Private School VAT FAQ
What has Changed?
From 1 January 2025, all supplies of education, vocational training, and board & lodge made by a private school will be subject to VAT at the standard rate (20%).
The draft legislation defines a private school as a school/institute that provides full-time education for pupils of compulsory school age (and those up to 19) where fees are paid for the provision of the education.
Scope of the new provisions
Only supplies of education, vocational training, and board & lodge are subject to the new measures. Other activities provided by a school may still qualify for exemption where they are supplied separately from the provision of education.
The main activities that are likely to fall within the exemptions are:
- Supplies closely connected with a supply of education, e.g., school meals, trips, transport, etc.
- Supplies for teaching English as a foreign language
- Supplies of welfare, e.g., some after-school clubs
Some supplies, however, may be eligible for zero rating; e.g., if the school provides transport in a vehicle that has a capacity of 10 or more, then this is zero-rated passenger transport, which takes precedence over the closely connected to education exemption.
Supplies of private tuition will remain exempt from VAT provided the conditions are met, i.e., the supply is made by a sole trader or member of a partnership and is of a subject ordinarily taught at school or university. If, however, someone who currently benefits from the private tuition exemption meets the definition of a private school (i.e., they provide full-time education), then they would be caught by the new provision.
VAT Registration
Schools that are not registered for VAT have been able to register from 30 October 2024. There are no special methods required to register, and the normal online form should be completed.
There are no special requirements for the registration, and the normal rules apply—that is, registration is only required where
- at the end of any month, the value of your taxable supplies in the previous 12 months or less is over the registration threshold (currently £90,000)
- at any time, you expect the value of your taxable supplies in the next 30-day period alone, to go over the registration threshold.
Those trading under the threshold can voluntarily register for VAT as normal. Schools that already make taxable supplies under the threshold would be eligible to backdate their registration to an earlier period (this can extend the scope of the pre-registration VAT claims).
Fees received prior to 1 January 2025
When the measure was announced in July 2024, an anti-forestalling mechanism was introduced that meant any fees received on or after 29 July 2024 for terms starting on or after 1 January 2025 would be subject to VAT.
For any fees received after 30 October 2024, the normal tax point rules will apply, i.e., the tax point will be the date of payment or the date of invoice (if VAT registered). For any fees received between 29 July 2024 and 30 October 2024, the draft legislation gives these a special tax point of the later of:
- 1 January 2025, and
- the first day of that term.
VAT recovery
No special provisions have been introduced regarding the recovery of VAT, and the normal rules will apply. That is, VAT can be recovered as input tax where the VAT incurred relates to a taxable business activity.
For schools that will continue to have exempt income, partial exemption calculations will need to be carried out and costs attributed correctly dependent on their use.
By default, the standard method will be required, though if this is the first year of registration, then the school can opt for a use-based method. Where the standard method produces a result that is not fair and reasonable, then consideration will need to be given to whether the standard method override can apply or application for the use of a special method where it cannot.
VAT recovery on costs before registration
No special provisions have been introduced regarding the recovery of VAT incurred prior to registration, and the normal rules apply, that is, VAT can be recovered on costs where:
- For services, they were incurred within 6 months prior to registration.
- For goods, they were incurred within 4 years prior to registration and still ‘on hand’ at the date of registration.
In both cases, it is a condition that the goods or services will be used for making taxable supplies.
For services, this will mean determining whether they have already been used in making an exempt supply of education or not. Where they have, no VAT would be recoverable. For services that are not directly used in supplied (i.e., overheads), the normal partial exemption rules should be applicable in recovering a portion of the VAT.
For goods that are still on hand (and not capital goods scheme items), HMRC has accepted in their guidance that they will allow a proportional recovery of VAT based on the use of the goods over their economic life. The guidance suggests a normal economic life will be 5 years, but this should be considered on a case-by-case basis, i.e., land and property are generally 10 years. The recoverable amount would be the amount of economic life that is taxable over the total economic life.
Capital Goods Scheme
Items that fall within the capital goods scheme (CGS) cannot be recovered under the normal pre-registration rules. Instead, VAT can be recovered as an adjustment under the CGS.
Items covered by the capital goods scheme are:
- Land and property with a VAT-exclusive value of £250,000 or more
- This includes work on property such as refurbishment, alterations, conversion, and repairs.
- Computers with a VAT-exclusive value of £50,000 or more
- Computer is a single item of equipment rather than a network.
- Aircraft, ships, boats, and other vessels with a VAT-exclusive value of £50,000 or more
The main one for schools will be the land and property items. Where such an item has been acquired in the previous 10 years, then partial VAT recovery may be possible under the scheme. Any adjustments will be for one tenth of the initial VAT incurred per year for the remaining number of years the item will be a CGS item. Land and property are CGS items for 10 years (other items are 5 years).
VAT Recoverability on School Fees
Where the costs of the fees are incurred by a VAT-registered business, the normal input tax rules will apply. VAT can therefore only be recovered if the school fees represent a cost of running the business. In the majority of cases this will not be the case, as the fees will be entirely used for private purposes.
Where paid for on behalf of an employee, the VAT may be recoverable, but there will be an onwards supply to the employee, and output tax would be due (which would negate recovery of any input tax).
HMRC Links
Government Consultation Response
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