Do Schools Pay VAT? | Guide to VAT Laws in Education
Do schools pay VAT? Until recently, the answer (for the most part) was no. Private schools were eligible for tax breaks, like charitable business rate relief, meaning they did not have to charge VAT on educational services or boarding fees.
However, on 29 July 2024, the government announced a major change, stating that tax breaks for private schools will be ending with effect from 1 January 2025.
If you are a financial manager or administrator for a school that will now need to pay VAT, getting up to speed with these changes in a relatively short time frame is critical. In our guide to VAT obligations for schools, we'll share a closer look at the key updates and what you'll need to consider to be ready for the beginning of 2025.
Do schools pay VAT?
Most businesses will be familiar with VAT, or Value Added Tax, having to charge it on their goods and services on behalf of the government, then remit via a quarterly tax return. However, independent or private schools and other educational academies for children under 19, which charge for their educational services, have historically been exempt. The aim of this position was to make education more affordable for families.
However, on 29 July 2024, the government announced that this exemption would soon end.
What are the upcoming changes to VAT laws for private schools?
The government published a Technical Note entitled “Applying VAT to Private School Fees and Removing the Business Rates Charitable Rates Relief for Private Schools”, stating that private schools would be required to charge VAT at the standard rate of 20% on services, including tuition and boarding fees.
This change will come into effect from 1 January 2025. However, any fees invoiced after 29 July 2024 related to services delivered after 1 January 2025 must also include a VAT charge.
However, it is more than just tuition fees that schools must consider. Other chargeable services, such as music lessons, sports coaching, or facility hire, must also be assessed to see how the new VAT changes apply.
The aim of ending these tax breaks for private schools is to better invest in state education, attended by nine out of ten children. The initiative is expected to raise between £1.3 and £1.5 billion a year.
How will this change in VAT impact private schools?
If you're working in the finance department of a private school, your pricing strategies and financial operations will likely require a significant overhaul following this change to VAT exemptions. Things to consider include:
VAT registration
The first step in implementing this change is ensuring your school is VAT-registered. If your school has a taxable turnover exceeding the VAT threshold, it will need to register with HMRC, charge VAT on applicable services, and submit regular VAT returns. Failure to register on time could result in penalties and interest on unpaid VAT.
Increasing school fees
Your school now faces the difficult decision of whether you'll need to pass on the VAT charge to parents and guardians, thus putting up school fees by up to 20%. Do you raise fees and risk impacting student enrolment figures or do you have the financial leeway to minimise fee increases?
Monitoring cash flow
Monitoring your school's cash flow will become even more critical to ensure you can make timely VAT payments without shortfalls. This obligation may mean you'll need to adjust your financial planning.
Managing records
You'll also need to ensure your school has the appropriate accounting systems and personnel in place to accurately track and report VAT liabilities and carefully maintain all records.
What about state schools?
The VAT rules for state-funded schools and academies remain unchanged. These institutions are not required to charge VAT on educational services. However, they can reclaim VAT on many of their purchases related to educational activities.
Nursery education will also remain exempt from VAT, even if taught privately.
The changes to the VAT obligations are significant, with the time frame for making these changes relatively short. If your school needs help navigating these changes, it is advisable to seek expert advice.
At Keith Graham, our professional accountants offer a range of VAT services and advice, including assistance with registration, tax planning, VAT reconciliation and completing returns. If you'd like to know more or have any questions about your school's obligations around VAT for 2025, please get in touch with our team.