Fees in Advance Scheme FAQs

on Wednesday, 12 June 2024.

Susie Luckman

0117 314 5454

Independent schools have a long history of offering flexible payment arrangements to parents. Fees in Advance (FIA) schemes are one such option.

With the upcoming election and potential changes to independent schools’ VAT exempt status, many schools have seen an increased interest from parents in making prepayments. Schools should consider whether the FIA schemes they offer remain suitable and effective.

In the last 18 months we have supported more than 130 schools with their FIA schemes and continue to advise and guide schools during this pre-election period.

We have reproduced below some of the most frequently asked questions which we hope you find helpful.

Why is a FIA scheme relevant to VAT potentially being applied to school fees?

The basic VAT tax-point (i.e. the date that VAT is due) is usually applied to a service (or goods) on the date of delivery or performance. This can, however, be created before or after the basic tax point, at the date of a VAT invoice or the date of receipt of payment. Under today’s legislation, a FIA scheme (that provides for schools to receive payment for several years in advance of the education services being performed) allows the tax point to be the date of receipt of such advance payments.
Can the school use prepayments in the ordinary course of business, or do these prepayments need to be kept in a separate account?

FIA schemes can be structured in different ways.

Older FIA schemes may provide for parents’ money to be held in a separate interest-bearing account and sums are drawn down against invoices as and when these are raised. Interest that accrued on the balance may be returned to the parents periodically. Under such a scheme, it is likely the funds may be found to still belong to the parents and it is unlikely the VAT tax point would have been created at the date of receipt of the funds.

Parents who would like to pay fees in advance now on the basis of the current VAT exemption need a different FIA scheme which provides that once received, the advance payment is used to prepay the future terms’ fees and forms part of a school’s general funds. The FIA scheme should be drafted to ensure it is clear the school has unfettered use of these funds. Once paid to the school, the school may use these funds as it wishes, for example to invest in capital projects.
Is it necessary to generate an invoice to account for the lump sum prepayment?

There may be different tax points in a transaction and in practice, most supplies are subject to an actual tax point created by the issue of a VAT invoice or receipt of a payment (or a combination of both). It is useful and advisable to issue an invoice at the start of the scheme to evidence the school’s demand for payment and to satisfy the parents’ obligations to pay fees. It also helps to identify the prepayment as belonging to the school for its own unfettered use.

A FIA scheme should incorporate a calculation of the fees to be pre-paid for each advance term, together with a discount on such fees and any other adjustment, demonstrating the amount of each prepayment made, on the day the lump sum is received.
A pupil is being withdrawn before the end of their FIA scheme, do I refund their prepayments?

Yes. Despite the prepayment belonging to the school, there are a few circumstances where the advance payment may need to be refunded to parents, e.g., if a pupil leaves before they have attended all the terms that have been prepaid. Schools should plan for this potential eventuality.
Can I simply raise an invoice for the next academic year now so those fees are prepaid under today’s legislation?

Some schools have sought advice on raising a single invoice for the next academic year, rather than the usual termly invoices (under the parent contract). Such an option will be subject to their parent contract containing this flexibility.

Subject to any changes that may come in, the raising of a single invoice may not, however, be sufficient to create the tax point without other contractual terms applying to the arrangement, such as a clear statement that the Spring and Summer terms are being settled in advance, or the school already being registered for VAT.

If successful, the issuance of an annual invoice would create an informal fees in advance scheme for the Spring and Summer term in that academic year. However, such an ‘informal scheme’ will not contain the benefit of the contractual terms and protections commonly found in FIA schemes.

For those schools who already operate a FIA scheme, we would recommend the existing scheme is utilised for a one year prepayment, rather than run two concurrent schemes: one formal and one informal scheme.
Do schools have to provide a discount on fees paid under a FIA scheme?

It is important that a FIA schemes contain a commercial benefit to parents, such as helping families with their financial planning, or offering a discount on fees.

FIA schemes are least likely to be challenged, in relation to VAT treatment, if the terms demonstrate a clear benefit to parents in paying for fees in advance. Offering some form of discount or commutation rate is a common way of achieving this.
Can FIA schemes take into account future increases in fees?

