Navigate the tax maze

  • 4th February 2025

Robert Warne, a partner and head of VAT at accountancy firm Crowe UK, provides an update on the latest VAT on fees position

 

From the initial announcement in the Labour Party’s manifesto for the 2024 election it appeared that VAT would be applied on all education and boarding fees from 1 January 2025. However, in reality the transition has been anything but smooth and as the policy goes live there are still a number of issues outstanding between schools and HMRC.

The interim before 31 December

Once it became clear VAT was going to be introduced, HMRC was always going to be unhappy with payments that were made before 29 July 2024 for education provided after 1 January 2025. These payments would still qualify for the exemption under the terms and conditions of fees in advance schemes supported by the tax point rules in VAT law in relation to exempt supplies.

HMRC has voiced its concerns on these arrangements but legal opinion provided in return appears to make it difficult for it to challenge where the procedure has been adopted within the correct legal framework.

Then there were the payments that schools received from 29 July 2024 to 30 October 2024. Although caught by the anti-avoidance legislation, the tax point for these taxable amounts will be the latter of: 1 January 2025 or the date to which that term starts. It is a subtle difference but one that could delay the payment of VAT for a few months.

Finally, any payments received after 30 October 2024 created a tax point there and then for independent schools where they were receiving payments in respect of taxable educational supplies after 1 January 2025. Therefore, the VAT became payable on the date the schools received that payment.

As a result, for many schools it meant that there was an obligation to register for VAT from 1 November as they were receiving over £90,000 of taxable income in that 30-day period going forward.

The rush was then on to register for VAT and HMRC’s promise on turning round new VAT registrations within seven to ten days was soon being put under pressure, especially where schools were applying for group registrations as well as new VAT registrations.

Post 1 January 2025 – the introduction of VAT

At present, school and boarding fees are all taxable at the standard rate of VAT. However, there are still a few exceptions to this as follows:

  1. Overseas school trips – subject to VAT under the Tour Operators Margin Scheme at the zero rate.
  1. The supply of transport “to” and “from” school in a vehicle capable of carrying 10 or more persons – the supply is taxable at the zero rate.
  1. The supply of books and children’s clothing – the supply is taxable at the zero rate.
  1. The supply of school lunches itemised on the invoice – the supply is exempt from VAT when the lunch is separately itemised on the invoice. We understand that HMRC does not require optionality although unfortunately this is not clear in its current guidance.
  1. The supply of school trips within the UK that are educational in nature. The supply is subject to the Tour Operators Margin Scheme and exempt from VAT.
  1. The supply of pre-school and post-school care – the supply is exempt from VAT as providing optional welfare services.
  1. The supply of stationery – the supply is exempt from VAT as closely related to the supply of education.

In addition to those separate supplies, HMRC has also agreed that the supply of a nursery class (with the example that more than 90% of the class are below the legal school age) will remain exempt from VAT.

Schools will also be able to continue providing English as a foreign language exempt from VAT, a decision HMRC reversed from its own initial proposal. HMRC has also left untouched the letting services provided by schools, so supplies such as gym membership to individuals or the letting of sports pitches to amateur sports clubs will also remain exempt from VAT.

Recovering VAT 

HMRC also introduced unexpected guidelines in respect of pre-registration input tax. As a concession, HMRC has allowed newly VAT-registered schools to go back four years to itemise the VAT incurred in that time on the purchase of any goods which are still on hand at the date of the registration. Newly VAT-registered schools will be able to pro rata the VAT incurred on a five-year cycle and recover an apportioned amount of that VAT paid on the purchase. So if a computer was purchased two years before VAT registration then the school will be entitled to recover three years of that VAT (subject to any partial exemption calculation in place). This is seen as a bit of a curveball because it only applies to schools that will be registering for VAT after 1 November 2024 as a result of the introduction of VAT.

For those schools that are already VAT registered this concession will not apply. It seems a strange concession to introduce as it penalises those independent schools which, through no fault of their own, have already been VAT registered.

A school that is VAT registered and purchased the same computer two years ago will get no additional recovery from when it originally incurred that VAT. There does appear to be a case to be argued with HMRC here as it does discriminate against schools that are already registered.

In addition, this apportionment only applies to the purchase of goods. No VAT will be recoverable on any services even where it’s clear that something like a 12-month software licence incurred in August 2004 clearly incurs VAT costs that will span the exempt and taxable supply of education. Pre reg VAT on services can only be recovered where the whole of the service relates to post 1 January 2025 education – no apportionments allowed on services.

Areas of uncertainty

There are still a number of areas that require more clarification from HMRC and where there may be areas of disagreement as the introduction of VAT develops.

  1. Bursaries – HMRC has accepted that bursaries are non-business income and outside the scope of UK VAT, unless the bursary relates to a named pupil. This does not appear to be consistent, as the genuine “donors” giving bursaries to a school (whether it is with a named pupil or not) do not themselves receive any benefits from the school in return for their payments.
  1. Business/non-business restriction – HMRC sent an email out last year stating that independent schools will not be required to undertake any business/non-business restriction. This has yet to be confirmed in any guidance and is important for schools that are providing free supplies of education. HMRC’s stance in relation to there being no requirement to undertake a restriction appears at odds with what normal entities would have to do if they were providing a free supply of services. Each school will need to look at the rationale for providing free places to decide whether in VAT terms this is a non-business activity.
  1. The provision of welfare remains exempt from VAT, while education moves into being taxable. There are still many outstanding issues on which is the predominant supply, especially for pupils where the element of care and support provided is essential for any educational supply to take place as opposed to items that are separate supplies of optional care (for example, before- and after-school care).
  1. The provision of sports coaching by an eligible body is exempt from VAT under one part of the VAT law, although HMRC insists that from 1 January 2025 it is taxable when provided by an independent school. Again, depending on the part of the VAT law referred to, there appears a contradiction in the VAT liability of those supplies.
  1. There is no doubt HMRC will review fees in advance (FIA) schemes to ensure that they comply with the VAT legislation and that parents have contractually agreed to the purchase of education. Whether HMRC will challenge any FIA schemes remains to be seen, although it is imperative that schools have received the payment before 29 July 2024 and have a written contract as well to support the payment. In addition, we would expect HMRC to enforce the standard method override to restrict input tax if the method of recovery appears distortive.
  1. I am sure that some of the sector professional bodies will continue to push for changes for boarding pupils. Why should lunch be exempt when breakfast and dinner for the boarders remains taxable? Again, there appears some discrepancy when you consider that day pupils can come in for exempt pre-school care and may well receive a breakfast as part of that exempt supply.

2025 promises to be an intriguing year for VAT within the sector and we await the results of legal action under way against the government as to whether VAT can be applied to education. One thing is for sure, the present guidance issued by HMRC will certainly need some fine-tuning over the next year.

Robert Warne

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