VAT on fees update

Head Ed Elliott provides an update on VAT on school fees at The Perse School.

On 29 July, the Treasury released a technical consultation and explanatory notes on ‘Applying VAT to private school fees and removing the Business Rates Charitable Rates Relief for private schools’, which can be read by following this link.

It is the government’s intention that:

• The rate of VAT on independent school fees will be 20% and it will apply from 1 January 2025 onwards (i.e. Michaelmas term 2024 fees will NOT be subject to VAT).
• VAT will apply to fees charged for pupils in all school years (Reception to Upper Sixth inclusive), but pupils in the Pelican Nursery will be exempt from VAT.
• Anti-forestalling legislation applies to all independent school fee payments made from 29 July in respect of supplies made from 1 January 2025. Fees-in-advance payments made after 28 July 2024 are no longer effective in setting a tax point, and HMRC reserve the right to challenge fees-in-advance payments made on or before 28 July 2024 if HMRC consider they are ineffective in setting a tax point.
• Some educational items will remain VAT-exempt. These include school meals, school transport, books and stationery. Schools will be required to set an accurate charge for these exempt items.
• Before and after-school childcare clubs that just provide childcare and not education will remain VAT-exempt.

The Treasury maintains that because independent schools will now be able to recover VAT on some of their input costs (but not the largest cost, which is staff) there will be a saving to schools. The Technical Guidance suggests this should allow schools to reduce their fees, so that when 20% VAT is applied to a lower fee the result is a less than 20% overall increase in costs to parents/carers.

In the technical note, the Treasury has suggested that an overall fee increase (post-VAT) of 15% is possible. It should be emphasised that whilst the Treasury has used this example figure, different schools will have different VAT circumstances and the Technical Guidance does not cover all the VAT details. In addition, the government also plans to remove local business rate relief from independent school charities with effect from April 2025. In The Perse’s case this will result in an additional cost to the School of circa £640,000 per year and a proportion of this will have to be absorbed within the 2024-25 budget.

VAT is a complex tax to administer, and the complexity is increased by the fact that some independent school services will be subject to VAT (e.g. core tuition fees), but others won’t be (e.g. school lunches). This creates a partial exemption situation and it will take us some time to model the impacts of VAT on the school budget and the consequent effect on tuition fees from 1 January 2025 onwards.

However, we hope to be able to make a modest reduction to our pre-VAT fees from 1 January 2025 onwards, and will provide more details in the autumn once the overall VAT and business rate relief situation is clearer. For the avoidance of doubt, a modest January 2025 pre-VAT fees reduction will still result in a higher cost to parents/carers once VAT at 20% is charged on tuition fees.

The Perse remains committed to academic, pastoral and extra-curricular excellence and will continue to invest in staff and facilities to ensure we provide children with an outstanding education. However, we are mindful of the financial pressure on parents and carers and are thus carefully managing our costs and developing profitable new income streams which reduce our reliance on tuition fees.

We also offer means tested financial assistance to families who could not otherwise afford our fees via our bursary programme. More details can be found here.