School Fees and VAT
13th August, 2024
With recent announcements by HM Government, the picture on the application of VAT to private education has now become a little clearer.
Prior to the Chancellors comments on 29th July, we knew that the application of VAT to private school fees would be from the start of the Spring term in January 2025, what we didn’t know was that any advance payment of fees would only avoid the VAT increase if it was made before the Chancellor spoke.
For the very lucky few who made that call, paid early and were able to afford it, they sidestepped the application of a new tax with a departure from the age-old rule that a VAT tax point, i.e. the date that tax is due is the earlier of payment or invoice.
The general view is that the net VAT charge to parents will be around 12%. Some schools, and it is likely to be the larger more exclusive ones, may, due to investment in buildings and facilities, actually be able to initially recover very substantial amounts of VAT and so could potentially shelter the parents from fee rises for as much as five years. So fee increases and impact on parents may be less the larger and better endowed the school is.
What Can Be Done to Mitigate the Additional Cost?
Here are some things you can do to mitigate the extra cost:
Advance Payment
Advance paying school fees, perhaps by a grandparent is still a good way to offset the likely above-inflationary increases in private school fees.
If a grandparent has income beyond their needs, they can gift it to family members with no inheritance tax implications – it is not seen as a Potentially Exempt Transfer, it is outside scope of inheritance tax. Paying school fees is a good way to move cash through the generations without, if it is not desirable, depleting the capital of the top generation.
Setting Up a Trust
Only recommended for those at the start of their school fee journey as the cost of setting up and running the trust can be significant and the benefit of the trust only pays back over a period of time.
Capital, ideally cash (if it isn’t cash then Capital Gains Tax is a consideration), is contributed to the Trust by grandparents, perhaps from capital passed to them by the parents of the children, meaning the income generated from assets in the trust is taxed on the beneficiaries, who, despite the fact they are minors, still have access to their personal allowance and lower rate tax band. If the trust is established with parental money the tax on the income falls back on the parents and the advantages are diminished. The trust then pays the school fees.
Of course, the above are only available to those with significant wealth and those who are paying fees from earnings, a substantial proportion of parents, may not have the capacity or capital to take advantage.
If you would help and advice on any of the point addressed here please contact Terry Smith, Tax partner. (020 7384 0920, enquiries@haggards.co.uk)
Andrew founded Haggards Crowther with his brother in 2004 and took over as Managing Partner in May 2023. He has always been closely involved in client work, in particular providing high level strategic tax and structuring advice, business advice and supporting the technical and compliance teams.
As Managing Partner, he has focussed on growing the business and ensuring the firm upholds its core values of Quality of Service, Innovation, Collaboration and Integrity. These remain central to all that we do both internally and in serving our clients.
A Fulham resident for over 30 years Andrew is closely connected with the local business community and supporting many of them on their journeys. He is especially linked with fellow start-up entrepreneurs advising them on their growth strategies and optimal structures.
A passionate Fulham FC supporter, along with his two sons, Andrew rarely misses a game. He plays and coaches volleyball, something he has done since university in Edinburgh, and which offsets another of his passions: exploring the vast and diverse range of food that London’s restaurants have to offer.
He has a keen interest in many conservation projects especially in protecting endangered species of birds and actively supports the Mabula Project in South Africa. This charity supports the Southern Ground Hornbill, a charismatic species of cultural and ecological importance threatened by loss of habitat through the encroaching development of the savannah.
