As expected, the Chancellor confirmed that VAT on school fees would be introduced in respect of terms commencing on or after 1 January 2025 in her Budget speech on 30 October.

Amongst the various Budget related papers was a summary of the responses to the Technical Note issued on 29 July. This contained the following amendments and comments to the policies previously announced both on 29 July and 10 October.

1. Higher Education taught at private schools that will otherwise be subject to the change in law (such as performing arts schools) will be carved out from the change in law. This appears to be being implemented by HMRC policy, rather than a change to the draft legislation (though at the time of writing this is to be confirmed).
2. The definition of private schools in the draft legislation will be amended to ensure that Further Education Colleges remain exempt. The amended definition will say that only institutions which are wholly or mainly concerned with providing education suitable for 16-19 year olds, and where the majority of its 16-19 year old pupils are charged fees, will be subject to the law.
3. Independent Training Providers and Independent Learning Providers (ITPs and ILPs) will be carved out of the legislation. These are defined as institutions at which education or training suitable to the requirements of persons over compulsory school age, but under 19 is provided, but where the consideration for that provision is payable by the relevant contracting authority for example, in England the Secretary of State.
4. The definition of a nursery class will be amended to “a class that is composed wholly (or almost wholly) of children who are under compulsory school age or, in Scotland, school age, and would not be expected to attain that age while in that class”.This is obviously designed to prevent an entire nursery class becoming subject to VAT when only one or two pupils turn five in that year. The definition of “almost wholly” will therefore be crucial. In other areas of VAT, HMRC take the view this is 95% or more, but the updated guidance makes no reference to a percentage figure and instead refers just to the majority of children being below compulsory school age.
5. Teaching English as a Foreign Language (TEFL) courses will be carved out of the policy where the courses are taught either by a private school or a connected person such as a trading subsidiary.
6. The definition of “connected person” in the draft legislation is narrowed so that it only applies where persons are connected in accordance with S1122 of the Corporation Taxes Act which deals with parent/subsidiary relationships.
7. Non-maintained special schools (NMSS) will be brought within the scope of the change in law but only in respect of placements paid from 30 October 2024 pertaining to terms starting on or after 1 January 2025.
8. The power to amend the anti-forestalling provisions will be withdrawn, so they cannot be changed.

The document comments on a number of responses and submissions which were made but which have not been acted upon. These include a call for small faith schools and international schools to be exempted from the introduction of VAT. The Government has confirmed that these schools will be subject to VAT along with other private schools.

As regards calls for military personnel to be exempted from paying VAT on school fees this will not happen, but the MOD and FCDO will be increasing the amount of funding allocated towards the Continuity of Education Allowance with both Departments due to release further information separately.

Where a single fee is paid for secure accommodation to cover all aspects of the service they provide including welfare, education, and residential care, then this will not be subject to the new legislation since the predominant element is not the education. Interestingly, this confirms that HMRC do see the composite supply principals, which I wrote about in my last article, will apply.

However, the guidance does say that where a separate fee is charged for the education then it will be subject to VAT if the institution concerned meets the definition of a private school, and its taxable turnover exceeds the VAT registration limit.

The representations to carve out children with SEND from the introduction of VAT fell on deaf ears. However, charity rates relief will be maintained for private schools that are “wholly or mainly” concerned with providing full time education to pupils for whom an EHCP is maintained.

Interestingly the Government says that it expects fees to increase by an average of 10% and that some of the costs can be absorbed by schools using their reserves, which will no doubt lead to interesting discussions with their auditors.

The guidance acknowledges the composite supply points discussed in the last article I wrote, but does not give an answer as to whether it would regard it as artificial if a school were to start unbundling charges such as for school meals. However, it does seem to hint that meals provided to boarders might be part of a single supply of boarding.

As regards ‘Fees In Advance’ the revised guidance simply restates its earlier comments but does say that HMRC will be scrutinising the details of such schemes.

For further advice around how we can help, please visit our VAT on schools fees page here, or reach out to your usual haysmacintyre contact.