VAT and Private School Fees

James shares his personal thoughts regarding the complexity of the new regime, especially for smaller private schools getting to grips with VAT for the first time.

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

[00:00:00] Hi, it's James Hurst here, VAT trainer and consultant for Mercia Group. Today, I'm going to share some thoughts regarding VAT on private school fees. At the recent budget speech at the end of October, we heard the Chancellor confirm the policy to introduce VAT on private school fees for school terms beginning October 1st. 

[00:00:22] On or after the 1st of January, 2025. And when preparing a summary of this measure for Mercy, his new topical issue on VAT and private school fees, I was struck by the fact that although the basic proposition, i. e. changing the treatment of private school fees from being VAT exempt to being taxable at the standard rate of VAT of 20%, that's a relatively straightforward concept, but it's when you start to look at the practicalities that schools face that it very quickly starts getting complicated. 

[00:00:57] And this brought to mind two further thoughts as I was writing the topical updates. And the first of those thoughts was around a previous budget with the previous chancellor, namely Kwasi Kwarteng and his mini budget, if you recall, or fiscal event during the brief premiership of Liz Truss and. That budget is still talked about for its dramatic consequences, but what perhaps is rather less well remembered is that during his budget speech, Kwasi Kwarteng announced the abolition of the Office for Tax Simplification, saying that it had served its purpose in the way forward was for the likes of the Treasury and HMRC to, in a sense, embed the objective of tax simplification in all that they do. 

[00:01:45] And the other thought that came to mind when writing the piece was linked back to a time earlier in my career, some years ago, when I was involved with the charity Tax Creep, an organization that's done some great work over the years in helping charities navigate through some complex areas of tax, and there's certainly some complex areas of VAT that affect them. 

[00:02:14] And that thought was that whereas some very large businesses and organizations often, in my experience, had a relatively straightforward profile for VAT, it was often the case that you could easily come across a very small charity, for example, that had a particularly complex and challenging matters to resolve in relation to VAT. 

[00:02:37] And I guess to put that another way, you. I always found that there was no automatic correlation between the size of the business or organization and the complexity of its VAT affairs and often these are small charities and organizations that lacks the resource or experience to deal with the particular VAT challenges. 

[00:03:02] As I say, these thoughts came to mind whilst looking at some of the detail facing private schools as they now grapple with the new VAT regime that is currently being introduced. And clearly not all private schools, charities, albeit many of course, have them. Our charities but the point here is that there will be a lot of smaller private schools in particular that are being, as I say, plunged into getting grips to grips with some relatively complex VAT matters. 

[00:03:34] And they're not helped by guidance from HMRC that in places is proving very controversial and indeed has already been revised several times in a period of just a few weeks. And just to give one example of the complexity or controversial nature of some of the guidance. Then the new HMRC guidance for private schools addresses the question of schools that are newly registering for VAT. 

[00:04:01] And by implication, these are going to be the smaller private schools, rather than sort of big, famous public school names. And the guidance, Guidance looks at how these schools can recover some of the VAT incurred prior to the date of their VAT registration. Now, Regulation 1. 1 of the VAT General Regulations has always allowed newly registered businesses to recover VAT incurred on certain goods and services received by the business prior to the date of registration. 

[00:04:33] Now, that, that measure is subject to certain time limits and conditions. But broadly speaking, you are allowed to recover an element of VAT incurred prior to the date of registration. If you look at the new guidance for private schools, HMRC appear to be somewhat embellishing those rules. And they so seem to be setting certain additional conditions and restrictions that are not set out in the guidance. 

[00:05:02] Law and I feel this is risks putting private schools in a different position to other taxpayers registering for VAT for the first time and some of the guidance at the moment either lacks detail when it would be helpful to have more detail or it seems to impose restrictions that And maybe based more on policy rather than the law and so to close these comments, it's not clear to me that this notion of simplification is yet embedded in the approach being adopted here by HMRC and their guidance. 

[00:05:39] And this whole situation with private schools, I think is a good example of when sort of tax simplified approach would be beneficial to help the taxpayers get it right. For more information on this topic and to keep your clients up to date I've created a topical issue tax article on this subject available to purchase at www.mercia-group. com