Do schools pay VAT? Up until recently, the answer (broadly speaking) was no. Independent schools qualified for tax relief, such as charitable business rate relief, which meant they were not required to charge VAT on educational activities or boarding charges.

However, on 29 July 2024, a big announcement was made by the government announcing that tax exemptions for private schools will be coming to an end with effect from 1 January 2025.

If you work in finance or administration for a school that will now be responsible for paying VAT, bringing yourself up to speed with this change within a relatively short time window is essential. Within our VAT rules guide for schools, we'll cover an insight into the main updates and what you'll want to take on board to prepare for the start of 2025.

Do schools pay VAT?

The majority of companies will be well aware of VAT, or Value Added Tax, where they are required to add it to their services and merchandise on behalf of the state, which they then pay through a tax return that is filed quarterly. Yet independent or private schools and other educational centers for under-19s, who charge for their services as educators, have long been exempt. The reason behind this stance was that education was being kept relatively cheap for families.

However, on 29 July 2024, the government announced that this exemption would soon end.

What are the upcoming changes to VAT laws for private schools?

The government released a Technical Note called "Applying VAT to Private School Fees and Reversing the Business Rates Charitable Rates Relief for Private Schools" stating that private schools would need to impose VAT at the normal rate of 20% on services such as tuition and boarding fees.

This change will come into effect from 1 January 2025. However, any fees invoiced after 29 July 2024 related to services delivered after 1 January 2025 must also include a VAT charge.

However, it is more than just tuition fees that schools must consider. Other chargeable services, such as music lessons, sports coaching, or facility hire, must also be assessed to see how the new VAT changes apply.

The objective of abolishing such tax relief for private schools is to invest more in state schooling, which nine out of every ten children attend. The policy will raise up to £1.3 billion to £1.5 billion a year.

How will the change in VAT affect private schools?

If you're in the finance department of a private school, your financial operations and pricing strategies will most probably need to undergo a drastic change with this shift to VAT exemptions. Points worth considering are:

VAT registration

The initial process to put this change in place is making sure your school is VAT-registered. If your school's taxable turnover is over the VAT threshold, it will be required to register with HMRC, charge VAT on qualifying services, and make regular VAT returns. Not registering in a timely manner may lead to penalties and interest payable on unpaid VAT.

Raising school fees

Your school then has the tough choice of whether you will be able to pass on the VAT charge to parents and guardians, thereby increasing school fees by as much as 20%. Do you increase fees and risk affecting students' enrolment numbers or do you have the financial flexibility to reduce fee increases?

Keeping an eye on cash flow

Keeping an eye on your school's cash flow will become even more important so that you can pay VAT on time without shortfalls. You may need to have your financial planning adjusted as a result of this requirement.

Dealing with records

You must also see to it that your school has the right accounting systems and staff in place to properly monitor and report VAT liabilities and handle all records with care.

What about state schools?

The VAT treatment for state-sponsored schools and academies does not change. These organizations are not obligated to charge VAT on education services. They can, however, recover VAT on most of their purchases related to educational efforts.

Nursery education will also be exempt from VAT even when privately taught.

The changes to the VAT obligations are significant, and the time available to make these changes is relatively short. Seek professional expertise if your school needs help with this change.

Our experienced accountants provide a variety of VAT services and guidance, including registration advice, tax planning, VAT reconciliation and the completion of returns. If you would like further information or have any queries regarding your school's VAT obligations for 2025, please contact our team.

Visit: taxvatreturn.co.uk

Call: 01284 332375

Email: info@taxvatreturn.co.uk