Upcoming VAT and business rates change for independent schools

Independent schools will all now know that starting 1 January 2025, they will become subject to 20% VAT on the provision of education services, vocational training, and associated boarding and lodging. This VAT will also apply to activities provided outside regular school hours, including after-school programs and holiday camps. Additionally, from April 2025 independent schools with charitable status will lose their eligibility for business rates relief.

As currently drafted, there are some key exemptions and exclusions in the proposed legislation. VAT will not be charged on essential goods and services directly used by students, such as school meals, transport, books, and stationery. Further clarity on these "connected services" is hoped for at the conclusion of the consultation period which ends on 15 September 2024 and to which we are contributing via the Charity Law Association's Working Party on VAT. Nurseries, both standalone and those attached to independent schools, are also excluded from the new VAT rules. For Special Educational Needs (SEN) pupils who are placed in private schools because their needs cannot be met in the state sector, and whose places are funded by a local authority or other government body, the funders will receive compensation for the VAT charged.

Schools should also consider the implications of these changes on the Capital Goods Scheme. This scheme allows for the recovery of VAT on significant building and maintenance projects to be spread across a ten-year period, known as the ‘adjustment period’. If a school has incurred VAT on projects like purchasing land or constructing buildings, they may be able to reclaim a portion of this VAT, depending on how far along they are in the scheme's ten-year adjustment period and how much of their services will become VATable.

It remains to be seen whether any legal challenges to the proposed legislation are brought on behalf of the sector, but schools, and in particular those with FIA Schemes should be aware of the risk that they could in future be selected as a test case by HMRC (see 2.32 in the technical guidance). Advice schools have individually taken from lawyers, if kept confidential, should be privileged, but anything put in writing internally or in communications with stakeholders is likely to be disclosable should there be an investigation or legal action taken against the school by HMRC.

For further information and advice around the VAT requirements please contact Alex Ueno-Park in our Tax team at 07880 335 935 or Barney Northover in our Education team at 07973 423 081. Alternatively, you can fill out the form below.