As of 1st January, independent schools in the UK are no longer exempt from VAT, meaning education and boarding services are now subject to 20% VAT. Chris Cutting, VAT & Indirect Tax Manager, outlines the opportunities available for independent schools to reclaim VAT.
As of 1st January 2025, education and boarding services in independent schools are subject to 20% VAT. The sector is preparing to face significant financial pressure as a result, with some schools already facing the possibility of closure as parents consider whether they can afford an increase in school fees.
While independent schools are now required to pay VAT on their education and boarding services, there may be opportunities for schools to recover VAT.
Partial exemption and what it means for independent schools
The new changes to VAT rules will result in independent schools most likely being classed as ‘partially exempt’, which simply means that the schools will be making both taxable and exempt supplies.
While partial exemption will allow schools to reclaim VAT on certain expenses, the rules and processes surrounding VAT recovery are more complex for partially exempt businesses, which increases the likelihood of errors and therefore unsuccessful claims.
For this reason, we strongly advise that independent schools seek specialist VAT support before attempting to reclaim VAT.
Capital Goods Scheme
The Capital Goods Scheme allows businesses to recover VAT on capital expenditure used for taxable supplies (supplies subject to VAT). The scheme becomes relevant when land or property is bought, altered or improved and the cost of this exceeds £250,000 (excluding VAT). The scheme has a 10-year monitoring and adjustment period that stipulates VAT recovery must be monitored over the period – this ensures that VAT can only be reclaimed when the land or property in question is used for taxable activities rather than VAT-exempt or non-business activities.
Now that independent schools are subject to VAT, they may be able to reclaim a portion of VAT on past land or property work that meets the eligibility criteria. Looking to the future, the Capital Goods Scheme will also enable schools to invest in their facilities and grounds at a lower net cost.
General liability of supplies, including school trips and meals
Depending upon how independent schools invoice for school trips and meals, these supplies may be either a taxable or an exempt supply as both are considered ‘closely connected goods or services’ in VAT terms. However, this is a complicated area of tax and a partial exemption calculation would be required to accurately assess how much VAT can be reclaimed. For more information, contact us to speak to one of our expert VAT team.
Nursery activities
If an independent school has a nursery, the nursery services remain exempt from VAT, provided the children attending are under the compulsory school age. However, the VAT-free status of these services is likely to cause issues relating to the recovery of VAT on certain eligible supplies due to the school’s partial exemption.
Pre-registration input tax
Pre-registration input tax concerns VAT incurred on goods and services before a business registers for VAT. Once independent schools have registered for VAT, they may be able to recover a portion of input VAT on past purchases that will be primarily used for taxable activities (e.g. education and boarding services).
We anticipate that the schools which were VAT registered prior to the government changes coming into force will be the ones that benefit from such input VAT recovery. This is because if assets (not falling within the Capital Goods Scheme) have already been used to make exempt supplies, the ability to recover VAT at a later date is largely lost. However, for those schools that were already VAT registered, there may be opportunities to recover VAT on such assets that were purchased in the ‘Longer Period’ in which these changes occur.
Discussing your situation with a VAT expert can provide clarity on this matter.
Review of students with Special Education Needs and Disabilities (SEND)
According to the Independent Schools Council’s Census and Annual Report 2023, almost one in five students at independent schools receive some form of SEND support.
Some SEND students may have an Education, Health and Care (EHC) Plan in place. If an ECHP lists an independent school as the sole placement, the pupil’s school fees (including the additional cost of VAT from January) will be funded by the local authority. This means that the school should be able to recover the input tax on those fees. SEND students without ECHP plans in place will be required to pay VAT on school fees.
However, the ECHP plans should be carefully considered with the view of defining what exactly is being supplied to the student. For most, this may likely be education, but for some it may be classed more as welfare services, which may be an exempt supply for VAT.
HMRC’s current guidance on identifying if a supply is more akin to welfare services states:
An example of a supply of welfare is supervision and guidance provided to a vulnerable person to develop a capacity to live independently and complete everyday tasks. This may be listed in an education, health and care (EHC) plan
Maximise your VAT recovery with PKF Smith Cooper
There are opportunities for independent schools to reclaim VAT and relieve some of the financial pressure caused by the recent VAT changes, but identifying the VAT liability of your supplies and carrying out subsequent partial exemption calculations can complicate VAT recovery. Seeking specialist VAT support is the most effective way for schools to ensure they recover all the tax they are entitled to. Contact us today to find out more about how our VAT experts can help.
