As predicted, it was announced by the new Labour government last month that it would remove the VAT exemption from private school fees on the 1st January 2025.
Whilst it agrees/admits it will price many parents out of sending their children to these schools, they say that it will have a minimal impact on the state school system. State schools are already losing teachers as the pressure on the sector has proven to be challenging, so the question has to be asked? What is going to be the real saving to this election banner headline?
With the less than half of the money they state will be raised predicted to be brought into the treasury, and then the pressure on schools to accomodate these additions, what is the true saving? As many of the people who send their children are self employed, you then also have the lost income tax revenue as to put a child through school, you have to either realise additional dividends or increase earnings. Without the need to pay for school fees, you don’t need to draw these dividends, leading to a loss of in some cases 33.75% of taxes. This is all exactly what it was meant to be, an election statement to get them into government with little actual financial review of the implications.
Why is VAT not currently paid on private school fees?
In UK law, the provision of education by an ‘eligible body’ which for the purpose of this article is Independent Schools, the supply is considered ‘exempt’ for VAT purposes. Then in addition, the other services supplied by the school are also considered exempt such as trips, meals, travel and any accommodation which are closely linked. There is then also another exemption for schools run as a charity or not for profit, and which then does not pay out the profits but retains them.
How would VAT then affect the amount of fees paid?
UK VAT is currently a standard rate of 20%, so if vat is charged the fees would increase by 20%. The school could add VAT onto the fees but they then have to consider the VAT which is recoverable on goods and service that it could not recover before. This is on heat and lght, repairs, professional fees, repairs and capital expenditure. The reclaim can go back 10 years so this will reduce the net amount the school has to pay to HMRC. It is expected that the average increase to school fees would be 15%, as the VAT on the income would be 20%, less an expected VAT recovery on expenses of 5%.
Would all parents pay
The simple answer is yes. Even if based overseas or paid by grandparents for example. It is about where the supply of education takes place and if the school is based in the UK, then yes all fees would attract VAT.
If you are worried about taxes e-mail Stephen Ward at tax@callan-group.com for more information.
