Scope of the VAT introduction to private school fees

There has been significant discussion surrounding the scope of the change of private school fees (to 20% VAT) from the start of the January 2025 term, which has required private schools to register for VAT.

The legislation is precisely written and applies only to private schools, leaving the remaining VAT exemption for education unchanged. This means that training events offered by eligible bodies (not-for-profit organisations) and tuition (for example, riding schools) provided by sole proprietors or partners remain exempt.

VAT on school meals for private school pupils

This issue has provoked some controversy following the introduction of VAT to private school fees. The key question is whether a school’s fees, which covers both education and accompanying meals, constitutes a “single” supply for VAT purposes, or a “multiple” supply.

If it is considered a single supply, the whole fee is subject to 20% VAT. However, if it is two supplies (education and catering), then the education is subject to 20% VAT, whereas the meals remain VAT exempt.

The negative implication of treating the meals as VAT exempt, is that the VAT on the costs, perhaps from a contract caterer, is not recoverable as input tax. Additionally, it will reduce the taxable to total percentage for partial exemption, thereby reducing the recovery of VAT on overhead costs.

For further advice on how to structure payments to ensure the exemption applies, please get in touch with one of our Indirect Tax Services team members.

Private Schools. Timing of VAT income on advanced fees

The basic VAT rule states that when a parent pays in advance for future school terms, the receipt of monies creates a tax point for VAT. As a result, the output tax must be declared in the VAT return covering the payment date. If a sales invoice with VAT is issued before receipt of the monies, this creates an even earlier tax point. This tax point takes precedence over the fact that the education has not yet been delivered.

However, for advance payments received between 29 July 2024 (when the government formally announced the introduction of VAT) and 29 October 2024, there are special rules. The tax point for advance payments received within this 3-month period, is the first day of the term that has been pre-paid.

For example, if a parent paid in advance on 1 September 2024 for the Spring and Summer terms of 2025, a tax point is created in January 2025 for the Spring term and April 2025 for the Summer term.

If you wish to discuss this in further detail, please get in touch with one of our Indirect Tax team members.

VAT partial exemption for private schools

The term “partial exemption” is used to describe a business that has both taxable income (which is VAT standard, zero or reduced rate) and VAT exempt income. The school must use the standard method of partial exemption based on turnover, unless it applies successfully to HMRC to use an alternative, special method. The calculation is taxable income as a percentage of total income. Total income is taxable plus VAT exempt income. Grants, bursaries and donations are excluded from the calculation. This percentage is rounded up to the next whole percentage point, so if for example taxable income is 81.1% of total income, the taxable rate is 82%.

If you wish to discuss this further, please use the contact one of our Education team members here at James Cowper Kreston.

If you would like to arrange a virtual meeting to discuss your specific circumstances in relation to any of the above, please get in touch with your usual contact within James Cowper Kreston or contact me using the details below.

Darren O'Connor

Partner

T: +44(0)7990525362 | E: DOconnor@jamescowper.co.uk