VAT on Private School Fees – A Small Win for Local Authority Funded Pupils

Given that VAT was introduced as a replacement of consumer purchase tax on luxury goods, it is not often that it remains a hot topic in mainstream media. 

However, following the October 2024 Budget and the announcement that VAT will be applied to private school fees, the subject has caused nationwide debate. Further still, the impact of the measure has not just increased school fees for consumers of the private education sector but in some instances has contributed to the closure of some private education providers. 

The aforementioned changes have resulted in private school’s fees becoming a standard rated supply for VAT purposes, effective for terms commencing on or after 1 January 2025. As such, private education providers are now required to account for 20% VAT on their term fees and are now being faced with a choice. 

• Pass on the cost to their customer base? or, 
• Absorb this cost within their existing fees and take the hit on their retained profits? 

When the government first published draft legislation in July 2024 setting out the details of the policies, a consultation was run for 7 weeks to invite responses and secure feedback. The underlying intention of the consultation was to ascertain whether the proposed measure would raise revenue whilst also ensuring the provision of high-quality education on a fair and reasonable basis and minimising the administration burdens for taxpayers. 

One key point that this respective consultation highlighted, was the fact that numerous pupils have their private schools costs funded by a local authority (LA), or devolved government, on the basis that the state does not deem that their needs can be met in the state sector.  

It was also highlighted that some private special schools solely provide education to those pupils who meet specific criteria as set out within the EHCP system and subsequently all their income is generated via local authority funding. Respondents suggested that all private schools should be carved out of the new policy, highlighting that the measure would be disproportionately burdensome for schools with a high level of LA or devolved government funded pupils and for local authorities to then recover the VAT incurred on these pupil’s fees. 

In anticipation of the budget in October 2024, the government considered the feedback presented and proceeded to issue their response to the consultation for England, Scotland and Wales. Ther finalised legislation confirmed that where a pupil’s place in a private school is solely funded by a LA, because either the pupil’s needs cannot be fully met in the state sector, or are best met elsewhere, local authorities will be able to reclaim the VAT they are charged on such fees via Section 33 VAT Refund Scheme. 

In essence, this means that private education providers whose sole source of income is derived from private education fees for pupils funded by local authorities will be considered fully taxable for terms commencing 1 January 2025. Furthermore, as the local authorities will be entitled to fully recover the VAT charged, there will be no irrecoverable VAT incurred for the customer base of private education providers whose pupils are funded by local authorities. 

Whilst the measure does not prevent those schools who were once considered exempt providers having to now enter the world of VAT compliance. As a fully taxable business moving forward, it does result in such providers being able to recover the VAT they suffer on business expenditure incurred in relation to the supplies made from the 1 January 2025 onwards. Thus representing a small win for those in this specific sector. 

Additionally, for private schools whose income is either wholly or substantially made up of term fees funded by local authorities, it answers the options posed at the beginning of this article. Given that the local authorities will be able to recover the input VAT incurred on such fees, the private schools in question should not absorb the VAT within their existing fees but simply apply the standard VAT rate on top of their current fee structure, minimising the impact on their profits. 

It is our understanding that many private schools whose income is solely derived by LA funded pupils were aiming to be excluded from the measure due to the feedback presented as part of the consultation. As such, they may not have yet become aware or acted on their requirement to register and account for VAT on their supplies to local authorities for terms commencing 1 January 2025 onwards. It is important to highlight that the new treatment of VAT on private school fees applies to any fees paid from 29 July 2024 which relate to the term commencing on or after 1 January 2025 onwards, and it is therefore important that private education providers are well prepared and meet their compliance obligations.