A leading tax expert is advising private schools to VAT register on a voluntary basis in order to maximise savings, as HMRC prepares to challenge the validity of prepaid school fees.
Prior to the Labour government announcing that private school fees will be subject to VAT from 1 January 2025, Daphne Hemingway, VAT Director at Jerroms Miller estimated that around £100 million could be subject to VAT.
School fees were paid to UK private schools ahead of the general election in a bid to circumnavigate Labour’s 20% VAT charges. However, the government’s technical note published on 29 July 2024 details how VAT will be applied under the new rules, introducing anti-forestalling measures which mean that schools without the necessary contractual terms can no longer secure the VAT exemption on prepayments.
Daphne Hemingway said: “It seems some schools, and their advisers, have misunderstood the VAT tax point and accounting rules. If school contracts were not properly structured in time, schools now face a difficult decision of whether to ask parents to fund the additional 20% or refund fees.”
Before the legislation date was announced, Daphne advised that parents and schools needed to ensure that school contracts were sufficiently robust, and the accounting treatment was properly applied as VAT treatment could be challenged by HMRC.
The technical note confirms that schools will have to VAT register with effect from 1 January 2025, but HMRC will allow schools to VAT register from 30 October 2024 if they wish, or even earlier if they have made taxable supplies.
Daphne said: “By making an earlier voluntary VAT registration, schools can increase VAT savings and bolster finances. Most schools already make some taxable supplies, such as school uniform sales, books, snacks, school photographs etc. but the annual turnover is less than the VAT registration threshold of £90,000.
“If a voluntary VAT registration is made prior to 30 October 2024 (but after the Winter term fees have been invoiced in September), further VAT savings can be made on costs incurred between September and 1 January 2025, which would otherwise be lost. Some schools will have one or more trading subsidiaries, in which a VAT group registration would further optimise VAT recovery.”
Daphne has helped schools make VAT claims in excess of £1.8 million and secured £620,000 VAT savings on prepayments of fees beyond 1 January 2025. To get guidance, please contact Daphne on 0201 693 5000, or visit: jerromsmiller.co.uk.
