What is the current position?

Currently, education services and closely related goods and services provided by private schools are exempt from VAT. This means that private schools have been able to provide education and boarding services without having to charge VAT on their fees.

What changes are planned?

The government is proposing to remove this VAT exemption for private schools for school terms starting on or after 1 January 2025. Under the new rules, all education services, vocational training, and closely related boarding services provided by private schools will be subject to VAT at the standard rate of 20%.

The draft legislation defines "private schools" as schools that provide full-time education to:

• pupils of compulsory school age, or
• to those over compulsory school age but under 19, where fees are payable. 

It also includes provisions to prevent private schools from trying to avoid the VAT charge by contracting education services out to "closely connected persons". This is intended to catch trading arrangements where the education is not provided by the school itself, including arrangements designed to avoid the VAT charge.

The government has said it will consider how to address the potential impact of these changes in cases where private school provision has been specified for pupils with special educational needs that can only be met in a private setting. For these pupils, the local authority or other public body funding their place will be able to recover the VAT charged.

The government has announced that it intends to make a separate change to remove the business rates charitable relief that private schools in England currently benefit from.

Why are the changes being made?

The aim is to raise revenue to help to fund state education priorities. In its election manifesto, the Labour party estimated that applying VAT and business rates to private school fees would raise additional tax revenues of approximately £1.5bn in 2028/29. Labour also set out how the money would be spent, including recruiting an additional 6,500 “new expert teachers” and introducing a new Teacher Training Entitlement.

It was not possible to charge VAT on private school fees while the UK was a member of the EU.

When will the changes take effect?

As currently drafted, the legislation provides that any fees already paid from 29 July 2024 onwards, in relation to terms starting on or after 1 January 2025, will be subject to VAT. This is to prevent parents and carers from trying to pre-pay fees and avoid paying VAT.

Depending on the specific circumstances, fees paid before 29 July 2024 may still be caught by the new rules if they relate to terms starting on or after 1 January 2025. Schools should consider seeking specialist advice on this.

The government will be legislating for this change through the Finance Bill that will be introduced after Budget on 30 October 2024.