoretically be possible, if unlikely, for legislation to be introduced with retrospective effect.   

In summary, whilst advanced fees could potentially work, this cannot be guaranteed. Even with caveats in agreements with parents requiring VAT to be charged should it become due, there could be practical issues in enforcing such measures. For example, children may no longer be at the school, or their parents’ circumstances may have changed. Pricing might also be difficult, especially if the period to which advanced fees relate is more than a year away.   

Can other items supplied still be exempt or subject to an alternative relief?

Thoughts about moving an activity to a trading subsidiary (for charitable organisations, for example) would in theory be possible but would almost inevitably be challenged by HMRC as avoidance. The legality of such measures would be scrutinised, and directions could be given to group entities as though they were one taxable person. HMRC might also argue that planning is contrary to the principles of VAT legislation (i.e. abusive), possibly ending with penalties. Litigation would be very expensive, hence great care would be needed for any bullish planning structure.   

The reality is that options may be limited. Some advisers may offer bold structures to mitigate this potential issue, but those that are cautious should think about normal management of VAT. In any event detailed provisions should be considered carefully once/if draft legislation and guidance is available.   

Delving deeper, how will the VAT law change?

The expectation is that certain types of schools would be removed from being “eligible bodies”.  This would presumably remove “closely related” items, such as transport, accommodation and sporting facilities from the education exemption, potentially allowing other reliefs to apply. But there is a further general VAT principle which could mean that reliefs are unavailable. These require supplies to a person that are ancillary to a predominant supply (of education in this case) to follow the predominant supply, meaning that other items could also be subject to VAT. This could prevent any artificial ‘unbundling’ of supplies and would be difficult to overcome. Nevertheless, it would be advisable to consider if the provision of transport, accommodation and sporting facilities could fall within a different zero-rated or exempt relief. 

Other things to watch out for in VAT

Whilst the addition of VAT to fees would allow for the majority of the VAT incurred on expenditure to be reclaimed, some independent schools may offer subsidised education. These could be regarded as non-business activities, adversely impacting VAT recovery. 

Supplies of accommodation and facilities to other schools, such as hires to English as a Foreign Language (EFL) providers, may well be subject to VAT, whereas previously there may have been an exemption of services closely related to the education the EFL provides, under the ‘eligible body to eligible body’ exemption. 

Are there VAT advantages we should look for?

There is one area which may present a significant opportunity. That is VAT spent on capital building projects both anticipated and those within the ten years before any change in legislation.  If there is more than £250,000 plus VAT of capital expenditure on certain building projects the law requires a VAT registered business to review the use of the property over a ten-year period and adjust VAT initially recovered for any change in taxable and exempt use. This is the Capital Goods Scheme.  Should VAT be due on fees and perhaps on sporting services, there may be an ability to claw back some of the VAT incurred. 

Rupert Moyle is the VAT Partner at Kreston Reeves LLP.  If you need VAT advice on this or any other area please contact him here.

This article first appeared in Independent Schools Management magazine in its February 2023 edition.