Private School Fees

Private School Fees

Background
Since VAT was introduced in 1973, private education has been exempt from VAT, meaning these fees have not been subject to VAT. Private schools have not needed to register for VAT, however, the government has announced proposed changes to start levying VAT at 20%.

Reclaiming VAT on School Fees
If the proposed policy comes into force, could the fees be charged to a VAT-registered entity and the VAT reclaimed? There is no explicit prohibition against reclaiming VAT on school fees, but it would be up to HMRC and the courts to determine if the expenses were genuinely for business purposes and, if so, whether the VAT could be reclaimed. The bar for reclaiming VAT on such expenses is high, even if they could qualify as business expenses, could still be excluded from reclaiming VAT.

Our examination of the legislation suggests that VAT on fees would not be recoverable by employers or companies. There would also be significant benefits in kind which would attract tax and national insurance, as the fees would still be treated as employment income on the director’s tax return.

A reminder of the rules for reclaiming VAT
HMRC manual VIT10200 specifically states that if the
a) “spending is for the personal benefit of company directors” and 
b) “spending is in connection with non-business activities”

“do not satisfy the purpose of the business test”.

The manual continues that:

“HMRC will normally accept that the VAT incurred is input tax if we are satisfied that:
• the expenditure was genuinely made for the purpose of the business;
• the expenditure was not made for private or other non-business purposes; and
• the use to which the purchases are put is an acceptable business use

If HMRC considers that the business use test is not satisfied we will normally reject the claim because the VAT is not input tax.”

Conclusion
In our opinion, HMRC is unlikely to permit school fees as business expenses, as they are typically incurred in a private capacity. HMRC would likely argue that reclaiming VAT on school fees would contravene the spirit of the legislation, intended to generate additional tax revenue for state schools.

Impact on Schools
If schools are required to charge VAT, they will need to become VAT registered, allowing them to recover VAT on their expenses. This could reduce their costs of providing services, potentially mitigating the 20% increase in fees. Therefore, the actual cost increase may not be a full 20% hike on current fees.





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