The key point to understand from the outset is that these changes will be introduced from 30 October 2024: although VAT is only due on payments which relate to terms starting after 1 January 2025, if a school receives payments from 30 October for the Spring term next year, VAT will be payable on the date of payment – not when the term starts. Hence the urgent need for urgent scrutiny of their implications.

Once a school has established whether it has received payments which are liable to VAT, it must then confirm when it needs to register for VAT as that determines both whether and when the VAT is payable to HMRC.

The VAT registration threshold is £90,000 per year. Schools must therefore track their turnover to ensure they do not register for VAT later than required. For example, if a school expects to receive more than £90,000 in income liable to VAT during November, which relates to terms starting after 1 January, it may be required to register for VAT on 1 November 2024.

Any schools that do not breach the £90,000 threshold during November will almost certainly be required to register for VAT no later than early December 2024. In December, schools must track both income received during the month and bring to account any income received on or after 29 July but before 30 October, which relates to the Spring term starting in January 2025. If the total of these two amounts is expected to exceed £90,000 in the next 30 days, the school must register for VAT from the start of that 30-day period.

The scope of the changes

VAT will be due on tuition and boarding fees from 30 October 2024. As a statement, this is most definitely only the starting point to determine what is liable to VAT in what is a complex scenario.

Among other things, schools will need to decide whether:

• Fees are for tuition or some other related service
• They are boarding their pupils or providing welfare services
• Other goods and services, such as catering, breakfast and after school clubs, and transport to and from school, are separate supplies with their own VAT liabilities
• Grants or bursaries are subject to VAT.

If a school is paid to teach and board its pupils, the income it receives specifically for those purposes will be liable to VAT. In reality, income received by a school covers far more than just tuition and potentially boarding fees.

If the school charges a single fee for tuition, together with related services such as meals and transport, the entire fee is likely to be subject to VAT. However, if the school chooses to offer additional services for a separate fee, each element may have its own VAT liability. The way in which those services are held out for sale will be the determining factor.

If the school can satisfy itself that it is offering separate services for an additional fee, there may well be opportunities to preserve exemption from VAT. For example, this would include catering, breakfast and after-school clubs, and transport to and from school.

Recovery of VAT

Most schools will make supplies which are subject to VAT and other supplies which continue to benefit from VAT exemption. They will therefore be partially exempt and require a partial exemption method to determine their eligibility to recover VAT. This can be a method based on respective levels of taxable and exempt turnover or some other method which more accurately determines a school’s entitlement to recover VAT.

Schools may well have an entitlement to recover VAT on costs incurred prior to VAT registration. The recovery of historical VAT will depend on the nature of the expenditure and the useful life of the assets on hand when the school registers for VAT.

So what’s the best strategy for schools? In our experience, every school is different and will need to review the rules published by HMRC in detail to determine its own requirement to pay VAT and its entitlement to recover offsetting input tax against income subject to VAT. Sourcing expert guidance and support can help schools to navigate a path to be both compliant and ensure that they remain as competitive and financially viable as possible.

For further guidance and a deeper dive into the strategies needed to manage this transition smoothly, consider joining our upcoming webinar, New VAT Rules for Private Schools: Key Insights and Strategic Planning Ahead of 2025.

William Anderson is a partner at MHA in Aberdeen