VAT on school fees - Fees in Advance schemes

We delve into the implications of the draft legislation for schools offering Fees in Advance (FIA) schemes and provide key considerations for schools navigating the new landscape.

Anti-forestalling

Schools and parents alike have been speculating what, if any, anti-forestalling provisions might be introduced by the government in relation to fees in advanced schemes. As education is not a service that is usually taxed, both domestically and throughout much of the world, there is little precedent to look to as a guide for educators, but there is precedence in other industries for how VAT exemptions have been removed and how anti-forestalling measures are sometimes employed. These provisions have now been introduced as part of the draft legislation published alongside the 29 July announcement.

From 29 July 2024, any school fees paid in advance which relate to school terms on or after 1 January 2025 will be subject to VAT at a rate of 20%. It is no longer possible to use a prepayment scheme to settle future fees under the current VAT exemption for school terms after 1 January 2025.

Impact on FIA Schemes right now

Many schools have seen an increase in interest in their FIA Schemes, with many schemes being entered into, and fully paid up, before 29 July. The Technical Note states that not all FIA Schemes entered into before 29 July will automatically benefit from the current VAT exemption. HMRC may seek to investigate historical FIA Schemes to ensure they effectively establish a tax point at the point the lump sum funds were received by the school. It remains to be seen what form such investigations will take.

In addition, there are likely to be a number of instances where schools have received expressions of interest from parents for FIA Schemes, but where the parents' entry into such schemes is incomplete, for example where the parents have signed the Scheme but only partial payment was received prior to 29 July.

The premise of most FIA Schemes is that a lump sum payment is received by a school and immediately used to prepay, or settle, future terms' fees in accordance with a calculation or schedule set out in the scheme itself. If the full amount has not been received before 29 July, such prepayment will not have been possible before the anti-forestalling measures apply. It is unlikely that such an incomplete scheme will have successfully settled the future fees while the VAT exemption was available.

Future FIA Schemes

That fact that FIA payments received after 29 July 2024 will no longer be exempt from VAT should not deter schools from continuing to offer their FIA schemes. Schools can and should maintain these offerings as FIA schemes remain a valid and advantageous method of pre-paying school fees. Beyond any VAT implications, there are many varied factors that may influence a fee payer's decision to pay in advance. To meet this demand, schools should continue to offer flexible payment arrangements, pass on a discount for prepayments and assist families with their financial planning.

If a school is considering offering a scheme which includes VAT on school fees from 1 January 2025, it should ensure it has already considered how it will show VAT applying to its fees and that its Fees List is up to date.

Communications with Parents

The consultation period for this policy will be a time when many parents may seek assurances from schools as to the validity of their FIA Scheme or the plans that the school may have in the future. During this time, schools should take care to ensure it limits its communications to factual accounts of the Technical Note and draft legislation and refrain from bold statements of reassurance.

At this stage, schools have access to the same publicly available information that parents do. From 1 January 2025, schools will have a primary obligation to pay VAT to HMRC, and so will need to ensure they have an unencumbered route to recover such VAT from fee-paying parents. Most FIA schemes contain explicit terms that enable schools recover any tax or duty imposed from fee payers. To protect a school's position in this payment chain, schools should ensure they do not inadvertently assume responsibility for meeting any tax imposed.

It is crucial that the school does not make any comments during this consultancy period which might jeopardise the school's ability to charge the parents VAT.

Challenging FIA Schemes

The Technical Note makes it clear that HMRC will have a role in challenging and scrutinising FIA Schemes in future, seeking to collect VAT where due. Such challenge could, theoretically take a number of months if not years to conclude. If HMRC's claim is successful, a VAT charge could be attached to school fees that the parent had paid a significant time ago, and this may pose difficulties to the school in recouping those VAT costs. Maintaining organised scheme records is crucial for pursuing fee payers and schools should anticipate potential issues with recovery if, for example, children have since left the school or belong to families based overseas.

For advice on your schools FIA Scheme, please contact Susie Luckman in our Independent Schools team at 07468 698 972, or fill out the form below.