Private Schools to keep Charity Status: But when will they have to charge VAT?

The Government has sought to address the long running perception that taxpayers are subsidising independent schools.  It had long been Labour party policy to abolish charitable status for independent schools altogether (about half of independent schools are registered charities) and this has predictably seen strong resistance.  However, in the lead up to the election, the Labour party announced a compromise; Private schools will keep their charitable status, but they will be required to charge VAT at 20% on school fees.

The Treasury has now published a consultation and technical note which sets out further details (see here) and draft legislation has been published (see here) but the key points are these:

1. From 1 January 2025, educational services and vocational training supplied by a private school for a charge, will be subject to VAT at 20%.
2. Boarding services which are closely related to the supply of such education or training will also be subject to VAT at 20%.
3. Extra-curricular activities which are educational in nature provided by an independent school after school hours or during holidays will also be subject to VAT at 20%.
4. However, the government has clarified that childcare is akin to welfare (VAT exempt) and not education and therefore, before and after school clubs and holiday clubs which do not include educational services will not be caught by the new rules. 
5. Any prepayment of fees from 29 July 2024 relating to terms starting in January 2025 or after will be subject to VAT.  However, pre-payments for multiple years which have been made before the 29 July cut-off could still be scrutinised by HMRC in some circumstances.
6. Educational services provided to a child by an independent school because it is named on that child's Education, Health and Care Plan ("EHCP") which are funded by a local authority, will also be subject to VAT. However, the local authority will be able to recover the VAT charged.  If a state school is named on a Child's EHCP, but the parents have placed the child in a private school out of choice and pay for the child to attend a private school, those services will also be subject to VAT at 20%.

For independent schools in England, the government is also planning to remove their eligibility to business rates charitable rates relief and the policy will be legislated for following the Budget on 30 October 2024 with the intent of taking effect from April 2025.