Private school payment in advance to avoid VAT

[SadOhShea]

Our DD is at a private primary school. We love it. There is now clearly a very real possibility that a labour government will come in and fees will rise by 20%.

The school have offered parents the opportunity to take part in a payment in advance scheme - where we pay the fees for the remainder of her time at the school thereby avoiding any increases.

They have said were someone to choose to leave the school then you would be refunded for the time you had left IYSWIM.

Are all independent schools doing this, and should we?! It would be a huge layout - she's only in reception so would need to pay six years of fees (school goes until 11) the amount would be over £100k but would save us over £20k if labour were to implement their plan which they obviously are!

They are already discussing clawing back these types of arrangements, so I would make sure that the contract with the school is absolutely watertight so that you can get your money back even if your child leaves the school or if the government introduce anti avoidance legislation

*They being the government

https://taxpolicy.org.uk/2024/05/09/private_school_vat_risk/

You have £100,000 to spare and don't want to pay your fair share of tax. I see.

They will probably claw it back, like many of the rich people's tax avoidance schemes, previously used by comedians, footballers etc.

There are mixed opinions between professionals as to whether advance payment would actually avoid the vat liability, so there's nothing as yet to say it would work.

The other issue is what happens if the school goes bust? You need to be willing to lose all the money you've paid them as there'd be a long line of creditors before you (HMRC, employees, certain other creditors etc).

We're paying a couple of years in advance but nothing more because if enough children leave the school there is a danger that it might close and pur money would be at risk. There are no guarantees that VAT won't still be charged. I'm a governor at the school for context.

VAT is generally charged at the point of service
So this sounds like dodgy ground to me

HMRC will clamp down on this as you're doing this to avoid VAT so this is tax avoidance. Stear clear.

We're clear that HMRC will likely charge VAT later on so if people do it they are aware..but we offer a small discount for payment in advance so there is a benefit.

Is it really worth the risk that it might not work?

You are forgoing 4 to 5%guaranteed returns in interest on that for at least the next year. So that’s £4K or £5K lost for sure to start with.

plus whatever future returns you would get in a high interest savings account or bond.

And what is they go bust? Or you start disliking the school after all or you need to move.

I personally chose not to do this in the end because if you put / leave that 100k in an investment / funds vehicle that pays some income it should be able to earn you the vat you need to pay (assuming you pay via salary). It might be worth getting advice but I basically bought income generating funds / shares.

One third of what we have paid would otherwise fall due at the end of August, the next third in December and the last third in March so it's not a year. But as I say, those fees are discounted too. And this is prep so less than secondary fees. I wouldn't pay 100k- it's too much of a risk.

I’ll happily pay the tax. The state school system is broken. We are fortunate enough to be able to pay to send ds to a private school so that he actually gets the education he deserves. Most people aren’t so lucky. Labour is going to use the tax to invest in the state system so the kids of less fortunate families aren’t left behind.

If it was 1 or 2 years then it may make sense but for so many years you run the risk of the school going bankrupt or needing to move and them not refunding plus earn interest!

If you've got the money and think it's the best way to spend 80k then go for it. The risks stated above would be enough to put me off.

Tax avoider alert.

I'll make the necessary notifications.

Thank for the heads up

Ozanj:· Today 22:36

Spoken like someone who is a net tax drain on the government.

What on Earth would lead you to say something as ridiculous as that? I've got a reasonably well paid job and pay what taxes I owe.

It's telling that you think that Jimmy Carr and David Beckham earning millions were, at one point, paying less tax than someone on £25,000 a year weren't a tax drain.

Thank you.

Mine and all my friends children go to state schools. They are in such a difficult state. Teachers constantly stressed due to doing multiple jobs and heads trying to keep all the plates spinning.
They are working their hardest but it's about to crash with the rate people are leaving the profession due to stress.

The state system needs help, desperately and immediately.

Thebill Tax avoidance is legal. Tax evasion is illegal. At least get your terminology straight if you’re going to be snotty

OP it’s about balancing the pros vs cons of advance payment

Pros - You may be able to avoid the VAT. However this is not certain legally, some tax advisers believe that VAT would be applied as at the date of service provision (ie as your dc goes through the school) rather than at the date of payment. Will probably be some court cases about this in future. Also Labour may make the VAT retroactive to cover payments clearly intended to avoid VAT.

You may be able to avoid other uplifts on school fees - some schools offer to fix the fees in return for advance payment, many don’t as they can’t predict cost inflation etc

Some schools don’t fix but offer a discount on whatever the fees are from time to time

Cons - You’ve tied up your money and can’t invest elsewhere

You will likely lose the money if school goes bust. As regards leaving, most schools will promise to reimburse you advance paid fees if you leave but that doesn’t cover the school going bust.

Basically once you take the greatest possible financial benefit of advance payment (saving the VAT), and discount it by a % to represent the risk that it doesnt work, and then discount again for the risk of losing it if school goes bust, then you can probably make more by investing the money.

minipill - you forgot:

cons: it's unethical

There are all sorts of legal ways to avoid paying more tax, including ISAs and pensions, salary sacrifice etc. Are these all immoral?

Do you voluntarily pay more tax than you legally have to? Bet you don’t.

But you wrote:

''You maybe able to avoid the VAT. However this is not certain legally''

Well I am not a drain and I agree. Pay what you owe FFS.