The introduction of new VAT rules is part of wider tax reforms in the UK. Around 6% of children in the UK are educated in private institutions. The government estimates that extending the tax to previously exempt units will benefit children attending state schools. What changes can we expect in January 2025? And what challenges might VAT registration for state schools in the UK bring?
Table of Contents:
- Why the decision to introduce VAT registration for public schools? The role of VAT in the UK tax system
- Significant changes coming to the UK private education sector
- What will be the VAT rate for private school education?
- How will payments made before 2025 be accounted for?
- What are the criteria for compulsory VAT registration for state schools in the UK?
- VAT registration for private schools in the UK versus HMRC
- Benefits and challenges of the new tax system
Why the decision to introduce VAT registration for private schools? The role of VAT in the UK tax system
VAT (value added tax) represents about a quarter of total tax revenue in the UK. This makes it an important element of the public finances.
VAT is a consumption tax levied at various stages of the production and sale of goods and services, but the burden is ultimately borne by the final consumer. It allows the government to generate stable revenue, independent of the volatility of other sources such as income tax, and its rates affect the prices of goods and services.
So it should come as no surprise that the UK government, in planning its 2025 budget, has made changes to VAT exemptions to help plug the budget deficit.
Significant changes for the UK private education sector
For private schools not under direct public control, the VAT rules have been relatively favourable. However, legislation will come into force in 2025 that will change the way public schools in the UK account for VAT.
VAT registration will become compulsory for institutions that were previously exempt. These changes will affect the way schools manage their finances, price their services and carry out their educational activities. At the same time, it should be noted that the implementation of the new rules will require schools to adapt to the new regulations.
How much will VAT be for education in non-public schools?
The removal of the VAT exemption for private schools in the UK is a solution to support public finances. The funds raised will help to meet the government’s commitments to state schools, such as providing a high quality education and supporting pupils whose needs cannot be met by the state system.
From 1 January 2025, private education services will be taxed at the standard rate of 20%. Charitable institutions will also be affected by the changes – under the new rules they will lose their entitlement to charitable relief.
How will payments made before 2025 be accounted for?
The changes introduced on 30 October 2024 will apply to terms starting from 1 January 2025. It is important to note that payments made before this date will be covered by the new tax rules.
This means that for invoices issued from 30 October onwards, VAT will be due at the time of invoicing or payment. However, for payments received and invoices issued between 29 July 2024 and 29 October (for semesters starting from January 2025) – VAT will be due on the first day of this period.
What are the criteria for compulsory VAT registration of private schools in the UK?
The changes include charging VAT on tuition fees. In addition, the new legislation aims to ensure that schools with high revenue-generating activities outside of education are required to register for VAT.
Registration will be mandatory for:
- Income from non-educational activities – where a private school generates income from non-educational activities (e.g. renting premises, organising extra-curricular courses) that exceeds a certain annual threshold;
- Change in the definition of educational activities – services related to extracurricular activities, which could previously be considered educational and exempt from VAT, may be classified as commercial, resulting in the need to charge tax.
VAT registration for private schools and HMRC
Private schools that have not yet registered for VAT will have to do so in the near future. They will be required to keep digital records using Making Tax Digital software.
Private schools with an annual turnover of less than £1.3 million can benefit from HMRC’s simplified scheme. The cash accounting system allows VAT to be accounted for and the annual scheme allows for a single VAT return (with regular monthly instalments and repayment with a refund). There’s also an estimated cost to HMRC of £7 million over five years for implementation, training and administration.
Benefits and challenges of the new tax system
The changes that have been introduced are expected to bring a number of benefits, including significant tax revenues for the national budget. At the same time, it will be a major challenge for businesses.
The government estimates that private school fees will increase by around 10%. This may influence parents’ decisions to send their children to state schools.
Some private institutions are already developing solutions to the VAT registration requirement. As well as dealing with the additional paperwork, they are also planning measures to minimise the increase in tuition fees – for example, some schools have announced that they will use their reserves to do so.
VAT registration for private schools in the UK may also mean changes for parents of pupils attending such institutions. Higher fees may mean that they have to increase their hours or find ways to make savings in their daily lives.
If you are in any doubt about the new legislation coming into force, what your obligations will be and what formalities you will need to comply with, the best thing to do is to contact a UK tax adviser.
