School fees VAT: pay upfront?

[tanyamcquoid]

One of the ways to mitigate some of the 20% VAT on fees is to pay the fees upfront. (Please see legal opinions online - it’s true!). We have 2 DC at private school and a back of envelope calculation is that we need to find at least 300k upfront. If we remortgage, the repayment costs over 25 years at 4.5% will be 500k - so we are paying an extra £200k on top to avoid the VAT. Does this make sense? Can anyone do the compound interest sums of what the overall cost of VAT would be? We have five years to go on one child at 25k per year, and 7 for the other at 19k a year. I realise I’m not taking into account the annual rise but a small fraction is offset by the paying upfront scheme.

The risk is: if we pay up front, the only way to get the money back is to change schools so if the VAT rise was not brought in, we could end up paying out crazy mortgage costs for nothing.

I asked our school if i could do this and they won't.

What if the school goes bust? It's not something I would risk.

I asked about lump sum payments a couple of years ago (3 kids in system) our (public) school does not allow it anymore

I imagine that the very clever people in HMRC will find a very simple way around this by deeming that the point of supply for VAT purposes will be the first day of term such that while you can pay in advance it will have no impact on what amount of VAT is charged.. I mean, I'm not particularly clever, nor do I work for HMRC, but it took me about 30s to figure this one out.

Why would you do that when the vat on 300,000 is 60k?

Thanks @Flopsythebunny but I wonder whether it will be far more than that due to inflationary rises each year? Eg the fees go up every year and then 20% of a bigger amount each year really adds up. I am just too innumerate to work out the compounding impact of this!

@Flopsythebunny is quite right - the VAT is £60k. The £200k interest isn't worthwhile

Presumably the upfront payment that the school have agreed would make some assumptions about fee rises - they won't just let you prepay several years at today's rate.

I would not let the school have 300k of your money. Particularly money that you do not have in cash, that you have borrowed to pay them.

Anything could happen. 300k is too much for them to have. What if VAT came in on fees and the school had to shut down because of a decrease in pupil numbers. Where would your 300k have gone? Into a black hole potentially. What if your child started to get terribly bullied and you needed to move and they wouldn't/couldn't refund.

Also, I don't actually believe that paying upfront will necessarily avoid VAT. There will be some fine print. It'll vary by school.

If you were only looking at paying a much smaller amount and you had the money in the bank with no other use for it, then I'd say fine, go for it. But in your position, I would never in a million years do it.

I am being spectacularly thick here but I am assuming that the compound interest of VAT will be devastating.

I assume it’s not just a case of adding 20% at the end of a 300k bill for both.

I will take the example of the youngest child with ‘lower’ fees but more time left at school.

For example, 20% on 20k fees in the first year is 4K. Presumably then next year’s fees are 24k and another 20% so that takes you to 29k and so on - unless the ly decide not to take last year’s VAT into account? It means that at the end of 7 years, fees are something like 80k per year! So total spent on fees would be 354,000 just for the one child that has 7 years left!

Her base fees alone would have been 140k without the VAT. The way others are calculating is to assume 20% added onto static sums of 20k a year but it will compound surely?

So paying an extra 200k over 25 years for BOTH is cheaper than 214,000 for the one child over 7 years (not least as inflation erodes the value of that money).

Have I got this right? Sorry I need an accountant don’t I!

To those querying the liquidity of the school, (DC are at different schools), the one that I would be more worried about had an income of 18 million but to be fair spent most of this on its work ie education. Is that cause for concern over solvency?

Your maths isn’t right at all OP.

But there isn’t compound interest on vat. It’s 20% done and dusted. Why would your fees be £80k?

what do you think compound interest means?

Also if you take a 25 year mortgage to pay 8 years of school fees of course the interest will mount up.

I’m lost…

They’re not going to increase by 20% + vat each year. Your maths is way off.

Please tell me what job you do that means you can afford school fees but also means you have convinced yourself you should take on 500k of debt based on such dodgy maths.

You should take legal advice before you pay the money as there are ways you can protect yourself if the school goes bust. But yes it will be much cheaper

Vat isn’t added onto the fee + vat amount, just the fee. But fees will definitely increase too. I expect up to 5-7% increases each year on top of Vat. So a 6% mortgage rate on 200kish would definitely make financial sense

Loads of risks - can't believe anyone would seriously consider doing this.

Labour could get in and then decide not to put VAT on school fees, or at a lower rate than 20% or phase it in or delay it.
Tories could remove Vat again in the future.
Your child might change schools (doesn't suit them, you move house, school standards drop, it might close, might decide to become a state school if numbers fall)
Interest rates could rise throwing off your sums.
You fall on hard times and can't afford to repay the loan.
Bank won't lend unsecured loan, so would need to be a remortgage. House prices could fall and you are in negative equity.

You would be giving the school an unsecured loan which makes no financial sense at all - even if you could make your theoretical sums work.

No it will be £21k per year plus vat, then 22.5 per year plus vat not increase on the total including vat each year. Vat is always added on after. Any increase will be on the base plus vat on top. - if it happens.

I'm going to use really simple numbers to try and explain - obv fees are a lot higher than this!

Say fees are £1000
Y1 - VAT comes in and now fees are £1,000 plus VAT of £200 = £1,200.
Y2 - 5% inflationary rise, base fee is now £1,050, plus VAT of £210 = 1,260
Y3 - 5% inflationary rise, base fee is now £1,102.50. Plus VAT of £220.50 = £1,323

And so on etc.

Point is it's the base fee, before VAT, that is increased by inflation year on year. 20% of that is then added on top for VAT. The 20% VAT itself won't be compounding!

(I mean, this is how I understand it - hopefully I haven't got this completely wrong 😬)

@Labtastic thank you and to PP that makes perfect sense.

You will be pleased to note I am not an accountant! I do tend to catastrophise though (creative industries job).

@Focalpoint we have access to around 300k from an offset mortgage that we currently owe nothing on but can draw down. House value probably 5 x that so for now, highly unlikely chance of negative equity (bought when prices were low and thanks to offset managed to pay it off in a decade).

@JustAMinutePleass This is interesting advice. My hunch is it could be cheaper to pay the loan upfront but I need the evidence! Any good mortgage/VAT calculator recommendations?

Why has no national newspaper done an illustration of this yet - not even the Torygraph or Times?!

Because it's a fucking stupid plan? For all of the reasons listed by pp above?

OP sorry your maths makes no sense - that’s not what compound interest means. Compound interest has nothing to do with VAT. The VAT amount won’t just be tacked onto the fees and then an increase applied to that. The increase will be in the base amount and yes that could well be 8-10% every couple of years if our school is anything to go by. But the base amount is not going to be 80K within 5 years!

for what it’s worth my DH is looking into paying our fees upfront as well, but there’s no way I would do this without a lot more research and not until it’s actually on the cards. An election hasn’t even been called yet.

Yes, HMRC will do something like this. And they will win even with retrospective legislation.

School goes bust.

School quality decreases.

You need to move.

The plan would only work if the School is prepared to refund fees in any above or other situations.

And then there is HMRC, underestimate them at your own peril.

The tax point will be when the servicws are aupplied not when you pay for them.