Private school Advance Fees Schemes - pros and cons?

[feesquestion]

DS's new school gives the option of paying his whole education up-front. We have the cash, and it's possible that this would allow us to avoid VAT (depending on how the legislation is written).

Has anyone else done this? What should we be considering? Will we regret it?

Any advice much appreciated.

I'm going to do it, but only because ds will have one year left of his A'levels by the time Labour impose this change (if they get in). He already knows he likes the school, and I have no intention of moving, being two years from retirement.

So for me it's a 15-20% saving against whatever interest my ISA currently pays. Definitely less than 15%.

You need to look at the details of the scheme as each school does it differently. Some schools ring-fence pre payments in a separate scheme, and the scheme then pays invoices going forwards. The invoices are raised termly, so I’m not sure that those arrangements would work to avoid VAT. This has the benefit of, I think, meaning if the school failed financially, the pre paid funds are safe. With regards to being able to get the funds back if you were to leave the school, some schemes will only release the funds on a termly basis going forwards. You can’t get the entire amount back in one go.

This is also a work in progress - had long chat with the bursar at one school last week - they are expecting the law to have some way to exclude paying in advance avoiding VAT and are very aware of the optics of the wealthiest parents avoiding it in this way..............

So they get the interest on the money? No wat. I don't believe vat will come in but I bet there would be a way of charging it anyway.
Our school had a small discount rate if you paid by direct debit. It d be looking fur a bigger incentive - like freezing fees. Otherwise they could be a accruing a lot of interest which you should be getting.

Check the financial status of the school. A school near me closed a few years ago as they could not afford to keep open. Several parents had paid up front and lost their money as they became unsecured creditors.

I'd be very careful,

I'd imagined my child would stay at his school until 18, he's been happy there since age 4....In September a new boy joined whose a nightmare ..4 children have already left, we were trying to limp on until the summer holiday but doubt we'll manage it ...New boy has a parent who is a governor and major school funder...is going to be very hard to expel so everyone else is jumping ship. We didn't see that one coming. You have no idea whats going to happen in the future

I work with distressed businesses (corporate advisory & insolvency) and have a lot of experience in the private school sector.

I'd say be very careful and have a detailed look at the school's finances before considering doing this.

Many private schools are already struggling (especially those which offer boarding to international students, as the market has fallen off a cliff since Covid and those students cover most of the running costs). If VAT comes into effect, it's likely to push a lot of schools over the edge into insolvency.

If the school were to end up in administration or liquidation and the money paid up front was not ringfenced in a separate bank account (schools often say they will do this but rarely do), you'd stand to lose the lot. If you then tried to pursue this as a breach of contract, you'd be unlikely to get anywhere as the school would have no money to pay you.

Regarding ringfencing: if the school ringfenced advance payments this obviously makes the money safe (or safer) on insolvency, BUT I believe it also makes it harder to argue it’s a true pre-payment for VAT purposes. So may be less effective at avoiding VAT.

If they can adjust the fees as they go along, i'm not sure how they can be confident that currently unwritten legislation to add VAT in the future will be so easily avoided.

A lot of sensible advice.

We are not yet offered this option but would do it if the school would offer it at today’s fees or with a small increase embedded. We have the cash, like the school and have a few years left before the next transition points. Hopefully these reduce the risks of us having to move or the school getting into financial trouble would be limited. The benefit is to lock in today’s fees, and any VAT savings would be an upside. I wouldn’t do it under any other condition.

We had to move DC after 3 years (bullying). I don't imagine we'd have got our money back.

To be fair to them they haven't said this will avoid VAT, just that it may. Apparently the relevant point in time for VAT is the point of payment (can anyone confirm this?), ie not point of delivery of the service.

And legislation is rarely retroactive, especially on tax (this I know to be true).

Hence (it is implied but not claimed), it's unlikely that VAT would be applied to prepaid fees.

I second everything Sherw00d said, and I've worked in that sector for years. There are so many schools teetering on the edge of not being able to continue operating due to lack of funds, literally unable to pay run of the mill creditors until the new term's invoices have been paid by parents.

There is no way on earth I would give any private school more than a term's fees unless there was a substantial discount on offer, and even then I'd only pay two years ahead for GCSE or A level years. VAT on school fees will be catastrophic for a fair amount of schools unfortunately. You have to ask why the school is offering this scheme - simply because they need the cash.

