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Quiz: Independent schools and VAT on fees

There will undoubtedly be a general election in 2024, and current polls strongly predict that the Labour Party will take control of the UK Government.

Whilst no official Labour Party manifesto has been published, the Party has repeated its intention to impose VAT on independent school fees. No precise details about how this policy would be put into effect have been made available but, given the complexity from a technical and systems perspective, it will be important for affected schools to look ahead and consider what ‘no regret’ actions can be taken now to aid preparation and planning.

To assist with this, we have prepared a mini-VAT quiz to introduce some of the issues and considerations. If you or the organisation are unclear on answers to these questions, it may be worth seeking at least a conversation with someone who can assist in your preparations.

 

The Independent school mini-VAT quiz

Question 1 – What is your net exposure to VAT?

The VAT rules allow for VAT incurred (on costs) to be offset against the VAT chargeable on income (mainly school fees). The difference between the amount of VAT available for recovery (‘input tax’) and the amount of VAT due on income (‘output tax’) will be the net VAT exposure.

The ability to offset VAT incurred on costs may, therefore, mean that school fees do not need to be increased by the full 20% (the standard rate of VAT) to protect net income levels.

 

Question 2 – Can your accounting system currently account for VAT?

Accounting for VAT is, sadly, more complex than adding an additional 20% to invoices. You may or may not already have an accounting system:

  • if you do you will need to consider if (and how) your accounting system is set up to account for VAT; or
  • if you do not, you may be considering one (and how to configure it), or consider how you can work with your existing processes to best manage VAT.

Alongside this you will need to consider any additional process changes needed to be compliant with the Making Tax Digital for VAT requirements.

 

Question 3Do you have any a capital expenditure plans?

Under the current rules, capital projects carry significant irrecoverable VAT costs, increasing the costs of delivering the schemes.

Assuming your fees become subject to VAT in the future, all or part of the VAT incurred on capital projects will become recoverable. This should significantly reduce the cost of the capital projects and may make more projects affordable – the timing and costings of such projects may, therefore, need to be revisited.

 

Question 4 – Who will be responsible for accounting for VAT?

Though once described as a ‘simple tax’, VAT accounting is now considered anything but simple! As a sector which has previously had minimal exposure to VAT, it will be worth considering who will be assigned responsibilities for VAT accounting. Alongside this it will be worth looking at whether there is any need to up-skill personnel to support compliance (this could include those responsible for finance data entry, VAT return preparers and reviewers).

 

Question 5 – What about income from other activities?

Your school will no doubt have several income generating activities beyond the school fees, for example: donations and bequests, before and after school clubs, catering, transport, and school trips.

The VAT treatment of these activities could differ from that applied to school fees. Determining VAT liability can be complex, and the VAT treatment of different income streams is not always clear – nor is the associated impact on input tax recovery.

 

Next steps

It would usually take a little while to implement a policy such as this but, given the profile of this policy in Labour’s current narrative, and the fact that future spending plans are reliant on the associated revenue planned to be generated from this policy, it may be that Labour look to implement this early in their tenure.

There are actions that could be taken now that could benefit the organisation in any event, whilst helping you to better understand VAT accounting and compliance responsibilities:

  • Understanding the likely impact on the organisation will help you to plan for different futures and put you in an educated position to feed into consultations should you so wish.
  • Reviewing accounting systems, processes and controls will always generate benefits.

Please get in touch if you need any support.

Independent schools
Disclaimer

The information was correct at time of publishing but may now be out of date.

VAT
Posted by Paul Hammond
7th December, 2023
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