How the new Budget impacts independent schools: Navigating VAT and financial challenges

The Autumn Budget 2024 has certainly prompted significant commentary, but the issues around the imposition of VAT on independent school fees has received little attention in the Budget presentation.

Those hoping to see significant changes to earlier policy announcements to VAT on school fees as part of the Budget were disappointed. Despite HMRC receiving some 17,500 responses to the public consultation on the proposals first announced in July – the new legislation and associated guidance includes very few changes. Those who were hoping for a delay in implementation were again disappointed, as were those wanting relief for things like breakfast clubs or faith schools. There was some additional support for military and diplomatic families, but this comes by way of additional funding to support the payment of school fees rather than any VAT reliefs, and there is no relief offered to the children of overseas diplomats or military personnel based in the UK as of yet.

What are HMRC telling us?

The message from HMRC is one of resolute determination to implement the policy as originally announced. There were a couple of welcome changes in the details around fee-paying special schools and nursery provision (covered in more detail below). But for most schools, there is little if anything new, and the sector faces a difficult period to adapt to dealing with VAT post January 2025.

Some points to consider:

• Most schools can apply for VAT registration from 31 October, and navigating HMRC’s online registration system will be the first exposure many will have to the practicalities of VAT administration. How long HMRC will take to process this influx of registrations is uncertain, but their reputation for administrative delay and their resources issues are well known.

• Schools whose VAT registration applications are still ongoing by late November or early December will need to understand how they can issue invoices for the January term which include the VAT they will need to pay HMRC but without having a VAT number to put on the invoice.

• Many schools will need to adopt new and more complex accounting procedures and systems and may need to amend the way in which costs like catering or repairs are invoiced in order to deal with the complexity of partial exemption.

• Bursaries and discounts remain an area of significant complexity and over the next eight weeks, schools will need to decide how these are to be treated for VAT purposes.

While HMRC have not made any significant chances or concessions in their policy, there are a couple of points of detail in the final legislation which are broadly positive:

Nursery provision

The legislation now includes a more tightly defined definition of nursery provision, which is designed to deal with the issue of a small number of older children attending a nursery pushing fees into the VAT net.

HMRC are clearly keen to ensure fees for any class with more than a handful of children over compulsory school age will be subject to VAT.

Special schools

The other change from the Budget sees fee-paying special schools included within the scope of VAT. At first glance, choosing to tax fees paid by special needs pupils attending such institutions seems harsh. But in many cases the fees for these SEND students are paid by local authorities, who will be able to recover the VAT from HMRC. So, this change offers these schools the ability to recover VAT on costs, including capital expenditure with no overall increase in costs for the majority of their customers. However, any self-funding pupils attending these schools will face an increase in fees

How we can help you plan

VAT registration will be the first hurdle for those that are not registered. The VAT team at Moore Kingston Smith can help you navigate the registration process.

The concept of VAT will be foreign to most people in the sector and our VAT specialists, Debbie and Geraint, who have extensive experience in all areas of VAT, will be on hand to offer practical, hands-on support to the sector.

Finally, schools should not underestimate the administrative task that comes with introducing such a significant change.

For all enquiries, please email Vanessa at vgomez@mks.co.uk.