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The impact of VAT on private school fees: what you need to know

As of 1 January 2025, a significant change is set to affect the education sector in the UK, particularly for those enrolled in or considering private schools. The introduction of a 20% Value Added Tax (VAT) on private school fees, announced by Chancellor Rachel Reeves in the Budget 2024, is a policy aimed at redirecting tax breaks to improve state education. Here is a comprehensive overview of what this change entails and how it might affect you.

Why is VAT being introduced on private school fees?

The primary goal of this policy is to end the tax exemptions enjoyed by private schools. In doing so, it seeks to generate revenue to enhance the standards and opportunities for the majority of children who attend state schools. The Treasury estimates this measure will raise approximately £1.725 billion annually, which will be allocated towards public services, including education priorities.

When does the VAT come into effect?

The 20% VAT rate will apply to private school fees starting from 1 January 2025. This includes fees paid from 29 July 2024 that relate to the term commencing in January 2025 and onwards. This means that payments made for the upcoming term will be subject to VAT, even if the invoice was issued before the VAT implementation date.

What services will be subject to VAT?

VAT will apply to a broad range of educational services provided by private schools. This includes full-time education for pupils of compulsory school age up to the age of 19 and education at private sixth form colleges. Boarding fees, educational clubs such as homework clubs, sports, drama or similar clubs, and other educational activities will also fall under VAT. However, nursery education, school meals, and transport services will remain exempt.

How will this affect private school fees?

While the introduction of VAT might suggest a direct 20% hike in fees, it is not expected to result in such a sharp increase for parents. Private schools, like other organisations, can absorb some of the VAT costs or adjust their pricing strategies. On average, it is anticipated that fees will rise by around 10%, rather than the full 20%.

Impact on state schools

There is evidence to suggest that the impact on state schools will be minimal. According to the Institute for Fiscal Studies (IFS), the number of pupils enrolled in independent schools has remained relatively stable despite previous fee increases. It is projected that only about 35,000 pupils, less than 0.5% of the overall pupil population, might transfer from private to state schools. State schools are expected to have adequate capacity to accommodate these potential transitions.

Registration and compliance for schools

Private schools not currently registered for VAT will need to register with HMRC by 1 January 2025. Registration can begin from 30 October 2024. HMRC has assured schools that additional resources will be in place to ensure timely processing of new VAT registrations. Schools already making VAT-able supplies can register voluntarily before this date, though they will need to meet compliance requirements from the date of registration.

Preparing for the change

Given the limited preparation time, private schools are actively working to manage costs and assess their financial needs. This may include efforts to cut expenses and timely communication of any fee adjustments to parents. For parents, understanding and planning for these changes will be essential for budgeting in the upcoming academic year.

Conclusion

The introduction of VAT on private school fees represents a significant change in education policy, intended to support state education through the redistribution of tax benefits. While this adjustment poses challenges for both private schools and parents, being informed and prepared will be key. At Cutts & Co Accountancy, we are committed to helping clients navigate these changes and ensure compliance with the new VAT regulations. If you have questions or need advice on managing these changes, please do not hesitate to contact us.