Labour’s plans to impose VAT on independent schools

As a Labour government takes office, we look at Labour’s stated intention to apply VAT to independent school fees. This initiative is part of their pledge to “recruit 6,500 new teachers in key subjects to prepare children for life, work and the future, paid for by ending tax breaks for independent schools.” They estimate the policy will raise around £1.6 billion, which is “urgently needed to improve the state school system” used by about 93% of students in the country.

At present, independent schools (and schools registered as a charity which supplies education) qualify as an ‘eligible body’ and are therefore exempt from VAT.  Other exemptions from VAT apply to the provision of services that are ‘related’ to the supply of education, such as school trips, boarding, and transport.

Originally declared in Labour’s 2019 manifesto and with a Labour Government now in place, the proposed changes should be anticipated by independent schools and preparation is advised to best mitigate the increased costs associated with the removal of the VAT exemption.

Key dates on the horizon

It is understood that the change will be made as soon as parliamentary time allows and will apply to full time education provided to children of compulsory school age, in line with the Department of Education’s definition of regulated independent schools.

The Chancellor of the Exchequer confirmed that the policy would be included in the post election budget in the autumn, with the measure passing into law in the new government’s first finance bill. However, it is “unclear” whether it would come into effect at the start of the new tax year (April 2025) or the start of the new academic year (September 2025).  At present, any dates are speculative.

What should I do if I’m affected?

Firstly, get in touch with your Swindells’ partner who will be able to advise you further. Some affected parties have undertaken prepayment planning to seek to avoid VAT and they may not have asked for advice in so doing. We can assist clients where planning is challenged and whether they have to settle VAT only invoices, which may be a matter of contract law as much as tax law.

Taxpayers with trusts or who are planning to use trusts for school fees for grandchildren could also benefit by getting in touch.  Existing trusts may require further settlements to cover extra future costs and new trusts need to ensure their administrative and compliance requirements are met.  Those unable to make further settlements onto trust without inheritance tax charge may need to consider further planning, such as the use of a family investment company.

If you have any questions about this subject, please do get in touch with your Swindells’ partner who will be able to advise you further.