VAT and fees in advance schemes

A look at Labour’s proposals for VAT and fees in advance schemes, on school fees and what schools can do to soften the financial impact.

Governors and staff at independent schools will have been thinking a lot in recent months about the impact of the COVID19 pandemic as well as the rapid increase in prices of energy, food and other essentials. They may also be increasingly nervous about another challenge on the horizon in the form of a Labour Party policy that could become reality after the next general election.

Labour is clearly anxious, in the interests of party unity, to offer something up to the party’s left wing but seems to have stepped back from its earlier declared intention of abolishing private schools and integrating them into the maintained sector. It is also quite unlikely that Labour will at any time soon remove charitable status from independent schools, given the potential legal complications and the risk of alienating those nearer the centre ground, for many of whom independent schools are far from being an enemy of the party.

The focus in recent months has been much more on tackling the “tax breaks” and “loopholes” that independent schools are accused of exploiting, and to offer the prospect of bringing in extra revenue that can be used in the maintained sector.  

Of course, as soon as you look behind the headlines and soundbites, the real story turns out to be rather less controversial. The focus of Labour’s policy appears to be on preventing independent schools from benefiting from relief from business rates (which flows from their charitable status) and from the exemption from VAT for the provision of education (which is not directly linked to charitable status).

Charities do not enjoy many VAT breaks on account of their charitable status. This is something that seems to confuse journalists and maybe even politicians who talk about schools getting VAT relief because of their charitable status.

Vat concessions for charities

There are a few specific concessions for charities, so for example a reduced rate of 5% applies to fuel and power for premises where certain activities happen, and there are complex rules for reduced or zero rates of VAT on certain works such as adapting for disabled access. There is also a VAT exemption for specified types of fundraising events.

However, the VAT treatment of school fees flows not from their charitable status, but from the fact that the legislation says that the provision of education is, by and large, exempt from VAT if it is provided by an eligible body. Eligible bodies include any school recognised as such for the purposes of the Education Acts, and that includes not only those independent schools that are operated by charities but also those run for profit.

This exemption applies not only to the education itself, but also to supplies that are closely related:

  • things that pupils need for regular use in the classroom
  • accommodation for teaching
  • catering
  • transport
  • school trips

This is good news for parents, in that they do not have to pay an extra 20% on the fees. This, in turn, is good news for schools in that it means their services are more affordable than they would otherwise be. 

The prospect of losing this exemption is therefore a very real concern for schools in the independent sector, whether they are charitable or not. Many schools are now looking at how a fees in advance scheme may be able to help.

Fees in advance schemes

Fees in advance (“FIA”) schemes have been promoted up to now as a way of taking advantage of charity tax relief. Where parents (or in many instances grandparents) pay over a lump sum in advance, the school can invest this money and, if it is operated by a charity, get a tax free return on it. This makes it possible for the school to offer a discount on termly fees.

These schemes may now offer an opportunity to reduce the impact of VAT on school fees, if the lump sum is paid over before the VAT exemption is lost.  

The issue here is the tax point, the date on which liability for VAT arises. In the context of a school, where the supply is continuous, the tax point is the date that payment is received by the school. So if the lump sum is received before VAT becomes payable on school fees, no VAT is payable, even though the education may continue to be provided for some years.

However, there are a few key points that bursars and governors need to bear in mind. In addition to some technical points, such as the requirement for the school to have unfettered use of the money, rather than holding it in an escrow account, they need to remember that these FIA schemes are only likely to be attractive to parents who can raise a large lump sum now and can also afford to hand it over to the school, which is perhaps not so likely at a time when parents are already feeling the squeeze and when the cost of borrowing is so much higher.

Perhaps most significantly, it is a temporary measure that will only apply where the lump sum is paid before the VAT exemption comes to an end, so it is not likely to be of any use for parents whose children are being registered for admission after 2025, or whenever the VAT exemption ends. Having said that, it may be an effective way of softening the blow if and when the rules are changed by an incoming Labour government.

How Moore Barlow can help

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