Pay fees upfront to take the sting out of private school VAT?

The issue

Once again, we face the prospect of VAT being applied to public school fees, which is currently generally not the case due to education being an exempt supply and the fact that many schools set themselves up as charities. A few years ago, it was the Conservative Government who was suggesting that all school fees should be subject to VAT. They ultimately did a U-turn on this policy because they decided that it would not raise any money, broadly because any extra VAT that was raised would be needed to meet education costs for private school pupils moving to state schools. We now face the very real prospect of a Labour Government coming into power next year and they have clearly stated that they intend to introduce VAT on school fees.

Bridget Phillipson, the Shadow Education Secretary, said (in early 2023) that “Labour will put our children, their futures, and the future of our country first by asking those with the broadest shoulders to contribute their fair share by requiring private schools to pay business rates as state schools already do and to pay VAT as our colleges already do.”

This would be a big blow to the private education ‘industry’ because parents would have to take a 20% hit on fees or schools would have to take a hit on their income. In reality this would not come in until early 2025 (assuming a final quarter 2024 General Election) although common sense dictates that it is more likely to be phased in over a period of time.

Example

Take a school with annual fees of £10,000 (to take an easy yet unrealistic example for most fee paying secondary schools!). If VAT were to be introduced at the 20% rate then parents would have to pay £12,000 for the school to still receive £10,000. Alternatively, the school could keep the price to the parents at £10,000 but this would then mean that it would only receive £8,333 in real terms. In reality, the end result is more likely to be a combination of these two outcomes.
 
Protection

With the above factors in mind it is likely to be beneficial for schools and parents to agree to advanced payment terms (subject to parents’ available cash). The point here is that the issue of an invoice is usually the VAT point and so fees should be safe from the prospect of VAT if they are paid early. Schools should consider using the current uncertainty as a basis for offering advanced billing options. For example, it may be attractive for parents to consider paying the remaining 4 years of their children’s school fees in one go if they feel that they may end up with a 20% ‘hit’ otherwise. The school may also want to incorporate some kind of early payment discount as an added incentive which is very tax efficient in itself (and is already common practice). It is tax efficient because the discount is not actually taxed unlike any interest which could alternatively have been earned (which should be considered in any decision-making process).
 
This opportunity could be offered by schools over the next year. Alternatively, it would be sensible for parents to simply ask about early payment opportunities, factoring in the potential VAT benefit of early payment.
 
Our view

Clearly, early payment deals for private schools will be more attractive if as well as involving discounts they also provide an opportunity to save on VAT that would otherwise be payable down the line. Depending on how the rules are implemented it may even be possible for VAT to be saved if the invoice is raised now but not paid until the normal payment dates. Would anti-avoidance legislation apply here? I think that it is very unlikely that this could be applied to an arrangement that seeks to avoid an anticipated tax. It is more likely that VAT rules would be changed to collect VAT based on the date that the services are supplied rather than when the invoice is issued, but seems unlikely.

The weekly Tax Bites are not intended to constitute tax advice. The information provided in these articles is based on our understanding of current tax law; however, we do not represent or warrant the accuracy of the information contained therein, and any information provided may be incomplete or condensed. Furthermore, the suggestions contained within these articles are for discussion purposes only and should not be relied on. You should seek formal tax advice before proceeding with any of the suggestions contained in this document.