The Government has published the draft legislation regarding the changes to the VAT exemption on education.
The changes will take effect from 1 January 2025, which is perhaps earlier than expected and awkwardly part way through the school year.
Education provided by “private schools” will be standard rated from that date. Closely connected supplies of boarding fees charged by “private schools” will also be standard rated. However, the supply of other closely related goods and services remains exempt. Vocational training will also be standard rated if provided by a “private school”.
Nursery classes, including those provided by “private schools”, will remain exempt. Where pupils attend specialist private schools because of their particular needs and are funded by a state agency or local authority, the funder will be able to recover the VAT on the fees.
“Private schools” are schools that charge for full-time education provided to children of compulsory school age, or are schools and colleges that provide and charge for education at sixth form level. Nursery schools and “non-maintained special schools” are not “private schools” and so will continue to provide exempt education.
Anti-forestalling
In view of the rumours that millions of pounds had been paid to schools in advance fees perhaps it was inevitable that the Chancellor has proposed anti-forestalling measures. These mean that payments in advance made on or after 29 July 2024 in respect of education to be supplied after 1 January 2025 will be subject to VAT. Even payments made before 29 July 2024 are likely to be challenged unless it is clear that they meet the conditions as payments made in respect of a specific future supply.
Connected persons
Just in case schools were thinking about sub-contracting services to related, non-registered organisations, a provision to treat “connected persons” as providing standard rated education and connected boarding services is also proposed. This is based on the existing disaggregation measures although more targeted at suppliers of education.
Registering for VAT
Some schools may already be VAT registered in respect of non-education services they provide. Schools that make some taxable supplies below the registration threshold and are not registered may register now voluntarily, although they may wish to wait until later in the year. Schools that are not currently making any taxable supplies should not register until after 30 October. Between now and 30 October HMRC intends to publish further guidance to schools that are registering for the first time.
Preparing for the changes
All schools affected by the changes need to consider:
- When to register and compliance with Making Tax Digital (MTD) record-keeping requirements, if not currently registered.
- Identifying standard rated (and other taxable) and exempt income streams.
- Recovery of input tax and partial exemption calculations.
- Whether any Capital Goods Scheme items have been purchased or constructed in the last ten years.
Start planning now.