VAT will be applied to Private School fees from 1 January 2025. While some clarification has been provided on the proposed draft legislation, questions remain such as the definition of “wholly or almost wholly” and what is a “closely related service”.

Following the Autumn Budget, we now have more clarity in respect of some areas of the application of VAT on fees for “Private Schools”. However, areas of uncertainty still remain. Further guidance would be beneficial, otherwise we could see schools requiring rulings from HMRC on a school-by-school basis, which is not ideal.

The key points learned from the Budget following the publication of a Technical Note (in response to the recent consultation) and the updated draft VAT legislation are summarised below.

What we know

• The changes will be effective (for school terms) from the 1 January 2025, as expected, despite various calls for this to be delayed.

What’s changed? (since the publication of the draft legislation)

• Further Education Colleges that are not wholly or mainly concerned with providing education suitable for 16-19 year olds, and where the majority of these pupils are not charged fees, don’t fall within the definition of a “Private School” and don’t have to charge VAT on their fees.

• Higher Education providers such as Universities (as opposed to Art Schools) are going to be excluded from having to charge VAT (but it is not clear how the legislation reflects this).

• The definition of nursery classes has been updated so that nursery fees for the whole class do not become subject to VAT as soon as one child reaches compulsory school age. As we reported in our last update, this was an area that required clarification, however, it may require further clarification as the new legislation refers to “wholly (or almost wholly)” in the new definition but with no explanation of how a class is considered to be “almost wholly” below compulsory school age. The technical note suggests this should be a majority, but a question remains, do they mean in terms of time, number, more than 50% of all pupils?

• Providers of Teaching English as a Foreign Language courses have been excluded from the definition of a “Private School”, so their fees will continue to be exempt from VAT. This aligns with the intention to provide an incentive to deliver these services even when profit making.

• The anti-forestalling provisions will not extend to before 29 July 2024, however, HMRC still intend to investigate payments made before this date.

• Non-maintained special schools will effectively not be subject to the anti-forestalling rules for any payments made before 30 October 2024.

• The connected persons tests have been updated to remove where an eligible body and the private school are closely bound to one another by financial, economic and organisational links, this is probably something that was superfluous given the other tests for connected persons.

• Where school meals are separately charged for and there is a genuine choice as to whether they are taken up, the technical note suggests that these costs can be exempt from VAT.

What we still don’t know and is open to interpretation

• What constitutes a “closely related” supply of education?

• What constitutes a single supply and what can be charged for separately and be treated as being exempt?

• How to treat and apportion the recovery of pre-registration input VAT?

• Will the standard method override apply to VAT recovery (Capital Goods Scheme)?

• Will Private Schools have to apply the Tour Operators Margin Scheme?

• Welfare vs Education – After school clubs vs Football classes?