VAT on private school fees: Parents paid millions in advance 'to dodge fee hikes' - HMRC to scrutinise schemes
Families who might have been trying to avoid VAT-linked fee increases may not be in the clear 💸
- Recent Government changes mean that, as of this year, private schools must pay VAT on the fees they receive from parents
- But a new investigation has found parents paid hundreds of millions up-front, possibly to avoid resulting fee increases
- Now HMRC is expected to scrutinise the details of some of these schemes
- A financial advisor says concerned parents should seek professional guidance
A big tax change to private school fees may still apply to millions reportedly paid up in advance, with school pre-payment schemes expected to be looked over closely.
From the start of this year, private schools were no longer exempt from paying the standard 20% VAT (value added tax) on the fees they charge. The Government described the policy change last year as closing a tax loophole, with the extra money to go towards improving the state schools that educate about 94% of UK students.
Many independent schools raised their fees in response. But a new analysis by The Telegraph has found that some parents may have attempted to stay one step ahead by pre-paying years of fees at a time into advance payment schemes, before the changes kicked in.
Now the UK’s tax authority is investigating. But what exactly does it plan on doing, and how widespread were these schemes? And if you are a parent who took part in one, what do financial experts say you should do? Here’s what you need to know:
What exactly has happened?
The Labour party had originally included ending the VAT tax break for private schools in its pre-election education manifesto last year. After its July election win, the policy was cemented, and the Government later announced that the changes would come into effect from January 2025.
Many independent schools opted to increase their fees to cover the difference, in some cases by thousands of pounds per year. Some families say this has put them in a difficult position, including military families, those of children with special educational needs and disabilities (SEND), and others at risk of being priced out. A legal challenge on behalf of some of these families was recently dismissed in the High Court.
The Telegraph’s analysis found that the UK’s 50 independent schools held £515 million between them in advance fee schemes as of 2024, up from just £121million in 2023. These schemes are usually used to pay school fees a year in advance – but the paper reported that these sums also included some parents paying fees for multiple years.
It also noted that the actual figure may be much higher. In total, there are more than 2,600 independent schools across the country. Tax experts even told them that it could cut into the amount the Government expected to collect, money which was due to be funnelled back into state schools.
What action is the Government taking?
A HMRC spokesperson told us that the Office for Budget Responsibility had already factored the increased use of pre-payment schemes into its revenue forecasts.
“Removing tax breaks for private schools is expected to raise £1.8 billion a year by 2029/30,” they added. “This funding will help us recruit 6,500 new teachers and improve standards in state schools, which educate 94% of children.”
Many schools have always offered schemes enabling fees to be pre-paid. However, the Government said it was aware of reports of increased numbers of parents utilising them ahead of its announcement, which could be an attempt to avoid these fees being subject to VAT.
HMRC has confirmed it will be scrutinising the details of pre-payment schemes to ensure that schools pay the correct VAT where it is due.
Last year, official guidance clarified that some fees paid in advance would be taxed. A Department for Education blog post said that any private school fees paid after July 29, 2024 for tuition and boarding fees covering a period on or after January 2025 would be subject to 20% VAT. Some fees prepaid before July 29 last year may be too, it continued, although that would be dependent on the arrangements of the school’s pre-payment scheme.
This could potentially apply in cases where a lump sum was paid into a pre-payment scheme in advance, but the specifics of what that money would cover for upcoming terms had not yet been set by the school. This will likely mean VAT will apply to those fees.
What should parents who have paid fees in advance do?
Your child’s school should be able to provide more information on the specifics of its pre-payment arrangements. But Alex Pugh, a chartered financial planner at Saltus, said that VAT could very well end up being due on some of them.
This will most likely be the school’s responsibility to pay, although another tax expert told The Telegraph that some schools’ terms and conditions could leave parents on the hook – meaning they’re worth checking.
For parents of private school pupils feeling the pinch of rising fees overall, Ms Pugh said professional advice was key. “For parents feeling the financial strain, speaking to a financial adviser can help identify the most sustainable path forward – whether that means reworking plans for private education, reshaping longer-term financial goals or seeking family support.”
She also believed that the move could have a further impact on private schools’ roll numbers. “Our latest Wealth Index found that four in ten (43%) parents will make a change to their child’s private education before term starts in September. This includes moving their child into state education, moving them to a cheaper private school, switching from boarding to day, home schooling, or even leaving the UK altogether to access VAT-free education abroad.
“As this number may well rise if it transpires that those who thought they'd avoided the VAT through pre-payments are still liable,” she added. “There is already real concern for the future of private schools… Should HMRC successfully unravel advance fee schemes, the financial pressures facing all private schools will be exacerbated.”
A recent survey explored how people across the country really felt about adding VAT to private school fees. You can check out our coverage online here.