0345 686 6551
The Government announced that from 1 January 2025, all education services and vocational training supplied by a private school for a charge will be subject to VAT at the standard rate of 20%. However, there are now concerns that the rules designed to implement this change will impact organisations other than private schools too.
What has happened so far?
HM Treasury (HMT) published draft legislation and its technical note on the VAT treatment of school fees and business rates for private schools in the UK on 29 July 2024. This has been followed by a guidance note issued by HMRC on 10 October 2024, based on the original draft legislation. Following the Autumn Budget last month, HMT published revised draft legislation which seeks to address concerns that some organisations/supplies would become taxable when HMT had not intended.
However, there may still be some circumstances where sixth form and FE colleges may be affected by the legislation, or HMRC’s interpretation of that legislation – which in some cases does not seem to fully align with HMT’s intention.
How may this impact on sixth form and FE colleges?
The latest draft legislation published by HMT sets out the definition of what is considered a “private school”.
The definition is wider than what we would expect to be referred to as a private school and also refers to “institutions” that “wholly or mainly” provide education in certain circumstances for a fee. See the relevant extract from the current draft legislation below:
(1) A “private school” means an institution which is either—
(a) a school…, or
(b) an institution —
(i) which is wholly or mainly concerned with providing education suitable to the requirements of persons over compulsory school age (or, in Scotland, school age) but under 19,
(ii) at which full-time education is provided for such persons,
(iii) where the provision of full-time education falling within sub-paragraph (ii) is wholly or mainly provision in respect of which fees or other consideration are payable, and
(iv) which is not an independent training or learning provider.
There is currently limited guidance from HMRC as to how the points will be measured in practice.
However, one of the more recent and helpful clarifications from HMRC was that “wholly or mainly” means that at least 51% of the class. However, it does mean that if there is a class where at least 51% of the class is made up of pupils aged 16 to 19 to whom education is provided for a fee, then the fees for that class will become subject to standard-rate VAT from 1 January 2025.
So while the effect of the VAT changes on sixth form and FE colleges is less likely to be as significant as initially feared, the changes still fall short of HMT’s previous statements that “education and vocational training provided by further education colleges, which are classified as public sector institutions, will not be subject to VAT”.
What can you do now?
The comments in this note are based on current information published by HMT and HMRC. It is reasonable to expect that further HMRC guidance will be issued to reflect the changes made to the draft legislation at the Autumn Budget and as further specific consequences, intended or not, are identified by the FE sector.
There are still questions which have arisen from the draft legislation and the current HMRC guidance, such as how should “full time” education be defined. Until those questions are answered, it will be difficult for sixth-form and FE colleges to reach a definitive decision on the VAT liability of their supplies.
Some action which can be taken immediately though is to understand the extent of fee-paying students who are aged 16 to 19, and also the supplies of education made to external bodies such as schools, local authorities or businesses.
For the supplies to external bodies, you should take care if you are currently agreeing fees for supplies from 1 January 2025, to make sure consideration is taken of the potential VAT changes.
Do not wait until January to consider this though, as any fees issued between now and 31 December for tuition delivered from 1 January 2025 may also be subject to the new VAT rules.