VAT will be imposed on school fees from 1 January 2025, according to draft legislation which is here.
We addressed in 2023 the issues for schools and steps to consider in a previous article.
What’s the new law?
As things stand, VAT will be imposed on currently exempt school fees as follows:
- 1 January 2025: VAT is to be accounted for by schools on fees relating to school terms starting from this date. This is part-way through the standard school year.
- 29 July 2024: Fees paid before this date will not be subject to the new VAT charge, even if they relate to education to be provided after date in 1. above. This will divide parents into two camps, perhaps unfairly.
The legislation is only draft at the moment, and we understand that a consultation is under way.
What’s the impact?
Most schools are expected to pass on to parents some but not all the VAT liability. The proportion passed on will vary by school, according to factors such as how much VAT they can recover on past and current purchases, how many funds they have in reserve such as a “rainy day”, how successful they are in cutting costs without affecting the quality of education provided, and how they can spread the fee increase over time.
The legislation as drafted does include some unexpected dates and these might create some imbalanced outcomes.
For example, many parents pay school fees by instalments and cannot invest in school fees far in advance. These parents will pay higher school fees from 1 January 2025 compared with parents who could afford to prepay school fees (often multiple years in advance, as some private schools were offering). Their children will receive VAT-free private education, whereas other parents’ children will receive the same education but that will be taxed.
The impact on parents of these price increases is also unknown (at the time of writing), and yet the new school year 2024/25 is just about to start. Even if parents keep their children in a fee-paying school in order to minimise disruption to their young lives, it remains a risk overall for the schools that some pupils could be withdrawn during the school year when fees increase. This will affect the fee-paying schools who rely on the income to cover costs (they are charities and do not make profits), but also children will take places in state schools. Not only would it be disruptive for the children themselves, but classes in state schools will be further increased when resources are already stretched, and classroom behaviour has deteriorated since the pandemic.
From the perspective of the fee-paying schools, as a charity is it difficult to for them to absorb reductions in income. Cutting costs and recovering VAT on costs are their significant options. While advisers such as myself can assist them to recover VAT on past and future costs (e.g. using current legislation regarding expenditure on property and refurbishments, or applying “TOMS” rules, structuring disbursements to preserve the VAT-free status of certain costs, and so on), a school’s expenses will largely remain unchanged. As the majority of a school’s expenses are staff salaries, any cost-cutting exercise will have to take staffing into account. However, the last thing any fee-paying school wishes to do is reduce the standard of the education they provide, and they will first look to increase income through other means (e.g. hiring buildings, summer courses, sharing resources, and so on) and as quickly as possible.
The new VAT charge was always going to be unsettling for all the people involved, including pupils, teachers, support staff and parents. To set a date for VAT to be imposed part-way through the school year makes this more unsettling; and to draw a sharp distinction between parents who prepaid and parents who did not is a further inequity. The government might say that it is better than imposing VAT on the first term of the year and gives all parties time to consider their options, but in reality it is now rather messy. If it is too close to the new school year to impose VAT on school fees from September 2024, perhaps it would have been better to issue the draft VAT legislation with effect from September 2025.
Employment impact?
If a significant number of pupils leave private schools for state schools and class sizes in private schools reduces, the viability of certain extra-curricular activities and courses may come into question. This uncertainty could lead to redundancies in order to reduce staff costs in areas where student numbers do not support the current structure; or in the worst cases, we see could some fee-paying schools unable to continue at all, looking at redundancies on a complete business closure basis. Other schools might look to vary contracts of employment, and for example, some schools might ask teaching staff to work across a broader range of subjects than they currently are required to do within their usual duties.
Such schools will start taking a proactive approach in reviewing current structures and, where necessary, commence meaningful redundancy consultations with all at risk employees, which could last up to 45 days before dismissals of employees can take place. There is not sufficient time for schools to undertake this process before the new school year begins and parents will be deciding whether to commit to another year’s fees for their children’s education. As private schools often have teachers employed on contracts of employment which require one complete term’s notice, any mid-year reduction in costs will need to factor in additional costs and timing of releasing staff.
Where schools look at other options to reduce overheads and/or add more flexibility into their workforce, this might include an increase in schools merging or collaborating to share facilities and centralise resources, resulting in an increase in TUPE transfers in the private education sector. We might also see hiring freezes in this sector as schools wait to see what effect the new VAT liability has on student numbers; or alternatively, schools may engage more staff on fixed term or casual working arrangements to secure greater control over the work and payroll liability of their workforce.
What next?
It is a worrying and uncertain time for all those involved in the education sector, whether fee-paying or state and this is only magnified by the dates proposed in the draft legislation.
This legislation is currently drafted and has not yet been passed into law, but it is not expected to be long before that happens. Schools are currently responding to a consultation, but it remains to be seen what changes (if any) will come from that.
If you have any queries or require further information, whether in respect of VAT or employment law, please do contact us and we would be delighted to discuss.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
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The information published across our Knowledge Base is correct at the time of going to press.
