As specialist tax consultants serving a diverse range of clients, including those in the education sector, Williamson & Croft is committed to keeping you informed about significant tax changes that may affect your financial planning. 

The recent announcement by the Labour government regarding the introduction of VAT on private school fees is a development that warrants close attention.

The new VAT policy

The Labour government has unveiled detailed proposals for applying VAT to private school fees. Under this new legislation, all education services and vocational training provided by private schools will be subject to the standard VAT rate of 20%. 

Business rates relief for charitable private schools is also slated for removal by 2025. Labour has reportedly abandoned its earlier plan to remove the charitable status of independent schools, which currently provides them with certain tax reliefs.

When will this come into effect?

This change is set to take effect for school terms beginning on or after 1 January 2025. The VAT charge will apply to any school fees paid from 29 July 2024 onwards for terms starting on or after 1 January 2025.

Implications for schools and families

The introduction of VAT on private school fees will likely have significant consequences. Common predictions for what will unfold as a result of this change are:

  • Fee increases: While the headline VAT rate is 20%, the Institute for Fiscal Studies estimates the net effect to be roughly equivalent to a 15% increase in fees, due to schools’ ability to reclaim VAT on certain expenses.
  • Potential shift to state schools: Some families may find private education unaffordable, potentially leading to increased pressure on the state school system.
  • Financial planning: Both schools and parents will need to reassess their budgets and financial strategies in light of these changes.

Prime Minister Keir Starmer made reassurances before the election that there was “no evidence” that raising VAT would force the closure of private schools. However, the true impact of the policy remains to be seen.

What next? The consultation period

It’s important to note that the government has announced a seven-week consultation period until 15th September 2024. This provides a vital opportunity for stakeholders to comment on the draft legislation, and details may change as a result of the consultation responses received.

Exceptions and special cases

It’s worth noting that certain educational services will remain exempt from VAT, including:

  • Nursery services for children below school age
  • Education provided by private tutors
  • Provision of education by state schools and sixth-form colleges (where no fee is charged)

Additionally, where Special Educational Needs (SEN) placements at private schools are funded by local authorities, the VAT charged can be reclaimed by the funding body.

Key considerations for private schools

Stakeholders involved in the management of a private school may wish to consider the following steps:

  • VAT registration: While HMRC advises waiting until 30 October before registering for VAT, start preparing now by reviewing your financial systems and processes.
  • Fee structure review: Analyse your fee structure and consider how to communicate potential increases to parents.
  • Expenditure analysis: Identify areas where you may be able to reclaim VAT, potentially offsetting some of the impact of the new charges.
  • Long-term planning: Consider the potential impact on enrolment and plan accordingly.

Helping you mitigate fee rises

While schools will need to adapt to the new VAT rate, families have options to potentially mitigate the impact of increased fees. At Williamson & Croft, we’ve identified educational trusts as a potentially valuable tool for families, particularly grandparents, looking to support private education costs in a tax-efficient way.

Understanding educational trusts

Educational trusts offer a tax-efficient way for families, especially grandparents, to contribute to education costs while potentially reducing their own tax liabilities. However, it’s important to get professional advice when setting up and managing a trust.

Structure

An educational trust typically involves three parties:

  1. The settlor: The person who puts assets into the trust
  2. The trustee: The person or people who manage the trust
  3. The beneficiary: The person who benefits from the trust –  in this case, the student

Inheritance Tax benefits

Gifts up to the value of the Nil Rate Band (currently £325,000) can be gifted to a trust without triggering an immediate Inheritance Tax charge. If the settlor survives seven years after the gift, it becomes entirely free from Inheritance Tax. This makes it an ideal way to pass wealth down to children or grandchildren to support their education. 

How Williamson & Croft can help

As these significant changes take effect, Williamson & Croft will continue to monitor developments and provide updates relevant to our business clients. For more information on how to minimise your tax burden, contact our expert team of tax accountants.

Want to learn more about how VAT affects you or your business? 

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