Susie Luckman says fees in advance schemes can help parents combat the VAT threat

With each new opinion poll and by-election result it’s clear that political change is coming to the UK and independent schools should be planning for a Labour government to come to power later this year, or no later than January 2025.

At the time of writing, one of the few clear policy intentions of the Labour Party is to remove the exemption from VAT currently enjoyed by schools and parents alike in relation to school fees. The stated political aim is to raise tax revenue and apply it to improve the state-funded education sector and there’s every indication that Labour is committed to this policy.

There are seemingly good arguments against the imposition of VAT, including that the tax revenue raised will be less than Labour expects and that there are hardly any examples elsewhere in the world where governments have chosen to tax the provision of private education. The Independent School Council continues to lobby on behalf of our sector, but at the time of writing there seems to be little hope that the lobbying will be successful.

Planning for VAT

Technically it is uncomplicated for a government to remove the exemption that is currently enjoyed. #While nothing is certain in politics, it is recommended that independent school leaders plan for a future where VAT is added to school fees.

In this context, school leaders should be taking steps now to understand what the impact of VAT would be on their business model. The removal of the VAT exemption that will require a 20% VAT charge to be added to fee invoices will enable schools to recover previously unrecoverable VATable expenses such that the net impact to the school business will be less than 20% – but the net impact rate varies between schools according to how much of their expenditure incurs recoverable VAT.

However, with parents facing a VAT charge and consequently higher costs to pay for the education of their children it is to be expected that pupil numbers will come under pressure, particularly at the usual entry points, so schools should also be taking steps now to build resilience and optimise the financial performance of their schools. With the support of VAT specialists, some complex tax planning may be possible for some schools – but with the new tax law yet to be drafted, no such schemes are certain to be successful.

Fees in advance schemes

Some parents will also be considering ways of potentially reducing their future tax bills. The same uncertainties apply to their tax planning, but one option for parents may be to pay fees for future years in advance and to do this now such that a ‘tax point’ occurs while the current VAT exemption still applies.

It is expected that a change to the VAT rules would occur quickly after a Labour government takes power, with VAT likely becoming applicable from September 2025. However, the window of opportunity to pay fees in advance on the basis of the current VAT exemption is likely to be much smaller than that, because a future government will have the option of making ‘anti-forestalling’ legislation to take effect almost immediately after the results of the election are announced.

Fees in advance (FIA) schemes are not new. For decades, schools and families have made use of flexible fee-paying options to help spread or consolidate school fees to fit with parents’ financial situations. It is not unusual for parents and grandparents sometimes to want, and be able, to pay up front for future years education. The incentive to do so may be to reduce a future Inheritance Tax bill, or to provide the peace of mind that their children’s or grandchildren’s education has already been paid for.

Schools are likely to be minded to accommodate such requests – it helps with long-term budgeting to have commitment for future years education and, depending how the scheme has been set up, helps with cash flow – and schools will often therefore offer a discount to encourage fee payers to pay in advance.

However, existing FIA schemes – drawn up when the potential for VAT to be added to fees was not contemplated – may not be effective for current purposes.  There are a number of features an FIA scheme should incorporate to give it the best chance of success at offering interim relief from VAT on school fees – and to be an effective and clear contract between the payer and the school, reducing the potential for future disagreements. These include establishing a clear ‘tax point’ at the point at which the funds are received by the school, the school having exclusive ownership and unfettered use of such funds and a clear contractual relationship with the payer. It need not be set at a high level, but it is also recommended that a discount is applied to future fees to demonstrate that the incentive for parents to enter into the FIA scheme is not simply to avoid future VAT.

A modern FIA scheme should dovetail with the parent contract and take account of the broader aspects of school life, such as scholarships, absence due to sickness, discount rates, regulatory issues and statutory rights.

Care should always be taken when discussing with parents how a FIA scheme may be affected by the potential removal of the VAT exemption currently enjoyed. It’s important schools don’t promote FIA schemes to parents for this one purpose, or over-promise their effectiveness at protecting against a change in the VAT exemption.

With an election due to be called this year, the window of opportunity for parents to pay in advance, potentially avoiding a future VAT charge, is closing fast. Schools can facilitate such arrangements, but care and thought is needed to ensure that an FIA scheme works effectively for both fee payers and the school and avoids the risk of future disagreement.

Susie Luckman is a legal director for law firm VWV.