VAT on School Fees – not so simple

In this article we explore some of the wide-ranging implications that independent schools may need to address in the event of the VAT exemption for private school fees being removed.

The Labour Party policy sounds simple, 20% on top of school fees, and its been widely discussed that there would be some offset of VAT recoverable on costs. However, its likely to be still more complicated than that. Further detail has not yet been provided by the Labour Party, and we don’t have draft legislation, but the following are some key areas to consider as we approach the General Election.

VAT liability of income streams

From recent commentary it appears the intention is to remove fee-paying schools from the list of ‘Eligible Bodies’ for the education VAT exemption, and not to remove their charitable status which is more complex to implement. The likely VAT rules change would impact fees and some other income that is closely related to education, but not necessarily all private school income streams:

• Nursery fees: There is a separate childcare exemption for nursery fees and removing this would impact most nursery provision across the country, not just nurseries run by independent schools. It seems unlikely that a Labour Government would want to increase childcare costs across the board, and it would be difficult to single out independent school nurseries, so these fees may remain VAT exempt.
• Boarding: If boarding were separately contracted and paid for, it could potentially still fall under another VAT exemption, separate from the Education exemption.
• Holiday camps: Many schools let their facilities to other education or charitable organisations to run summer camps etc, and some apply a VAT exemption related to the education exemption, which may fall away after the change.
• Sports Lettings: There is a separate VAT exemption for sports admission charges by charities which is likely to remain, and many schools use this. Some schools run sport facility lettings through a subsidiary so that VAT applies, and these structures may need to be reviewed to ensure they still achieve the desired VAT positions.
• Property lettings: The land and property VAT exemptions won’t be affected by Labour’s policy so residential lettings will remain VAT exempt, and other property lettings can be exempt or subject to VAT if opted to tax.

VAT recovery

Whilst VAT on school fees would significantly increase VAT recovery, its likely for many schools that they won’t switch to full VAT recovery for a number of reasons. There is also the possibility of increased VAT recovery on past capital building projects.

• Continuing exempt income: As identified above, some types of income could remain exempt, which would require a partial exemption VAT recovery restriction.
• Free places: 100% bursaries and other free places may be seen as a non-business activity which could result in a proportional restriction on VAT recovery.
• Fees in advance: Many schools operate a Fees in Advance option where fees for future years can be paid up front. Provided the school has unfettered use of the funds, the current VAT rules mean the VAT treatment of the fees is set at the point of payment, so they are currently VAT exempt. It is likely that anti-forestalling rules will be introduced along with the headline VAT change, and this could impact on fees in advance payments received before the rule change. But if the payments received before the change remain VAT exempt, then it is possible HMRC could seek to treat pupils on exempt fees in advance education as exempt use after the change and restrict VAT recovery in respect of these pupils in future years.
• Capital Building Projects: There should be an opportunity to revisit VAT recovery on building projects over £250k plus VAT in the 10 years preceding the VAT change to gain some additional recovery. New projects after the change should benefit from increased VAT recovery, subject to the mix of income streams and ongoing VAT recovery restrictions applicable.

VAT Structure

As a result of the above complexity, the VAT changes are likely to require most schools to review their overall VAT structure to ensure that the optimal VAT position can be achieved.

• Trading Subsidiaries: It will be important to review the current VAT structure to consider if the changes impact any subsidiaries’ VAT positions. Points to consider for example, might be if the Subsidiaries are still required, or need to be updated, or moved into or out of a VAT group.
• Property Companies: Some schools hold certain properties or carry out building works in separate companies. If the VAT changes mean additional VAT recovery could be possible in the school itself, it may require changes to how properties are held. This could involve considering using the Option To Tax or VAT Grouping to secure improved VAT recovery.
• VAT Group: The changes to VAT liability of income streams, VAT recovery and overall VAT structure are likely to require a review of VAT grouping options.
• Partial Exemption Methods: Many schools will remain partly exempt, and changes in structure and VAT liabilities are likely to mean a new partial exemption special method will need to be considered and if required, negotiated with HMRC.

Please get in touch with a member of our VAT team if you would like to discuss these issues further.