Tax Planning Around VAT on Private School Fees

With the election date fast approaching and opinion polls predicting a change of government, clients may now be worried about one of Labour’s flagship policies, VAT on independent schools, and looking for planning opportunities to mitigate any increase in costs this causes.

Labour’s manifesto lacks specific implementation details, and the election campaign hasn’t provided much additional information beyond stating that it won’t affect certain students with EHCPs and that it won’t take effect until 2025, most likely in the latter half to align with the upcoming school year.

Given the lack of details, any concrete planning at this stage is practically impossible and entirely theoretical, and clients should be advised as such. We have at Vantage, however, received numerous queries around two planning methods in particular, which we will look at in this article: pre-paying several years in advance before the change is implemented, treating the cost as a company expense, and reclaiming the VAT.

Paying Fees in Advance

This is a method I have been asked about for several years now, both by schools and parents, and to which I have always given the same answer – maybe, but unlikely.

For those unaware of how this would have any effect on the VAT, the basis proposition is to manipulate the tax point such that it occurs before the proposed changes have any legal effect. Under the time of supply rules for VAT, a tax point for services is triggered on the earlier of:

1. The completion of services (the basic tax point)
2. The issue of a VAT invoice (actual tax point)
3. The receipt of payment for the services (actual tax point)

If an actual tax point precedes a basic one, the basic has no effect. As school fees are currently exempt supplies, option 2 has no real relevance as you cannot issue a VAT invoice for an exempt supply (this requires actual VAT to be charged), and option 1 has no planning opportunities as this will occur after any change.

The method therefore relies on option 3 – the receipt of payment in advance. As this occurs before the basic tax point (which is the default for an exempt supply), it would override this. If this is done before the first budget of the new government, then in theory you could front-load the costs, and the basic tax points after this for each school year would have no effect on the VAT position, as at the time they were paid, the supply was exempt.

There are two issues with this method: one VAT-related and the other practical. Turning to the latter first, a client needs to be able to afford to pay several years of school fees at once (or at least obtain finance for this), which, depending on the school, is no small feat.

On the VAT side, it assumes that Labour will not invoke anti-forestalling legislation alongside the change to the rate of VAT as either a) they have not thought about this planning opportunity or b) they will turn a blind eye to its implementation.

Neither option is realistically likely, and given the current commitment to not raise the rates of the main taxes, they will likely seek to implement anti-forestalling legislation to maximise the VAT raised by this policy.

Anti-forestalling legislation, for those who have not come across this, is legislation that will seek to stop the manipulation of tax points by moving the actual tax point to the basic tax point, where it occurs before the basic and before the change in VAT rate. This was last implemented in 2010/2011, when the rate of VAT was increased to 20%, though surprisingly, it was not implemented for the temporary reduced rates during the COVID-19 reliefs.

Schools Fees as Company Expense.

The more recent proposed method is to have the fees for the school invoiced to a company that the parents are directors or employees of, then reclaiming the VAT as input tax. The school fees paid by the company are then treated either as a salary sacrifice or as additional remuneration.

In looking at these, the salary sacrifice method would not actually achieve the desired result. After the CJEU judgement in Astra Zeneca (C-40/09), HMRC revised their policy on these schemes, and the result is that the amount of salary sacrificed is now consideration for a supply, with the supply being the benefit provided under the scheme. As such, while the company could reclaim the input tax, they would also have to charge output tax on salaries forgone. This will effectively net off the VAT and put the recipient in exactly the same position as having paid the school fees directly (at least from a VAT perspective).

If treated as additional remuneration or employment perk, then the specifics would need to be considered. The most common query on this we have is only adding the additional renumeration/perk to the director. Under this example, I cannot see how VAT can be treated as an input tax as it is effectively a private use of company funds by the director, and VAT cannot be recovered where it is incurred for private use.

The alternative is that the perk is offered to employees as well as the director (be that select employees or all), and therefore the cost should be treated no different than other employee perks and incentives, e.g., gym membership (a common example provided).

The Supply of Services Order (SI 1993/1507), however, does provide that companies that make available any services supplied to them for private use or use other than business by any person must declare output tax on the value of that private use. As an employee would be using these costs for their children, there is an argument that the use is wholly private and unrelated to the business.

The normal reply to this is that it is still a business use as the costs are there purely to attract the best employees into the business, and it therefore is a real cost of business and no different than the salary paid to an employee. This may be a valid argument, but one suspects HMRC will not agree and may require a tribunal or higher court to decide.

Though it may never get as far as a tribunal, in the same way Labour would likely instigate anti-forestalling measures to maximise revenue raised, they are equally likely to anticipate this and add further provisions that will categorically disallow the cost to be treated as input tax, much in the same vein as VAT on cars and business entertainment cannot be reclaimed.

Ultimately, until we see the details of the proposed legislation, any planning is shaky at best, and you realistically have to assume Labour is also looking at any planning measures that may be taken to close down loopholes and maximise the potential revenue.