One of the questions that has rumbled in the background of the debate about VAT and school fees is whether a new government might seek to make VAT payable on payments into fees in advance schemes, even if those payments were made before any formal announcement of a change to the rules.
The threat of retrospective taxation has been discussed in relation to school fees ever since Labour announced its plans to end the VAT exemption, so there were sighs of relief when the Shadow Chancellor, Rachel Reeves, announced last week that:
We are not going to have a retrospective tax. I don’t think that would be the right thing to do. So these changes would be in our first budget, but they would come in after that, not retrospectively.
For a brief moment, those of us who had been reminding ourselves of the various arguments against retrospective taxation thought we could stop worrying. It is now clear that the proposed change in the VAT rules will not be announced before an Autumn Statement, and it seems realistic to think that the VAT burden might not materialise until April or even September 2025. Does this mean that parents can continue to pay fees in advance, safe in the knowledge that they will not have to pay VAT on top of what they have already paid in advance before the rules change?
As always, things are not necessarily that simple.
In particular, it is still not clear whether there is scope for HMRC to challenge the basis on which it is argued that advance payments made before the rule change will be exempt from VAT to the extent that they relate to education provided after the rule change.
By way of a reminder, liability for VAT is determined by reference to the tax point and the rate of VAT in force on that date for the particular goods or services being supplied. In most instances, this tax point occurs when the delivery of goods or services has been completed. However, in situations where the services are provided on a continuous basis, the tax point will arise instead either when a VAT invoice is raised or when the customer pays. The example often used to illustrate this is a rolling contract for a telephone service, under which the customer pays periodically rather than when the contract comes to an end.
In the case of school fees, there is, of course, no scope for a VAT invoice to be issued at this stage because of the existing exemption from VAT, so the key question is whether actual payment for education is made in a way that triggers the tax point.
One important factor here is whether sums paid in advance represent payment for services that are clearly fixed and defined at the time of payment. In the ECJ’s judgment in the BUPA Hospitals and Goldsborough Developments case in 2006, it was held that sums paid up front would not accelerate the arrival of a tax point if in reality the arrangement was for sums to be credited against the price of goods that the purchaser then chose from a list, and for the purchaser to be able to withdraw the unspent balance. For the tax point to arise earlier, there has to be clarity about precisely what the customer is paying for and a commitment to buy those particular goods or services.
Applying this to school fees paid in advance, this is why existing schemes are drafted in a way that defines the education services to be provided with as much precision as possible (and usually excluding any optional extras such as music lessons or school trips) and makes it clear that the money belongs to the school and is not refundable.
One further lingering concern about the proposed change to the VAT rules is whether HMRC might take the view that tax points are only triggered as and when the school makes the relevant entry in its accounting systems to record the allocation of funds from parents’ pre-paid sums towards the settling of liability for fees, and that until those sums are allocated, the money paid by parents is more in the nature of a payment on account of future purchases.
But perhaps the key issue is whether things are going to change immediately after the general election. Even if the changes to the legislation do not take effect until a much later date, there is scope for anti-forestalling measures to limit the window in which payments of fees in advance will achieve a VAT saving. The Shadow Chancellor’s comment last week did not suggest that Labour was backing down from its declared intention to use anti-forestalling measures, so schools and parents need to bear in mind that, as soon any an announcement of specific changes to the VAT rules is made, VAT would be levied on payments in advance made after that date, even if the relevant Act of Parliament is not passed until later.
How Moore Barlow can help
As independent school lawyers we regularly advise on governance issues from updating the governing document to mergers and collaborations, fees in advance schemes and everything in between. We also provide training for Governors either on a bespoke basis or as part of our conference programme for Independent Schools.
