Preparing for VAT on school fees

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Considerable concern has been caused by the announcement last year that, if elected, Labour will introduce VAT on school fees. Clearly the downside would be the need to add VAT to fees, which could deter your parents. However, as the majority of supplies to independent schools are exempt irrecoverable, VAT has always been a significant cost. If school fees do become taxable, this cost would be eliminated, as schools would be able to recover VAT on any VAT bearing expenditure, just like any other taxable organisation, thereby mitigating the impact.

In addition, schools should also be able to recover an element of VAT incurred on costs prior to school fees becoming subject to VAT, as a result of the Capital Goods Scheme (CGS).

This applies to expenditure over £250,000, on which VAT was incurred, and which relates to the construction, refurbishment or alteration of a building. The recovery of VAT on such expenditure is adjusted over a ten year period to reflect its use in making taxable supplies, so if a school had incurred VAT on, for example, the construction of a new school block or sports facility, at present it would be unable to recover the vast majority, if any, of that VAT. But if, say two years after incurring that VAT, its supplies become taxable, then it would be entitled to start to recover some of that VAT over the remaining eight years of the ten year period. For example, if a school spent £3,000,000 on a building project in 2014, on which it incurred £600,000 VAT and its supplies become subject to VAT in 2019, it has used the building in making exempt supplies for 5 complete years. It would then be able to recover £300,000 of VAT in respect of the remaining intervals in the CGS, in instalments of £60,000 over the remaining 5 year period.

The start date for the CGS is the date of first use, so my advice would be to prepare for the possible introduction of VAT on school fees by identifying any construction projects, where the date of first use is within the last 10 years.

The next step is to identify the total VAT incurred on each of these projects so that you can commence making CGS adjustments, should school fees become subject to VAT. It might also be possible to retain the benefit of the exemption, in respect of any fees paid in advance of any change in legislation, as the receipt of the payment would crystallise the time at which the supply of education is regarded as being made for VAT purposes.

We live in uncertain political times, whereby the current government were elected through a marginal majority. In fact, the Conservatives received just 2.35% more votes than Labour at the last election.

Start your contingency planning now, and you will hopefully begin to see that the potential impact, is not quite as bad as once feared.

Phil Salmon, haysmacintyre

Phil is a Chartered Tax Adviser who has specialised in VAT for over 28 years, haysmacintyre acts for over 100 independent schools, academies and multi-academy trusts.

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