Implications of VAT on private school fees
Understanding VAT on private school fees
Since the introduction of VAT in 1973, private schools with charitable status have been exempt from having to register for VAT. VAT-registered entities have to charge VAT to their customers on any sales made and then pay this tax to HMRC. Prime Minister Sir Keir Starmer’s Labour government announced in their General Election manifesto that they were planning for the removal of the VAT exemption previously enjoyed by private schools. This legislative change now looks set to go ahead in the new school year from the 1st of January 2025.
Under this legislative change, private schools in the UK will have to charge an additional 20% on fees for children’s education. The aim of this change is to raise tax revenue that may be used to develop state education provisions and promote equality in education. Some caveats are expected to this change, such as relief for independent schools that provide education for children with special educational needs.
The news that private school fees are set to increase has concerned many parents who choose to send their children to private schools. Many people had not budgeted for such a drastic increase in fees and, as such, may consider placing their children into state education instead of private institutions.
The proposal to implement VAT on private school fees
The plan to add VAT to private school fees was an important part of Labour’s campaign before the recent general election. This change looks set to be one of the first we can expect to see come to fruition. The government has shared draft legislation that explains the details of this proposal. This draft states that VAT may be applied to the cost of education and vocational training in private schools as well as boarding and lodging fees for boarding schools.
However, there is scope for some exemptions on “closely related goods”, which may include items such as school meals, transport arrangements and examination fees. This offers some good news for parents as there will not necessarily be a blanked 20% increase on all expenses incurred by sending their children to private schools.
The impact of VAT on private school fees
The primary effect that the removal of VAT exemption from school fees will have is that there is likely to be an increase in fees. That said, the increase will not necessarily be a blanket 20% on the current fees charged by schools. Schools will be able to reclaim the VAT on purchases, which may lower their operating costs, creating a saving that could be passed on to parents in order to blunt the increase in fees. The size of this impact will vary from school to school depending on their expenses and the VAT charged to them.
Furthermore, the draft legislation does contain provisions for some exemptions. The wording in HM Tresury’s technical note is that:
Other “closely related” goods and services other than boarding (i.e. goods and services that are provided by a private school for the direct use of their pupils and that are necessary for delivering the education to their pupils) will remain exempt from VAT
This may include items such as school meals, transport, examination fees and stationery. The specifics are yet to be formally set out therefore, the full scope of VAT to be charged to parents of children in private education remains to be seen.
Will this affect education in the UK?
There has been much debate over the effect that the introduction of VAT on private school fees will have on education as a whole. The main concern is that parents of children in private schools will withdraw their children from private education and turn to state-provided schooling as an alternative. Currently, 6-7% of pupils in the UK are enrolled in private schools, equating to roughly 560,000 pupils, according to the Institute of Fiscal Studies (2023).
The government expects that the real fee increase will be around 15% after the recovery of VAT on costs and exemptions. The IFS estimates that an effective VAT rate of 15% on fees would lead to a 3–7% reduction in private school attendance. It is likely that these pupils would be enrolled in state schools instead. In HM Treasury’s technical note, the government claims to be confident that the state sector will be able to accommodate these extra pupils and that additional pupils will not have a significant impact on the state education system as a whole.
Will the full 20% VAT Rate Apply to All Private School Fees?
The standard VAT rate is 20%. However, how VAT applies to private school fees and boarding fees will depend on details in the legislation. External estimations have predicted the increase will amount to a 15% increase in fees.
How Will This Affect Financial Aid and Scholarships?
The effect of VAT on financial aid and scholarships is still not completely clear. It is expected that financial aid methods may change to include the extra VAT costs. However, the exact details will probably differ from one school to another.