I think my niece’s school is offering it because of the VAT point.

I think, in theory, you’re correct. However, it will depend on how your school structures the pre payment plan I think. The Labour Party are already looking at ways of making the VAT retrospective.

https://www.ft.com/content/11e3c349-c1cc-4356-9911-691bc6f0cb17

Only the very well off can take advantage as they can invest and not need to draw down the full amount.

This is the ridiculous thing about the VAT proposal. The wealthier parents are trying to avoid it by pre-paying. The schools with the largest fees are those which have huge capital expenditure and can reclaim VAT on projects, meaning they are proportionally affected less by the imposition of VAT. The small, lower fee schools and parents who scrimp each year to pay the fees will be affected more.

I can't see how they can avoid vat because in accounting law whilst they may have "cash in the bank" they can only draw down the money for the time period it relates to - they can't account for it as 2024 revenue if £x is for 2027. So in September 2027 if vat is in place they will need to pay the vat.

The only benefit I can see in upfront payment is if grandparents are paying and you want to avoid inheritance tax because to the tax man this will be a bill to pay and exempt from the inheritance tax.

legislation is rarely retroactive

Agreed, but if they're taking your money in advance, but not actually calculating what you owe for a period of service provided in advance (because they're leaving themselves the ability to adjust), then I'm not sure it would be retroactive.

Maybe it's possible they can explicitly link future fee increases to, e.g. changes in inflation/CPI or something like that, so it's at least pre-defined.

Apparently the relevant point in time for VAT is the point of payment (can anyone confirm this?), ie not point of delivery of the service.

I think this can get quite complicated, and I'm not sure I'm up to wading through stuff like this!:

VATTOS5100 - Actual tax points: payments: contents - HMRC internal manual - GOV.UK (www.gov.uk)

I'm a governor at an independent school (and a parent) - we offer a small discount and then it's up to the parents if they want to do it in the hope of avoiding VAT. There is no real benefit to the school. And we've only started offering it again as parents started asking for it in light of the proposed changes. I might pay a couple of years for my two children - but I won't pay any more as I'd rank as an unsecured creditor if the school goes into insolvency. We're a small school without huge reserves so it is a real risk.

@oldwhyno

can get quite complicated

Yep! I waded through a few sections, but this is not for amateurs like me.

The cases I did read however all seemed to support the school's claim that the VAT tax point is the point of payment. But I am not a lawyer.

I also learned there is a whole Place & Time of Supply Team at HMRC to ponder such questions!

From the info I can glean from several accountancy / tax advice firms, the key takeaways seemed to be:
The VAT could be charged at 20% but might also be charged in another band, e.g. there currently exists a 5% band.
schools might choose to break down their charges to reduce the VAT liability, e.g. for boarding, the cost of accommodation is not (fully) taxable but the cost of education would be. There are also some deductions they could make which again suggests it wouldn't be 20% on the full amount
the most likely date of introduction would be September 2025, following a march 25 budget.
Anti-forestalling legislation would likely be included so that any prepayment from the date of announcement would still be charged VAT. However although it can be backdated to the date of announcement, it couldn't be backdated to before the election.

If the money is kept in a ring-fenced account, it's less likely to qualify as pre-payed and so more likely to attract VAT. If it's not kept in a ring-fenced account, you're less likely to get it back if the school folds. so there are risks either way.

The OP didn’t say anything about being in the SE. Also ‘average’ takes that into account

True, but other refs suggest that the UK average is now over £20k per year for day school, not the £15k that she suggested. I would be staggered if there are enough schools significantly below £15k to make up for the large number in the SE that cost £25k, that it would bring the average down to £15k. For every school that charges £25k, you'd need a comparable size one charging only £5k, or many charging in between.

https://www.sjp.co.uk/individuals/news/how-much-does-private-education-cost

https://www.schoolguide.co.uk/blog/how-much-does-private-school-cost

“the majority of pupils attend day schools with an average fee of £5,218 per term which equates to £15,655 per year.

If you live in the North-West of the UK, you can expect to pay an average day school termly fee of £4,500, whilst London families can expect to pay just under £6,250 per term.”

The average day fee is no where near £25k.