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!

The others you mention are definitely legal

What I meant is that tax experts are not sure that paying in advance will actually mean that VAT is not owed. This is because there is debate about the date at which VAT should be applied - is it the date of payment (in which case advance payment before the rules change would work to avoid VAT) or is it the date the service is provided (in which case advance payment won’t work as the educational services will be provided after the VAT rules change).

It is absolutely legal to make payment in advance, in the hope of avoiding VAT. There is a risk it might not work, depending on the legal interpretation of the tax rules. There is no suggestion, from anyone, that it is illegal to do this.

I hope that clarifies things.

I agree the state systems needs help but it shouldn’t be at the expense of children’s education in the private sector. Both can exist next to each other. The government should be diverting more money from elsewhere into education as a whole not trying to take from one education bucket to another! Besides if enough people quit private school (which report says 10%) then there is no benefit in the policy at all.

Not that I have £100k in cash but I don’t think we would pay it all upfront, maybe a portion but hard to predict what happens from reception to year 6.

Pay your sodding taxes! And this applies to everyone, from the king avoiding inheritance tax to the op, who is privileged enough to have a spare hundred grand tucked away. Jesus 🙄

As per minipie’s excellent summary, advance payment schemes may not work, because of the “due at the point of service” possibility.

But if they do, then OP would be like someone buying a year’s supply of Jaffa cakes shortly before a ruling that was likely to say they were biscuits and therefore VAT-able.

Would you call that person a tax avoider?

(Labour voter here, support the policy, think some of the rhetoric on both sides is nonsense)

Paying it all now makes no sense.

1. HMRC will just backdate their demands
2. £100,000 of your money will be sitting with this business and they will be profiting from the interest
3. You could just wealth manage it efficiently and it will earn you money over the years that it's in there for, to offset against the 20k you'll need to pay.
4. If the school does go bust then your money's gone.

I wonder how the school would accept this exorbitant sum for HMRC purposes?

I would be really alarmed that they are basically asking you for more money op - what are they needing to shore up? Are their finances not robust enough to cope?

I work in a private school - never assumed they offer these things just be nice and supportive.

The chippy comments about tax avoidance are inevitable -by hypocrites who will have paid cash in hand/happily accepted ‘state‘ benefits paid for by others.

My DH looked into this quite carefully.
It worked out that it was not going to save us any money. We’d be better off putting the money in some form of savings. The gains on it would more than cover any possible fee increases.

This is refreshing 😊

Horrible comment. I’ll bite. I’m a higher earner as are my family, so no benefits and pay more than half income in tax. And I still believe in accessible and equal healthcare and education. Shocking to be able to recognise your own privileges and care about others I know, but there are some of us around. I imagine you’re someone who would prefer the standard of state education to be inferior because an educated society might start to question some of the insanely unfair practises of hereditary privilege in the UK.

I can’t imagine why you would expect everyone else to pay tax but not contribute yourself? Will you be using the services provided by our government while skulking in the corner while everyone else pays up? Personally I’d be questioning if a school that came up with this policy was the right place for my child. Do your bit and grow a young person to be proud of.

MY chippy comment is from someone from a very working class background who received an excellent state education in the nineties. This has enabled me to work in a well-paying profession meaning I happily pay hefty taxes so others can do the same, ideally.

I won’t judge YOUR chippy comment. But roll on July 4th.

We were fortunate enough to be able to pay some fees in advance, the school gave us a small discount to do this. But this was set up as an advanced payment, and the fees for the terms our payment covered were deducted, including any increases that happened during the period.
So it might end up that the fees plus VAT is deducted from your advanced payment.

You can afford, and are prepared to pay, 100k upfront but feel aggrieved at paying 20k over 6 years towards the other 90% of children in the UK being able to have glue sticks and maybe getting a GP appointment or dentist in the next 2 years? This is actually disgusting that schools are even suggesting this.

The money raised from this policy really isn’t going to help state education, in fact some have forecast that it will cost the Government money, so I wouldn’t use the argument that the OP shouidn’t do this as it is screwing state education. State education is already screwed

There will be no money from this policy though.

Parents who leave the private sector will pay less income tax which will dwarf any VAT payments.

Im afraid the taxpayer will be left with a bill to pay, not money to spend.

