However, it was confirmed in the Budget that from 1 January 2025, all education services and vocational training supplied by a private school (or a “connected person” to the school) will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.

This means many schools will need to register for VAT, as their taxable sales will exceed the £90,000 registration threshold.

Nursery education, whether stand alone or in a nursery attached to a private school, will remain exempt where the class is wholly, or almost wholly, made up of children below compulsory school age.

What services are included in the new standard rate?

Whilst education and boarding fees at private schools will fall into the new rules, other ‘closely related goods and services’ linked to education will continue to be exempt, e.g. school meals, transport and stationery.

Hiring out rooms (e.g. for use as meeting rooms) will usually be exempt, whereas hiring out sporting facilities, is more complex and can be standard rated.

What does this mean for input VAT recovery?

Schools will fall into 1 of 2 categories;

a) Only providing taxable supplies therefore input VAT recoverable in full (other than blocked VAT)

b) Provide some taxable supplies but also some other ‘closely related’ exempt services, in which case they will need to manage the ‘partial exemption’ complexities, apportioning expenses between taxable and exempt categories.

We expect that a lot of schools will fall into category B. Those schools may wish to consider their corporate structure. For example, if input VAT relating to exempt supplies is calculated and is over the ‘de minimus’ level for partial exemption, should they consider setting up a new company in the group and running those other exempt activities through that separate company?

What about the Capital Goods Scheme?

The Capital Goods Scheme is a scheme that aims to ensure VAT is only recovered on capital items to the extent they are used for taxable supplies over a 10 year period. It can result in a clawback of VAT where VAT was recovered in full on purchase and that asset later starts being used for an exempt purpose.

However, in the case of private schools, it may also result in a VAT deduction. In reality, most capital items would have been purchased at a time when schools were making exempt supplies, therefore they would not have recovered the VAT. Therefore, there may be scope for schools to recover VAT on capital expenditure already incurred. This is most likely to apply to schools which have spent significant amounts (>£250k) on building works in the last 10 years.

Anti-Forestalling

It was on 29 July 2024, when Rachel Reeves delivered her first statement to the House of Commons, that the intention to review and change this was announced, therefore schools were offering various ‘pay in advance’ schemes ahead of the October budget, to accelerate payments whilst the fees were still exempt.

However, it has been clarified that any payments made after 29 July 2024 covering a term starting on or after 1 January 2025 will be subject to VAT.

We expect that many schools will have protected their position (within their terms and conditions) and will look to charge on this cost to parents, in which case they may need to do further invoices to pass this cost on.

Making Tax Digital

Schools will need to comply with the ‘Making Tax Digital’ requirements. This means the schools must keep digital records of transactions using a Making Tax Digital compatible software, and submit their quarterly VAT returns using this software.

What can Rickard Luckin help with?

• Registering for VAT if not done already
  
• Analysing services to determine which are taxable and which are exempt
  
• Considering the impact on input VAT recovery and whether any restructuring would be beneficial
  
• Assist with making tax digital compliance
  
• Assist with claims for historic capital expenditure under the Capital Goods Scheme

This marks a significant shift for private schools requiring thorough planning. If you need assistance or advice regarding any of the above, please contact Rickard Luckin .