VAT loopholes may help independent schools

  • 9th October 2023

Independent schools may have to pay less tax then feared if a Labour government imposes VAT on fees, Tes has reported.

Christine Cunniffe, principal of Berkshire independent school LVS Ascot, said she feels “quite optimistic” after tax specialists advised her that there are a number of ‘recoverables’ that mean schools could avoid having to pay VAT on all fees, including exemptions for activities held outside core school hours and legal rules that apply to boarders who stay in accommodation for longer than 28 days.

Kevin Hall, tax specialist at law firm Wright Hassall, said after-school care is exempt from tax if it meets certain guidelines, including if the service is “looking after young children” and is run by qualified teachers. After-school clubs are exempt from VAT charges as they provide a “welfare service”, according to HM Revenue and Customs. These services must involve “care or protection of children and young persons”, rather than being an activity-based club such as dance classes.

Hall said it’s possible Labour may just charge private schools VAT for their teaching and overlook other welfare services like the after-school club, which would remain exempt. Many private schools provide breakfast and homework clubs.

Richard Staunton, a partner at accountancy firm Gerald Edelman, said Labour’s policy could result in “unrealised consequences” leading to any law becoming “extraordinarily complicated” due to the different legal categorisation of after-school care.

Staunton added that boarding fees could be exempt from VAT. Under HMRC’s 28-day-rule, hotel or similar accommodation will only be charged a quarter of the value after the 28th consecutive day a person occupies a room. From that point, VAT drops from 20% to 4%. So fees for boarders would only be subject to full VAT for the first four weeks, and then a quarter of that rate for the remainder of the school year, as long as no one else occupies the room during their stay. It’s unclear whether this would renew for each school year or would apply to the whole time the child boards.

There’s also the option of delaying capital projects, such as major works on school buildings, under the Capital Goods Scheme, whereby if an organisation acquires or creates an expensive capital asset, or already has one when it is registered for VAT, the amount reclaimed may have to be adjusted using the Capital Goods Scheme, which allows the initial tax bill to be spread over a number of years.

However, Labour’s shadow chancellor Rachel Reeves in her speech to Labour’s conference today said: “In my first Budget as chancellor of the exchequer I will end the tax loophole which exempts private schools from paying VAT and business rates.”

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