Guard against VAT on private school fees

The issue

It is now being widely rumoured that VAT will be applied to public school fees, which is currently generally not the case due to schools setting themselves up as charities. This would be a big blow to the private education ‘industry’ because parents would have to take a 20% hit on fees or schools would have to take a hit on their income. This could come in as early as 29 October 2018 although common sense dictates that it is more likely to be phased in over a period of time.

 

Example

Take a school with annual fees of £10,000 (to take an easy yet unrealistic example for most secondary schools!). If VAT were to be introduced at full rates then parents would have to pay £12,000 for the school to still receive £10,000. Alternatively the school could keep the price to the parents at £10,000 but this would then mean that it would only receive £8,333 in real terms. In reality the end result is more likely to be a mixture between the two extremes.

 

Protection

With the above factors in mind it is likely to be beneficial for schools and parents to agree to advanced payment terms (subject to parents’ available cash). The point here is that the issue of an invoice is usually the VAT point and so fees should be safe from the prospect of VAT if they are paid early. Schools should consider using the current uncertainty as a basis for offering advanced billing options. For example it may be attractive for John Jackson to pay the remaining 4 years of his son’s school fees in one go if he feels that he may end up with a 20% ‘hit’ otherwise. The school may also want to incorporate some kind of early payment discount as an added incentive which is very tax efficient in itself (and is already common practice).
 
This opportunity could be offered before the budget as some kind of ‘urgent bulletin’. Depending on what transpires there may also be an opportunity to do something similar after the budget.

 

Final comment

I wonder if schools could invoice now for a set amount and then accept payments terms that run for years into the future?!

 

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