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.

Don't do it. It's a really bad idea.

Have you even spoke to your school about their plans for VAT? DD’s independant school have mitigation plans in place to absorb most of the 20% rise and therefore not have to pass it all on the the parents?

Yes our school would also absorb some of the cost (by not increasing fees year on year to the extent currently done and by shelving some capital projects)

The whole idea is full of risk and feels like a bad idea for all the reasons others have mentioned. And in any case, why would the school let you do it? They'd have to guess now what fee rises they'd be looking to apply for the next 5 years, how can they possibly know?!

I don't know that this is a good idea however I feel you have missed a big point that a PP mentioned.

Currently you are paying around £45k to school fees and expect this to rise. Presumably this is coming from salary. If you remortgage by £300k, it will only cost you another £200k in interest if you let the mortgage run for 25 years. (Disclaimer I have used your figures here and not checked!) Surely though you would put the ~£50k that you were using to pay fees into your mortgage, so that in around 6 years you would have paid off the additional mortgage and therefore only pay 6 years of extra interest. It will also be a decreasing amount each year, as your mortgage loan amount will reduce, although it will depend on how much you repay and if it is enough to pay back the capital plus interest.

Schools will sometimes let you pay 5 or 7 years of fees at the current rate. The bonus to you (putting aside VAT) is you pay less in fees overall and the bonus to the schools is they have that cash now and you are less likely to leave. Of course a lot of schools won't agree to it based on how much fees are rising, as they will end up more out of pocket.

Our school offers a discount for fees paid upfront. 2 percent for year one up to approx 16 per cent for year 7. You are an unsecured creditor but in our case the school seems a viable business and have calculated they can lose up to 20% of students and still be in good financial health.

for us we had the cash and have done it as we didn’t have to factor in borrowing costs, just the opportunity cost of investing the money (which is somewhat offset by the discount)

How big is the school OP? £18m isn’t a lot.

I find it a bit off that you want to avoid paying vat considering what vat is used for and would rather pay interest to a bank instead.

@OhhhhhhhhBiscuits my first thought too. A very, well established private school close to us, announced they were closing. All happened very suddenly. It’s a new build housing estate now.

Early payment plans are already in place for many private schools and are widely used. 2% discount on fees pa (based on estimates of future years) & an inflation hedge would be attractive - & rebates are normally given if the kid leaves the school, for whatever reason...check the plan & email the school bursar
It will be v.difficult for HMRC to change rules on an historically paid VAT free invoice, accounted for under existing accounting rules & would open a can of v.large worms....as long as its paid before any budget amendment / law is passed.
But VAT is v.unlikely to come in at 20% as schools itemise out activities that must remain VAT free (e.g. bed & boarding, hot food, p/e/games, pastoral care, health/first aid, HHH, religious teaching, mental health, speakers etc. E.g female empowerment & entrepreneurs /Black history month etc) - infact the list of activities that seems to really rile the populist wing of Labour that thinks taxing education charities is acceptable (I.e key stage maths, English, science, music lessons etc) seems remarkably small, & the impact on the 157k of pupils who benefit (i.e. from bursaries/scholarships) at no cost to the treasury just seems politically spiteful when they won't commit to a single penny more for the education budget, not to mention no other form of recognised education or any recognised charity is being taxed I.e. its a tiny "exceptional" tax not an "exemption"
....remember to that if they charge VAT then they can also reclaim the 20% off capital expenditure the schools have incurred over the last 10 years.
However if they go bust (v.unlikely with £18m revenue) it could be a schlep to recover monies but an insurance policy could cover it.
My hunch is that you might end up with a single digit rise (e.g. 5%) and if your borrowed money is cheaper it may be worthwhile but not if your rate goes up after 2 years or the cost of insurances etc outweigh the advantage then why bother.
If you have the money sitting around making 2% interest, it makes perfect sense - i.e. the v.wealthy will benefit probably with a rebate as VAT reclaims reduces overall fees when they paid none

OP your maths is completely off - not sure you understand compounding at all.

That would really piss me off tbh

If they can deliver a good service at around 20% lower cost, why the hell are they charging the higher price?

OP: we don't know when VAT will be introduced, nor do we know at what rate, nor can we be sure it will not be levied at the date the service is supplied.

It can be a very good move to pay fees in advance in some circumstances (inflation proofing, or even small discount) - eg it's often done for the whole of the sixth form, or maybe all of years 9-11 as they're the public exam preparation years where families usually shun moving their DC.

This isn't long term sustainable though, is it? The quality of facilities etc goes down when these projects aren't done for decades so eventually they will have to start charging proper fees unless you're suggesting they will simply hold out until a less educationally-stupid government gets in.

