Ian Brown

Ian Brown from accounting company RSM UK reveals the impact of VAT on schools as ‘businesses’ – and it’s not just the fees that are affected

The chancellor confirmed in his Autumn Statement that he doesn’t intend to impose VAT on independent school fees, but Labour’s policy takes a directly opposite approach. Where does that leave independent schools with their VAT and tax planning?

Dating back to 2017, the addition of VAT to school fees has been a clear part of Labour’s manifesto and policy – a measure which Labour has claimed could raise £1.7 billion in VAT. Further still, it is also Labour’s policy that schools would lose their charitable status. Such changes could have a significant impact for independent schools. But it’s difficult for schools to plan ahead when the changes may never come and if the full impact of the potential changes can’t be known yet.

Changing the VAT liability of school fees sounds simple enough – one day they could be VAT exempt, the next they would have VAT applied. However, in VAT there’s often a domino effect resulting in other VAT considerations which schools, and HM Treasury, need to be aware of. For example, having school fees be subject to VAT means that VAT incurred on expenditure becomes recoverable and there’s a potential VAT windfall for a school where there has been large capital expenditure in the past 10 years.

This complexity in the VAT legislation alone means there is a question of how quickly would any changes to the VAT status of independent schools be made. There are concerns that the VAT changes could be brought in almost immediately following a change of government and not provide schools the time required to prepare.

An immediate change in VAT status is unlikely because of the legislative changes required to implement a new VAT status if there is a change of government. A timeline can’t be given with any certainty, but a more reasonable estimate for a change in VAT status appears to be six to 12 months after a change of government, if not longer.

In addition to the legislative changes, there will be some policy review required as well. Not least, research suggests that with VAT reclaims and the movement of pupils into the state sector, the introduction of VAT to schools’ fees would cost the government more than £400 million by its fifth year. It seems that the proposed application of VAT on school fees by Labour is more about facilitating social change rather than generating tax revenue.

Is there something schools can implement now despite the uncertainty? A change in VAT liability also brings into consideration the tax point rules and when a service takes place for VAT purposes. A VAT charge on school fees can be mitigated or removed by parents paying for their child’s entire school education in full before VAT becomes applicable. Receipt of payment in advance ‘locks in’ the VAT rate in place at the time the payment is made. We have previously seen anti-forestalling measures put in place when there’s been a change of VAT rate. This could affect the ability to ‘lock in’ the VAT exempt rate after a change windfall for a school where there has been large capital expenditure in the past 10 years.

This complexity in the VAT legislation alone means there is a question of how quickly would any changes to the VAT status of independent schools be made. There are concerns that the VAT changes could be brought in almost immediately following a change of government and not provide schools the time required to prepare.

An immediate change in VAT status is unlikely because of the legislative changes required to implement a new VAT status if there is a change of government. A timeline can’t be given with any certainty, but a more reasonable estimate for a change in VAT status appears to be six to 12 months after a change of government, if not longer.

In addition to the legislative changes, there will be some policy review required as well. Not least, research suggests that with VAT reclaims and the movement of pupils into the state sector, the introduction of VAT to schools’ fees would cost the government more than £400 million by its fifth year. It seems that the proposed application of VAT on school fees by Labour is more about facilitating social change rather than generating tax revenue.

Is there something schools can implement now despite the uncertainty? A change in VAT liability also brings into consideration the tax point rules and when a service takes place for VAT purposes. A VAT charge on school fees can be mitigated or removed by parents paying for their child’s entire school education in full before VAT becomes applicable. Receipt of payment in advance ‘locks in’ the VAT rate in place at the time the payment is made. We have previously seen anti-forestalling measures put in place when there’s been a change of VAT rate. This could affect the ability to ‘lock in’ the VAT exempt rate after a change of VAT rate is confirmed but before it is implemented.

Labour’s policy does not impact VAT alone. A similar domino effect, as discussed above for VAT, would also happen because of a loss of charitable status. The most obvious impact is that a removal of charitable status would result in a loss of corporation tax exemption. Corporation tax is charged on accounting profit, adjusted to add-back depreciation, and then capital allowance can be claimed against assets. Schools would be best placed to undertake a capital allowance review of historical spend on assets currently being used by the school in order to mitigate any future tax impact.

The loss of charitable status would also result in the loss of mandatory relief on business rates (currently up to 80% in England but some local authorities top up the relief to 100%, so called ‘discretionary relief ’), which would likely have a more significant impact on the sector.

While still creating complexity and having the potential to cause significant impact, we believe there is more scope for the charitable exemption to be removed rather than the introduction of VAT on school fees. This is largely due to the introduction of a VAT charge requiring a great deal more thought and the legislative changes required being more straightforward (relatively speaking).

Overall though, there are too many unknowns for independent schools to plan definitively with any sort of time scales for VAT and tax changes. The question of ‘when is the right time to act?’ on different options will inevitably be a bit of a gamble.

Commercial considerations for schools can begin to be managed as the potential changes are already much discussed, including if any VAT liability would be passed on to parents and the impact on them. Communication and engagement on these points are best managed as early as possible, even if there are not any absolute answers.

What would support schools, and parents, now is if a timeline could be put in place for the implementation of changes to VAT and loss of charitable status if there is a change of government. That if will likely need to come first though.

Ian Brown is an associate director in VAT at RSM UK.