At least £100M in private school fees paid prior to Labour election win could still be taxed

Parents and grandparents of children in UK private schools have prepaid fees in a bid to circumnavigate Labour’s 20% VAT charges, after Shadow Chancellor, Rachel Reeves said the rules won’t come in until 2025 and will not be imposed retrospectively.

In theory, the current VAT exemption on private school fees applies until the rules come in, meaning those making prepayment will not incur VAT. However, a leading tax expert is warning that, regardless of whether the VAT rules come in now or in 2025, prepaid fees will still be subject to 20% VAT if schools have not understood complex VAT rules.

Daphne Hemingway, VAT Director at Jerroms Miller has been advising schools about the VAT treatment of prepaid school fees prior to the introduction of VAT, she said: “Schools have accrued millions in prepayments on the basis that these fees will remain VAT exempt when the law changes. However, without robust contracts, prepayments may not be protected. If school contracts are ineffective — and I’ve seen many that are — then the point at which VAT is chargeable, is the date the services are performed.”

Private school prepayments across the countries are estimated to be in the region of £100m, although the total figure could be significantly higher. Daphne is warning that these fees could be subject to VAT due to nuances in tax point rules.

Daphne: “Even though Rachel Reeves does not intend to tax private schools retrospectively, VAT may be chargeable on all prepayments regardless of when the legislation is enacted. Without action, this could leave schools facing significant tax bills and could even face closure as a result of relatively simple VAT accounting errors. If the relevant pupils have left the school when the rules are applied, parents may no longer be contactable to clawback the additional 20%.

“What’s more, not all parents can afford a rise in fees so pupils could be withdrawn from private education, creating a further gap in finances. Advance payments will therefore be crucial. VAT law is rarely clear or logical, and the correct accounting treatment can override the terms and conditions of several fees in advance schemes.

For schools seeking further guidance, contact Daphne on 0201 693 5000, or visit: jerromsmiller.co.uk