@AnotherNewt because what PP is suggesting is unsustainable and will result in a reduction of quality of the product (the product in question being a private education). This reduction won't be tangible in the short term e.g. they didn't get that new school building so keep doing what they're currently doing, or they don't pay new staff the same salary as more established staff, but over the long term it will erode the quality for the students (which is exactly what's happening in the state sector and Labour would do well to focus on sorting that out for the many instead of making life shitter for the few).

So paying the teachers less results in higher staff turnover and less continuity of education for the children, as well as less experienced staff being recruited (as the experienced ones go abroad or into other sectors for better pay - most likely to happen with science and maths teachers whose skills are in demand elsewhere). Not building the building results in less facilities and narrower range of subjects or potentially larger class sizes.

Edited to show my working.

Lol. The lengths that some people will go to avoid paying tax...

It's a very sad story with VAT , a clear example of misopedia.

Too many unknowns at this stage OP to consider such a risky and expensive plan.
If you already had the money, yes I can see asking this question.
But it would be borrowed money.

Leaving aside your calculations which are incorrect as explained by other PPs.

You don't know if this plan will be implemented or when. You don't know if there might be a specific VAT rate instead of the current standard 20%.
You don't know if the school might close for any reason between now and end of study years.
You don't know how quickly you will pay this new mortgage and what interest rates will be like in 5 year's time.
You simply cannot know the answers to the above and nobody else can either.

You are better off concentrating on saving the school fees in your own bank account or investments. And make sure you are insured for any job related potential losses.

I don't think it's that.

I think it's the latest iteration of "soak the rich"

(Though that doesn't explain why Gove has spoken in favour of it in the past - and, depending on how the next round of tedious Tory infighting goes, might end up as their policy too)

@MrsBennetsPoorNerves It is not about avoid tax. It is about avoiding paying a higher bill - whether it’s to the school or government - an already stretched budget. If it costs more to pay it to the bank then of course I want to avoid that route too.

Do I have any faith that the govt will spend this supposed one billion this will raise on education? No.

If they price all but the multi millionaires out of the private system, then those who have left the private system will simply redirect their money to renting or buying in sought after state school catchments, elbowing out the families that cannot afford to move but who could have once relied on a decent state school. Everyone will lose with this policy but I can see why it’s wildly popular for now.

If you want to ban private schools, then ban all selection whether it’s by ability or property price and bring in a full lottery system.

If they can deliver a good service at around 20% lower cost, why the hell are they charging the higher price?

Schools currently pay VAT on a lot of things. If they charge VAT on school fees they can then claim back the VAT they pay on other items (just like other businesses do). This will have no impact on quality of education but will mean that the fees do not need to go up by 20%.

The PP also said her school had plans to shelve some of the capital projects they had planned. This will have a minor impact on education in the short term, but will mean that the fee rise won't need to be so high (again in the short term).

My school is preparing to do both of these things. We expect the actual fee rise to be more like 10% rather than 20%, with slightly higher than inflation rises in the subsequent years to enable the "on hold" capital projects to go ahead.

The lengths that some people will go to avoid paying tax.

The vast majority of people will choose to pay as little tax as they can. By using ISAs, for example, or tax-free childcare schemes, or paying into a workplace pension.

Has the school agreed they will be willing to invoice all of the fees in advance, while it's not subject to VAT?

Otherwise it will be irrelevant that you may be "in credit" with the school.

If they can deliver a good service at around 20% lower cost, why the hell are they charging the higher price?

If they have to charge VAT, they will be able to recover VAT that they currently pay. However, that won't cover anything like the full 20% as the bulk of an independent school's outgoings are on things like staff wages which are not subject to VAT.

I suspect that some schools will try to cushion the blow for parents by eating into their reserves, but this is not sustainable long term.

OP: we don't know when VAT will be introduced, nor do we know at what rate, nor can we be sure it will not be levied at the date the service is supplied.

It depends on whether Labour win the next election (which must be held no later than 28th January 2025), which currently seems highly likely. They have said they will introduce it within a year of being elected. The figures they are quoting for the amount they expect to raise are based on the rate being 20%. VAT rules are that VAT is charged when a VAT invoice is issued or payment is received, whichever is earlier. Labour would have to change the rules on VAT if they wanted to levy it when the service is supplied. As that would delay income for the government, it is highly unlikely they would do so. They could, in theory, make the change retrospective, thereby requiring schools to charge VAT on any fees paid in advance, but such a move could face challenge under the ECHR.

Avoiding tax is perfectly legal. Evading tax is a different story.

@prh47bridge
Schools that are businesses are already VAT registered. Schools that are charities may be depending on turnover in the "business" side of the establishment (eg hire of facilities).

Will there really be that much change to VAT arrangements to those already registered, allowing a fee cut enough to offset a substantial part of 20%?