There are proposals that fees for education be taxed for VAT.
With the standard rate of VAT currently at 20%, this change is expected to result in significantly lower funds being available to schools, foundations, academies, colleges, clubs, additional tuition institutions and anyone charging fees for education. Even universities and TFL colleges, who will be hoping they are not affected, should be considering their position.
With careful management, the changes do not have to mean that fees must increase by 20% overnight. There are opportunities to reduce significantly the impact of any future new VAT liabilities.
A well-prepared institution will be considering how to reduce the impact of any future new VAT rules, before determining how much of the remainder to absorb and how much to pass on to students. They will be considering both the additional VAT which could be recovered and also activities which could retain their VAT-free status for reasons other than education.
Opportunities include:
- recovering VAT in respect of costs, both future and past (including property projects in the past);
- exempting certain activities and income streams (including clubs, various hire charges, and others);
- zero-rating certain supplies (eg food, transport and international);
- reducing VAT charges in respect of some activities (eg excursions, on-site sleeping accommodation);
- careful deployment of disbursements and discounts (eg scholarships etc); and
- how groups of institutions are organised for best practice from a VAT perspective.
Some of these savings will be significant one-off windfalls, but others will be repeated annually becoming more valuable in the long term. Each institution’s activities will be different and different opportunities will be taken by different institutions. At this stage, a high level review is recommended, simply in order to be ready for the proposed change in VAT law.
Example 1
A fee-paying school has bought or refurbished some property three years before the VAT change comes into effect (note: this date is not known in October 2023).
The school had then paid £2m in VAT which it was unable to recover at the time.
There are specific VAT rules which permit that school to recover some or all of that £2m VAT, even three years later (in fact up to 10 years later). This school will recover £1.4m from HMRC and will also be able to recover VAT in respect of future property projects.
The rules governing this mechanism are awkward, but the VAT savings are valuable and the school is better off for reviewing its past property projects.
Example 2
A college charging fees is caught by new VAT rules (note: it is not known in October 2023 how the new law will be framed).
A number of its activities could be exempt or zero-rated for reasons other than education. Collectively, the college charges £5m for these various activities, which will result in £1m of additional VAT. This includes trips/activities, clubs, sleeping accommodation (whether in or out of term-time), even some financial services such as credit and insurance. Some can be exempt in their own right, but others are not.
This college takes the decision to organise its delivery of these services in order to secure these exemptions on the relevant half of its activities, and has improved its VAT position by £500,000 each year.
Next steps
In order to reduce the impact of future VAT charges in the education industry, there are a large wide variety of potential solutions to consider.
Some solutions might apply automatically, others will require adjustments. Many are complex. Understanding which approaches will be achievable and which are impractical, will assist institutions to quantify the impact of expected VAT rule change and to being preparations for the financial impact.
Institutions and their advisers would ideally give themselves time to consider these opportunities.
If this article raises any issues or queries, please contact me and I’d be delighted to discuss.
Kevin has commented on this subject in:
Separately, Kevin has also recently been published by Taxation magazine about a UK VAT registration issue where there is a question over VAT implications around where a company established for VAT.
