Update on VAT for independent school fees

Posted: 12/02/2025

Many independent schools will now be registered for VAT and will have issued their first VAT invoices.

For those who received fees in advance for the spring term prior to January, the requirement to register occurred on 8 December 2024 if the total payments exceeded £90,000. For schools who received payment in January of over £90,000, registration was required from 6 January. For any school that has not yet reached the £90,000 threshold, registration will be required once it is anticipated that the aggregate VATable income for the year will reach £90,000 in the next 30 days.

This article provides an update on further information following the previous two bulletins, available here and here, together with some important reminders.

Nurseries

When HMRC first published its technical guidance, it was understood that nursery education would remain exempt. This is because the VAT charge only applies to the provision of education to children of compulsory school age. However, HMRC released an update to its guidance, which states that a nursery class provided by an independent school will only remain exempt if it consists ‘wholly, or almost wholly’, of children under compulsory school age. The suggestion is that the nursery would need to consist of at least 90% or more of children under compulsory school age.

If an independent school has mixed classes of nursery and reception children, this could mean that the 90% test is not met – certainly at some point in the academic year, even if not immediately, depending on the birth dates of the reception age children.

Where the 90% test is not met, this means that the fees of the whole class will become subject to VAT, not just for those children over compulsory school age.

Capital goods scheme

This has been mentioned in previous bulletins, but the capital goods scheme should now be considered by all schools. It may be possible to recover VAT from past projects within the last 10 years for any land and building project where the costs excluding VAT were at least £250,000, and within the last five years for computer expenditure exceeding £50,000 excluding VAT.

Schools should consider what projects they have undertaken in the last 5-10 years to identify whether there are any opportunities for a VAT reclaim.

Fees in advance

HMRC has now published guidance on its view on whether pre-payments of fees made prior to 29 July 2024 will be subject to challenge

The HMRC view is that any payment will only have created a VAT point prior to 29 July 2024 ‘where the fee rate for the relevant term has been set and was known at the time of payment’.

Any pre-payment that has been made for future fees where the fees have not already been set for the relevant period would therefore, in HMRC’s view, not create the VAT point prior to 29 July 2024, and would therefore be subject to VAT when the tuition is received.

Payments creating a VAT point is not a new concept in VAT. The guidance for independent schools does not follow the long-held understanding of how VAT points are created; the requirement being that it is the services that are precisely identified, not the exact amount due.

It is likely that at some point soon HMRC will bring a test case on this point which will force the determination of the issue. In the interim, there are a number of ways of dealing with the VAT risk – the education team is able to provide advice and guidance on this.

VAT challenge

The High Court has now set hearing dates from 1-3 April for a challenge made by six representative families and backed by the Independent Schools Council against the imposition of VAT on independent school fees. The hearing has been expedited given the impact that the changes are already having on fee payers of children at independent schools. The claim largely focuses on children with special educational needs and faith schools. The aim of the challenge is to ask the High Court to make a declaration that the change in VAT law is incompatible with the ‘right to education’ guaranteed under the Human Rights Act 1998.

State school places

It is understood from local press that a number of councils across the country have warned that state schools lack the capacity to accommodate the influx of pupils affected by Labour’s VAT policy on independent education. It appears that an increase in intake has been anticipated in the more common entry years, but outside of this, places may not be available, particularly in years 9, 10 and 11.

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