After months of anticipation, the Government has finally issued a detailed VAT technical note and draft legislation, regarding the proposed changes to the VAT status of private schools. This significant update initiates a seven-week consultation period, allowing stakeholders to provide their comments and insights.
The key changes announced are;
- With effect from 1 January 2025, supplies of education by private schools (and connected parties) will become liable to VAT.
- Boarding and lodging fees will also become liable to VAT
- Closely related supplies will remain VAT exempt (e.g. books, school meals, transport, stationery) which is necessary for the provision of education
- Private nursery education (up to compulsory school age) will remain exempt from VAT.
- Funded SEN/EHCP education will be liable to VAT as the funders can reclaim the VAT
- After school childcare/holiday clubs will be VAT exempt as a supply of welfare services
- Anti forestalling rules came into effect from 29 July 24 which means that parents cannot prepay for any education provided on or after 1 Jan 2025. Any prepayment schemes will be scrutinsed by HMRC
- VAT registration will be possible from Budget day (30 Oct 24) for schools which do not make any taxable supplies currently or from 29 July 24 if some taxable supplies are made
- HMRC will have a dedicated team to deal with applications and support will be provided
- Private schools which have charitable status will lose their current business rates relief
VAT recovery
The upside to the changes are that as schools will be making some taxable supplies, they can reclaim some of the VAT paid on costs. This includes VAT on capital projects and revenue expenditure. However, partial exemption rules will apply. Capital works in the last 10 years may give schools a clawback of some of the VAT paid under the Capital Goods scheme.
Next steps
Now that there is certainty and some clarity around the changes, schools should be;
- finalising the impact of VAT on budgets/financial modelling. Some schools may pass on the full 20% whilst others may pass on less, taking into account the partial VAT recovery on costs
- Identifying correct VAT liabilities and how to how to apply the partial exemption rules
- Consider the treatment of different supplies being made and reviewing contracts etc. However, HMRC have said they will be looking for any value shifting whereby schools seek to reduce VAT liabilities
- Implement software changes/new invoice formats/VAT accounting records/understand the MTD rules
- Staff training
- VAT Registration – when/how to apply
How Jones Harris can help
There is a lot to consider in a very short timescale. The Jones Harris Tax team would be happy to support you with the transition to VAT, so please do feel free to get in touch.