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.

We’ve just pre-paid for DD (currently Y7), starting from Y9 (Sept 2025) through to the end of Y11. My thought process is that I’m happy to start from Sept 2025 as I don’t believe an election will be called until October so Y8 is ‘safe’. DD has a 25% sports scholarship so the cash outlay is relatively small (compared to DS who doesn’t have a scholarship). We obviously hope VAT won’t be retrospectively applied, but if it is, we can pay it. We are very happy with the school (DS is in Y10 and both been there since Reception so we know it well by now). It’s a large London day school, with significant assets and heavily oversubscribed so whilst I’m taking credit risk, I feel comfortable with the risk I’m taking - it wouldn’t be a disaster if school closed and we lost it. School will refund any pre-paid fees if she leaves - either if we choose to take her out or if school ask her to leave. I’m an additional rate tax payer with no personal savings allowance so pay tax on all cash savings outside my ISA’s/premium bonds which are maxed out. School still apply their usual fee inflation, we’ve asked them to assume 5% for the purpose of the calculations, anything above that we have to ‘top up’ which we can and would, do. We get a small 1.25% discount, which is neither here not there really, but obviously nice to have.

It’s mentally quite reassuring that she is ‘paid up’ to the end of GCSE’s so if DH or I lose our jobs, we don’t have to worry about taking her out mid GCSE’s and if we don’t, it simply gives us more monthly disposable cash (we’re paying out of income). We’ve not pre-paid for DS as he goes into Y11 in September which I think will still be VAT free, and not pre-paid for either for 6th form. Currently, whilst we think they will both probably stay for 6th form there is far more uncertainty about whether they will get the required GCSE’s and/or want to go, they may like to have a change of scenery, or take subjects not on offer. For us, I think we’ve got the balance right between trying to avoid a bit of VAT whilst not risking all of our savings.

@edwinbear - it will help your school as they can make another 10k on the approx 75k you paid them upfront if they invest it at 4% tax free (because they are a charity so keep the investment income). So instead of you paying HMRC 45% tax on that 10k - they now benefit. By doing this you also help their financial viability indirectly.
The 15k VAT gone and your 4.5k tax on interest (or investments in equities) gone. Schools like yours will also reclaim on the VAT capex. And you will now probably look more closely at the great state Sixth Form options in London (thereby resulting in another state school child not getting a place). And your children with their strings of 9s will get those places.

@Araminta1003 we’ll certainly look at (as you rightly say), the excellent state 6th forms we have in London. We probably wouldn’t have pre-VAT. By the time DD gets to 6th form, if her scholarship isn’t carried forward, assuming 10% fee inflation each year plus VAT, we’d be looking at c.£45k a year. At that price point, I don’t think private offers £45k worth of added value over state. £30k pa fine, £45k pa. the value just isn’t there in my view.

@edwinbear - it will be the likes of Giles Coren and certain Labour MPs moaning when the bankers’ and lawyers’ DCs start taking their DCs coveted state places at the likes of Camden School for Girls, the Oratory, Greycoat Dame Alice Owen etc. especially in the high birth years which we are still in for Year 7/8 and above. I don’t think some of them have clocked that Sixth Form places are not secure until you get the grades.

I guess if you’ve got the money or perhaps it’s a good idea to pay some fees in advance and draw down a small amount now and a larger amount later?

Resurrecting this post as Labour have made their intentions around VAT avoidance more clear, even if not the implementation.
I think the key point on this is the question on date of payment vs date of consumption of the pre paid service.
We are considering pre paying our childs fees, and as the OP pointed out, the offer is not very compelling, with no discount, although the ability to claim back if we leave etc.
On that basis, for all the reasons discussed earlier, it doesnt look attractive, but if we had confidence that we would save VAT it might still be worth it. Though I note someone elses comment on expected return over 5 years largely negating this saving.

