VAT on Private School Fees: What Labour’s Proposed Changes Mean for Parents and Schools

One of Labour’s key policy proposals is to remove VAT exemptions and business rate relief for private schools. This could generate an estimated £1.6 billion annually, but what will this mean for parents facing increased fees and schools navigating complex tax regulations?

The Current VAT Situation

Currently, education provided by eligible bodies, including private schools, is exempt from VAT. Labour’s proposed changes would likely target this eligible body status, resulting in a 20% VAT on private school fees.

The Rise of Prepayment Schemes

In response to the potential VAT changes, many parents are considering prepayment schemes to secure current VAT exemptions. By paying fees in advance, the tax point for VAT is triggered before the new rules take effect, potentially avoiding the additional 20% cost.

Labour’s Anti-Forestalling Measures

Labour is aware of these schemes and has signalled potential anti-forestalling measures. These could include:

• Legislation covering payments made between the announcement and enactment of the tax change.
• Retrospective legislation affecting payments made before the change but covering services delivered after.

Implications for Prepayment Schemes

The success of prepayment schemes depends heavily on the specific anti-forestalling measures implemented. It’s crucial for parents and schools to understand that these schemes do not guarantee VAT avoidance.

Risks and Considerations for Schools

Private schools offering prepayment schemes face potential VAT disputes with HMRC, which can be lengthy and costly. Schools must carefully weigh the risks of pursuing former students for additional VAT if the schemes fail.

Planning for the Future

Private schools can reclaim some VAT on their costs, but a 20% increase in fees will still significantly impact many parents. Schools need to plan for how to manage fee increases while maintaining their competitive edge.