Further to the announcement on 29 July about the introduction of VAT on fees for independent schools and the comments that HMRC would produce further guidance in due course, the latest draft guidance has now been released as of 10 October 2024.

Two papers have been published, and the first of these gives guidance on VAT registration, whilst the second is guidance on charging and reclaiming VAT. Unfortunately, neither of them are as helpful as they might be, though they do contain some useful points. The first point to note is that they say they are based on the Technical Note issued on 29 July 2024, but that they will be updated if there is any policy or legislative change announced in the Budget. Given that the Budget is on 30 October 2024, issuing guidance which may be subject to change 20 days later does not give much certainty that the guidance can be relied upon.

Composite supplies
Turning to the guidance on where VAT should be charged, the first problem is the section headed “Supplying education services that include other elements (such as school meals and transport)”. This section confirms the problem I highlighted in the last in this series of articles, where I pointed out that the way that the draft legislation had been introduced and the policy desire to continue to allow closely related goods and services, like school meals and transport, to remain exempt from VAT did not sit comfortably with the principles of composite supplies.
A composite supply arises where two or more goods or services are supplied, and there is a principal supply to which the other supplies are ancillary, or a means to better enjoy the principal supply. Where this is the case then the ancillary supplies take on the same VAT liability as the principal supply.

The HMRC guidance acknowledges this and goes on to say that you should not “artificially split the package to create separate supplies with different VAT liabilities”; and it goes on to say “When you supply a package of education for a single fee this will normally be a single supply for VAT. This package could include a number of elements (such as transport or meals) alongside the main element of education.” It goes on to confirm that this would be a single composite supply with a single VAT liability. The very next paragraph goes on to say that if you provided education and school meals for separate fees, then they would be separate supplies with the school meals being exempt from VAT. But the glaring hole in the guidance is whether HMRC are saying that if a school chose not to charge for separate items prior to the General Election, and instead charged a single inclusive fee, but now decides to charge separately, that is artificially splitting the package and would retain a single VAT liability, notwithstanding the Government’s clear intention to allow closely related supplies to be treated differently.

Welfare
The second area of uncertainty is in the section headed “Supplying education and welfare together”. The guidance says that if the two are supplied together then you need to decide whether you are supplying education or welfare. It goes on to seemingly say that for it to qualify as welfare that it must be the largest element of the supply, but then confusingly says an example of a supply of welfare is supervision and guidance provided to a vulnerable person to develop a capacity to live independently and complete everyday tasks which “may be listed in an Education Health Care Plan”. But given that HMRC have clearly said that VAT should be charged for pupils who are on an EHCP , are they now saying that part of a supply of education incorporating the above aspects can be treated as exempt welfare, and are we back to whether there is a single composite supply or separate supplies?

Bursaries
The guidance is also somewhat unclear as to its comments on bursaries. On the face of it, it seems to be taking the same view that we have, in that if a bursary payment is made for a specific named pupil then that is third party consideration for the supply of education and subject to VAT. But the language is unclear as it talks about schools making bursary payments to themselves which are outside the scope, so it is unclear whether HMRC are talking about bursaries being provided by a third party such as an endowment and is saying that these are subject to VAT even when they are provided as a block of funding which the school internally allocates towards pupils.

Invoicing
The guidance helpfully confirms that it is possible to issue a single invoice for supplies which are subject to different rates of VAT, and it also confirms that if a class contains a mixture of children who are below compulsory school age and others who are above it, then the whole class is subject to VAT.

Recovering VAT on expenditure
As regards recovering VAT on costs the guidance mainly restates basic principles. It makes no comment as to whether an override calculation would arise as a result of Fees In Advance payments having been made prior to 29 July. However, the guidance does seem to contradict guidance elsewhere in the HMRC manuals when it talks about recovering VAT incurred prior to registration. This new guidance says that VAT incurred on goods in the four years prior to registration may need to be apportioned over the economic life of the goods (normally five years) based on the taxable period of use and the exempt period of use. This is in contrast to the HMRC manual which says that you can only recover VAT incurred prior to registration to the same extent you could as if you had been registered at the time the goods were bought. In most cases the goods would have been used in making exempt supplies when they were bought meaning you could not have recovered any VAT. This new guidance seems to envisage that if you bought the same goods two years ago, then you could potentially recover 3/5th of the VAT to reflect the change in VAT liability. It is also at odds with some earlier comments by Labour shadow ministers prior to the General Election which seemed to indicate VAT recovery might be restricted.

VAT Registration
The guidance on registration is more helpful and makes it clear that any payments received from 30 October 2024 for terms starting on or after 1 January 2025 will be subject to VAT so invoices issued in December for the January term will be subject to VAT and you would therefore need to be registered to charge this VAT. It confirms that if you already make taxable supplies you can register now on a voluntary basis. If you make no taxable supplies currently then you will be able to register from 30 October 2024, but the exact date on which you need to register will depend on the value of taxable supplies and when you receive payment. For payments made in advance after 29 July 2024 relating to periods after 1 January 2025, the payments will be subject to VAT the later of 1 January 2025 or the first date of the school term for which they have been paid. For payments in advance made prior to 29 July 2024 the guidance says the treatment will depend on whether a tax point has been created, so it goes no further than the comments in the previous Technical Note. Payments made after 30 October 2024 for school terms starting on or after 1 January 2025 will become subject to VAT on the day you receive the fees.

For further advice around how we can help, please visit our VAT on School Fees page here, or contact Phil Salmon, Partner and Co-Head of VAT.