We've gone and got the quote from the school and within it it lists the charges and balance remaining at the start of each term for the whole duration. It also states that the invoices will be dated for the applicable start of term.

My take on this is that it would be relatively trivial for the government to draft the legislation in such a way that VAT is applied at the applicable rate at the time it is drawn down and the invoice raised. In other words, prepayment upfront wouldnt protect you.

Now, I suspect the school has drafted it in this way out of caution and to avoid any future challenges/complications, but I would be interested in knowing how they have been drafted for others on the forum who have explored/done this type of thing? Are your agreements written in a way to suggest the payment upfront is somehow for the services to be delivered in the future?

I feel like some in the previous discussion are perhaps being over optimistic around the chances of advance payments (even if done before Labour come into power this week), being effective in avoiding VAT. Would be happy to be wrong of course.

I don’t understand these schemes. The money would earn more in an instant access savings account plus you would have the cash if you/your DC decide the school is no longer right.
Our school has a similar one but the discount is even less

5% Gross is 3 or 2.75% net so that's a competitive rate.

Wouldn't do it if I didn't feel the schools were financially stable, wouldn't do it for a small school.

Well you’re taxed on the interest. We’ve decided to pay for years 8-11 for one of our children. The other we’ll pay as we go along. Pre-election the new government will struggle to charge VAT.

Our school has a similar scheme,
offers a 3% discount but makes clear that we are an unsecured creditor and would lose the lot if the school went into administration.

My friend has 3 DC at boarding school, once her DC are settled, they pay in advance.
I think mainly because some years they are more flush than others due to bonuses.
Their eldest has just done GCSEs, they have already paid for her last 2 years at school.

I get that but had presumed a tax free vehicle but I guess it could be being used for other things…

you can put only £20k per year into an ISA and get £500 tax free interest only

Our school is offering approx a 1.3% discount. It’s oversubscribed but there is a lot of volatility in the cohort due to local senior/all through schools. We have decided the financial incentive is not big enough and the risk is too high.

Sure and I get that 3.5% could be more attractive depending on where the money is currently sitting, your tax bracket, whether you have unused pension allowance to push you into a more favourable position, the number of years of fees paid in advance… etc.

I've heard this is the loophole Rachel Reeves is going to close to stop people avoiding paying 20 percent tax on school fees.

She can’t really do anything about something that was done before they came to power.

Yes she can, they can apply the tax when the service is delivered not when it's paid for.

Exactly, which is the point I was making earlier. I think some people are over optimistically assuming that a lump sum payment pre election/announcement is going to avoid future VAT. It seems a trivial step to draft the legislation based on date of delivery rather than payment? The other risk of course is that tieing the money up in this way then prevents other returns if you can't benefit from VAT savings. In our case I'm being told there is no guarantee we could take the money out and do something else unless our child leaves.

Our school is offering a 2.5% discount (p.a. equivalent).

This detailed analysis is very good on time-of-supply rules:

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

Labour could change time-of-supply rules. Alternatively, HMRC could issue a challenge under existing legislation, basically claiming that the time-of-supply should always have been the term in question, not the pre-payment time. That would be messy but if successful would require no retroactive legislation.

In our case we're paying a lump sum and will be issued dated invoices at the start of each term that draw down against remaining balance. I just dont see how that is going to avoid the applicable VAT rate at the date of the invoice?

The only way it could would be for the initial lump sum to somehow be invoiced as an advance payment for however many terms.

At this point not sure if I'm over thinking it or not but all feels sketchy

I think you’re right there’s a good chance that won’t work for the reasons in the link above. Of course no one knows till the details are worked out but if it’s not invoiced and you’re putting money on account rather than genuinely pre paying it sounds unlikely to be successful in avoiding VAT.

This Tax Partner says otherwise

www.crowe.com/uk/insights/fees-in-advance-schemes

Well no one will know until the details are announced (at which point it will almost certainly be too late to prepay and avoid VAT). It also depends on the terms of the payment and how the funds are being held.