Yes. Schools can opt to build an estimated inflationary rise into the prepayment amounts for future terms at the time the fees are settled. This is usually achieved by way of an estimated percentage increase, in each academic year of the FIA scheme.

As the fees increase in the future, or if there are charges to be paid that were unforeseeable when the FIA scheme was created, the FIA scheme should allow for schools to charge a top up fee under the usual termly invoice, alongside extras and supplemental charges.
We have an existing FIA scheme in place, should we make parents sign up to a new/updated scheme?

We would recommend schools only offer one type of FIA scheme at a time to avoid the administrative burden of running two schemes on different terms. This is sensible to reduce the concern that some parents who have paid in advance, may receive different tax treatment to others on different terms.
Could future changes to the law affect FIA schemes?

How FIA schemes are affected by future legislation will depend on how such legislation is drafted. This could include any anti-forestalling legislation in addition to how VAT is applied to the various components of school fees themselves. It is also possible a government could take specific steps (e.g. applying new legislation retrospectively) targeted at preventing FIA schemes from creating the tax point (as set out above). FIA schemes should contain clear terms that if VAT should become retrospectively due then it is the obligation of the parents to pay this to the school.
Is it too late to put a FIA scheme in place?

This will depend on the school’s reason for offering a FIA scheme. A FIA scheme is more at risk of being challenged if there is no school focused reason for its introduction. Demand from parents for a FIA scheme may be reason enough for a school to offer one. In practice, there are likely to be good commercial reasons why schools may want to promote an FIA scheme now, for example, to build up cash reserves; to have better visibility on future pupil numbers; to offset the current high cost of borrowing; or to fund particular projects, and it would be helpful to keep a note or minute of a governors’ discussion as to the benefits to the school.
How might VAT be applied to school fees?

Administering VAT is complex and specialist advice may be necessary, including on whether a school’s parent contract provides the contractual right to charge VAT in addition to the published fees. Practical steps include a review of a school’s accounting software to ensure it facilitates both raising VAT on school fees and calculates correctly input VAT. If that software has a ‘practice’ database, using it to do a trial fee run to highlight any issues and provide an early view of how financial statements might look in a VAT environment, may be helpful. It would also be prudent to review cashflow forecasts and ensure they reflect any timing differences between submission of VAT returns (probably on a quarterly basis), payments to HMRC and receipt of fee income.

This will be a big change for finance staff. Setting aside sufficient time for training on administering VAT will be extremely important.

How we can help

VWV are the leading law firm for independent schools, well known in the sector for advising on contractual relationships with parents. Our experience in advising on FIA schemes is extensive.

Does your FIA scheme help your school and parents alike achieve their objectives with a clear and unambiguous contractual arrangement?

We would be delighted to discuss any concerns you have with your FIA scheme, arranging a new scheme or managing parents’ enquiries. Please contact Susie Luckman, in our Education team on 07468 698 972, in the first instance.

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Independent schools have a long history of offering flexible payment arrangements to parents. Fees in Advance (FIA) schemes are one such option.

How we can help

We would be delighted to discuss any concerns you have with your FIA scheme, arranging a new scheme or managing parents’ enquiries. Please contact Susie Luckman, in our Education team on 07468 698 972, in the first instance.

Get in Touch

Fees in Advance Scheme FAQs

Susie Luckman

Upcoming VAT and business rates change for independent schools

Getting VAT ready in the lead up to January 2025

VAT on school fees - Fees in Advance schemes

Upcoming VAT changes: Considerations for your contracts with parents

Bursar's Checklist - VAT practical considerations

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Independent schools have a long history of offering flexible payment arrangements to parents. Fees in Advance (FIA) schemes are one such option.

How we can help

We would be delighted to discuss any concerns you have with your FIA scheme, arranging a new scheme or managing parents’ enquiries. Please contact Susie Luckman, in our Education team on 07468 698 972, in the first instance.

Get in Touch