We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
Comprehensive guidance on the upcoming changes
The UK government’s decision to remove VAT exemption for private schools was confirmed in the Autumn Budget on 30 October 2024. This decision follows the publication of draft legislation on 29 July 2024, which outlined the key changes ahead of its inclusion in the Finance Bill 2024-25.
Under the new rules, the VAT exemption that private schools have historically enjoyed will be removed, meaning that from 1 January 2025, private schools will have to charge VAT on services such as the provision of education, vocational training, and board and lodging.
Nursery classes provided by private schools consisting wholly, or almost wholly, of children under compulsory school age will be exempt from VAT. For example, a nursery class consisting of 90% or more children under compulsory school age will be exempt from VAT. If you’re a school that only provides nursery education you will not need to register for VAT.
Higher education courses provided by private schools will continue to be exempt from VAT. Higher education courses are defined:
- as higher education courses in England and Wales specified in section 83(1) of the Higher Education and Research Act 2017
- as courses in Scotland specified in section 5(3) of the Further and Higher Education (Scotland) Act 2005
- in Northern Ireland as courses of any description mentioned in paragraph 1 of Schedule 1 to The Further Education (Northern Ireland) Order 1997.
Check if you must register for VAT if you receive private school fees
Here are the key changes to the guidance that was originally published on 10 October:
1. Updated ‘when you must register’ section
HMRC has added a link to a tool that helps private schools determine when they need to register for VAT, based on their specific circumstances (such as their turnover and the nature of the services they provide).
2. Guidance for payments received by non-maintained special schools (29 July 2024-29 October 2024)
There is now specific guidance for non-maintained special schools that received payments between 29 July 2024 and 29 October 2024. Any fee payments received between 29 July 2024 and 29 October 2024 for school terms starting from 1 January 2025 onwards will be subject to VAT from the later of either:
- the first date of the school term that the fees have been paid for
- 1 January 2025.
These schools need to ensure they understand how VAT applies to the payments they received during this transitional period, as the registration for VAT might be sooner than they expected.
Example:
Payment received on 28 October 2024:
The private school receives £100,000 for the upcoming school term beginning 6 January 2025. At this point (28 October 2024), the payment is not subject to VAT because the school term hasn’t started yet, and VAT won’t apply until the later of either: the first date of the school term that the fees have been paid and 1 January 2025. In this case it is 6 January 2025.
VAT registration threshold:
You must register for VAT if either:
- your total taxable turnover for the last 12 months goes over £90,000 (the VAT threshold) or
- you expect your taxable turnover to go over £90,000 in the next 30 days.
So, on 8 December 2024 – you become aware that in the next 30 days (ie 6 January 2025) you will be over the £90,000 VAT threshold and you must register for VAT.
You will have 30 days from 8 December 2024 to register for VAT, as that is your effective date of registration.
You must also pay any VAT that may be due on fees paid from 8 December 2024, even though you will have not been given your VAT registration number yet. If you are an education provider that’s already providing services or goods that are chargeable to VAT and you are not yet required to be registered, you can voluntarily register for VAT at any time.
If you are an education provider that is not providing services or goods that are chargeable to VAT now, you can register for VAT from 30 October 2024 if you provide or intend to provide private education for terms starting on or after 1 January 2025.
Once you voluntarily register, you will be required to comply with all VAT obligations, including charging VAT on any taxable goods and services you supply. You will also need to start submitting VAT returns and keeping VAT records as part of your compliance.
Voluntary VAT registration can be advantageous in some cases because it allows you to reclaim VAT on any VAT paid on business-related purchases, such as supplies, services or equipment.
VAT input tax recoverability and partial exemption
Since most schools will have a mixture of taxable and exempt sales, they may not be able to recover all of their input tax. In such cases, schools will need to apply a partial exemption method to calculate the amount of input tax they can recover. Schools will need to categorise all expenses into one of three groups:
- directly related to taxable sales: all input tax can be reclaimed, subject to the usual rules
- directly related to exempt sales: no input tax can be reclaimed
- residual input tax: this is input tax on purchases used to make both taxable and exempt supplies. That could be because it’s used directly to make both taxable and exempt supplies or because it’s an overhead of the business.
This amount is determined through a partial exemption calculation, using either the standard method, or a special method. If the standard method is not suitable, a special method can be proposed, though it requires HMRC’s approval. Further guidance on partial exemption can be found in VAT Notice 706.
Purchases before registration
You can reclaim VAT paid on goods or services bought before you registered for VAT if you bought them within:
- four years for goods you still have or goods that were used to make other goods you still have
- six months for services.
You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.
In addition, the VAT incurred on large capital items is normally adjusted over a period of five (computer equipment) or ten (land and buildings) years to reflect its use over that period under the Capital Goods Scheme.
Read further guidance on the capital goods scheme
3. Private sixth-form colleges
The updated guidance also confirms that private sixth-form colleges will be affected by the VAT changes on school fees. This means they will need to charge VAT on school fees from 1 January 2025 and follow the VAT registration procedures.
4. Inclusion of VAT on invoices
The guidance emphasises that affected education providers cannot include VAT on their invoices for school fee payments received from 29 July 2024 until they have officially received their VAT registration number. This is crucial to avoid incorrectly charging VAT before they are formally registered for VAT.
Further guidance:
Read more about charging and reclaiming VAT on goods and services related to private school fees
Check if you must register for VAT if you receive private school fees