I DO pay my sodding taxes. Including money that pays towards an education system I don’t use and a benefits system that I claim nothing from. Not even child benefit. We pay quite a lot of tax, thanks.
But anyone who thinks that they wouldn’t do what they could to not pay even more tax is either lying or kidding yourself. I don’t believe for a second that when you see your wages taken for tax you sit their happily thinking ‘oh I’m so glad my hard earned money has gone to help other people’
My biggest issue with this policy is that I don’t believe at all that it is going have any discernible benefit to the state education system. It’s an election con.

I’m not sure this is such an accurate list other than point 4.

VAT is and has always been charged at the point of invoice not at the point of recipient of goods or services.

Schools have more attractive tax rules than you do as an individual meaning if the school invest the money you can effectively split the profit between the 2 parties and both be better off.

I agree if the scheme is effectively a savings pot to pay future fees that you may as well invest it yourself as you’ll be impacted by the annual rises anyway. However if it is a genuine future purchase scheme ie payment is taken to cover several years fees at one time and not held in a client account then it may still be worth doing to insulate against not just VAT but also inflationary rises.

The final point about schools potentially closing is significant particularly if you are using one of the smaller schools.

@Smartiepants79 I may not sit in a glow of self righteousness every time 50% of my salary goes off to hmrc in one way or another, but I am honestly grateful for the other 50% that I get to keep, entirely down to the brilliant state education I received. Part of my job takes me into schools, and it makes me weep to see the deterioration over the last 14 years. So, I repeat, pay your sodding taxes. ALL of them.

You are attacking the wrong people.

If you have 2 DC in private school and pay 40k fees per annum you also pay a similar amount in income tax to fund it. That is on top of the total amount of income tax on the remainder of your income.

If you decide the VAT increase is unsustainable you can drop your household pay by 80k and still be in the same position. You may do this by paying by more into pensions or by working 4 days instead of 5 or by the second parent giving up work. Whichever avenue you go down you’ll be paying far less income tax.

If you want to maximise the amount of tax taken from private school parents as a group then you need as many of them as possible to continue to use the schools. Anything else starts to create huge bills for the taxpayer.

I read one article yesterday that showed that offering incentives for more people to attend private schools would actually be a more sensible economic policy. Of course we all know this policy has nothing whatsoever to do with economic benefit so suggestions such as this won’t be given the light of day.

I do pay ALL of them! And we will be paying what’s asked when the time comes.
and I’m a teacher, so I know exactly what is going on in schools.
and I’m very grateful for our income and what it provides for my family.
If I thought for a moment that this was actually going to make any difference to state schools I’d be a lot happier about it.
But it’s highly unlikely that it will.
As I said I think it’s an election con in the ‘£350 million for the NHS’ brexit bus territory.

Sorry don’t believe that anyone would ‘happily’ pay tax. Nope.

@Charlie2121 yes, that’s a good point that I do get. It’s just the immediate “ohmygod how can this tax be avoided” that is swirling - not just here - that gets on my tits and prevents me from being more nuanced!

@Shangrilalala if you’ve ever had your bins collected, or walked on a pavement, or been to see your gp, then you should be happy to pay taxes. I will admit the COVID fraudsters in govt makes that a shaky belief right now.

Most payment-in-advance schemes wouldn't achieve this end because the school would have to word the contract so that they had no right whatsoever to charge you any further fees according to any kind of inflation-based fee increases etc. Payment in advance has existed for years but generally the funds held in fee prepayment are kept separately and each time a fee would be otherwise payable you get a statement showing that your balance of funds held has dropped by the amount of this term's costs. With an arrangement like that the school currently charging £14k per year can be sure they won't lose out no matter what inflation does over the next 5 years, but it would be very easy for the VAT rules to specify that VAT gets charged at the time of that statement so there would be no saving. For there to be any chance of this scheme being successful the school would have to invoice you in full for 5 years of education and reserve no right to ask you for more if inflation makes fees rocket by 2027.

Would the investment over 5/6 years not accrue the equivalent VAT amount anyway?

It's dodgy as generally, VAT is charged at point of service. They will clamp down on this type of thing.

I agree with your idea, I wouldn't want to give a penny more in tax than I have to for our incompetent government to squander (you think it's bad now, it's about to get a whole lot worse under a labour government) but I don't think the logic stands up unfortunately.