How does VAT work?
VAT (value added tax) is a tax added to most products and services supplied by VAT-registered businesses. Businesses have to register for VAT if their taxable turnover is more than £90,000.
A VAT-registered business must in particular:
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include VAT in the price of goods and services it supplies to customers (the current standard rate being 20% and known, in the jargon, as its “output tax”);
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report both:
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the amount of VAT charged to its own customers; and
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the amount of VAT the business has paid to its business suppliers (known in the jargon as its “input tax”)
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by sending a VAT Return to HMRC (usually every 3 months); and
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pay any VAT the business owes to HMRC.
The VAT payable to HMRC or repayable by HMRC is usually the difference between any VAT the business has paid to other businesses, and the VAT the business has charged its own customers. So:
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If the business has charged more VAT to its customers than it has paid to other businesses it must pay the difference to HMRC; or
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If the business has paid more VAT to other businesses than it has charged to its own customers HMRC will usually repay the difference.
Private schools and VAT – the basics
At present, private schools do not have to charge VAT on their fees because there is an exemption for the supply of education Education and vocational training (VAT Notice 701/30) – GOV.UK (www.gov.uk)
This also means that independent schools cannot claim back VAT on the supplies and services they purchase from other businesses (as to which see “How does VAT work?” above).
However, the Chancellor confirmed on 29 July 2024 that VAT will be payable from 1 January 2025 on private school fees and boarding fees (but not nursery school fees).
Given that VAT will be chargeable on fees a school will be able to reclaim VAT on some costs it has paid to other businesses (see above under “How does VAT work?).
Accordingly, as schools will be able to recover VAT on some costs, schools may not have to pass on the whole 20% increase in fees to parents.
The draft legislation providing for all this is “to be treated as having come into force on 30 October 2024”.
Anti-forestalling
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Where the VAT treatment of a supply – such as a supply of education – changes from being exempt to being taxable, the time at which the supply is to be taken as having been made is crucial in fixing whether it falls within the old (exempt) regime or the new (taxable) regime.
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As VAT is only payable on private school fees with effect from 1 January 2025 a payment on 1 August 2024 would – in terms of the general rules – result in 1 August 2024 being the time of supply.
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As 1 August would be before VAT is chargeable, it should follow that no VAT would be payable on the fees. That technique is known as “forestalling”.
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The draft legislation however blocks this technique by containing “anti-forestalling” provisions.
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These “anti-forestalling” provisions mean that where a payment in respect of a term is received on or after 29 July 2024 and before 30 October 2024 (when the legislation is to be treated as having come into force) the supply covered by that payment is treated as made on the later of (i) 1 January 2025 and (ii) the first day of that term – i.e. when VAT is payable.
Pre-29 July 2024 prepayments
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It appears that the fact that a payment pre-dates the window prescribed in the anti-forestalling provisions outlined above does not guarantee the preservation of the existing (exempt) VAT treatment or that the “early” payment will necessarily escape: the Treasury’s Technical Note (“Applying VAT to Private School Fees and Removing the Business Rates Charitable Rates Relief for Private Schools” Technical_Note_-_DIGITAL.pdf (publishing.service.gov.uk) said:
“… if the [prepayment] scheme involved paying a lump sum to the school in advance, but the details of the supplies that the money was buying were not determined at the time the money was paid (i.e. if the money paid did not relate to specific terms’ fees that had already been set), HMRC stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due.”
Possible challenges
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There have been reports in the press that the government is facing a potential legal challenge to its plans to remove the exemption (see Millie Cooke, “Private School VAT raid facing legal action as ministers poised to introduce concessions for military”, Independent, 10 October 2024; and Jonathan Ames, “Private Christian Schools to sue government over VAT plans”), the Times, 8 October 2024). It will be interesting to see what develops. So far, the government has said it does not comment on potential litigation matters.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Paul Neilly: email Paul@mitchells-roberton.co.uk