Value added tax, or VAT, is the tax paid on most goods and services not considered essential. The standard rate is 20%.
Historically, independent schools in the UK have not had to charge VAT on their fees due to the exemption for organisations providing education. Approximately half of private schools are also charities, so they can take advantage of other tax breaks.
The new Labour government committed to removing these financial advantages before the election in July and has now published its plans to remove the tax exemption for independent schools from 2025.
What and when will be the change?
Independent schools will have VAT of 20% applied to all school fees from 1st January 2025. The government has also closed the door on prepaying fees to avoid the tax, with VAT added to any payments made after 29th July 2024 for the January 2025 term.
Will fees necessarily rise by 20%?
While independent schools will have to apply the full 20% standard VAT to fees, they will also be able to recover input VAT on some of their costs, with an estimate that the likely net increase of 14–18% will be passed on to parents.
This headline increase may be less still, as independent schools will no doubt look at other efficiencies or a potential reduction of their profit margins, particularly if they determine that many children may be withdrawn in the face of rising costs.
High-profile announcements see Eton College stating it is planning to pass the full 20% onto parents, with fees rising from £52,749 to about £63,000. Meanwhile, the largest independent girls' school trust, The Girls' Day School Trust (GDST), representing 23 independent schools, has announced a 12% increase in fees.
How consistent will fee increases be across schools?
All schools will be required to charge VAT, although the impact on fees will inevitably vary on a school-by-school basis. More services may be withdrawn or placed on a pay-by-use model, allowing parents to tailor the services their child receives, particularly extra-curricular activities, by opting in or out.
There had been some suggestion among tax professionals that boarding fees might continue to be exempt. However, the government recently confirmed that "boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%."
Another factor is that larger institutions with higher pupil numbers and more resources may well be able to find efficiencies and absorb costs more easily than smaller schools. As a general rule, the smaller the school, the more likely the fees will rise proportionally more.
What impact might the change have on school numbers?
There are a wide range of estimates for the number of students likely to leave the private education system as a result of the policy change. In a survey of high-net-worth individuals reported by The Times and conducted by Saltus, a financial planning firm, 26% of respondents said they "would have to remove their children from independent school if VAT was imposed."
However, the Institute for Fiscal Studies, a non-political research institute, has cautioned that how people respond to a survey is rarely a good guide to how they behave in practice. They estimate a reduction in independent school numbers of 3-7%, spread over time.
What about children with special educational needs?
The legislation for the VAT change is still in draft stage, and not all issues have been addressed. One key area is the position of children with special educational needs (SEN).
To date, Prime Minister Sir Keir Starmer has stated that children with legally binding education health care plans (EHCPs) who are in private schools due to insufficient provision in the public sector will not have to pay VAT. However, parents who choose to pay fees for their SEN children at a school of their choice will not be eligible for relief.
How has the sector responded?
At the time of writing, a consortium of private school heads and governors have written to the Treasury stating that imposing VAT in January could lead to a large number of pupils leaving private institutions for state schools in the middle of the academic year.
They contend that this would cause chaos for both the private and state school systems and that the current consultation on the legislation should be extended, with any VAT changes delayed.
The bottom line
Parents with children in private schools, with the limited exception of those with EHCPs, should expect VAT of 20% on their child’s school fees from January 2025. Hopefully, schools will not have to pass on the full 20% rise and will mitigate wherever possible with budgetary efficiencies. While there is some activity to delay the change, your school nevertheless should by now have made provision for this change and be able to advise what their new fee structure will be.
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