Coping with VAT Hike: Pre-paying Independent School Fees?

[minervafrosty]

With the upcoming VAT hike, many may feel the financial strain, especially regarding our children's school fees. Are you considering pre-paying fees to manage this increase?

If so, when do you plan to make these payments?

We are thinking of pre-paying fees ahead of this year's election. Please share with us your thoughts.

My understanding- though I haven’t looked into it in depth - is that VAT will fall due at the point the income is recognised ie you can’t avoid VAT by doing this.

Also, fees go up 5-10% a year anyway, how many years in advance will school let you pay?

My kids are in a London private that has (apparently) been thoroughly investigating every route possible to minimise future VAT being added to already astronomical fees. We have been told that paying in advance will not work.

I think this is due to the ‘point of service’ thing but also how the fees in advance system actually works. For us it doesn’t lock in the price of tomorrow’s fees at today’s prices - so if the fees go up you are still expected to make up the difference. What it can do is offer a very small reduction in the long term due to the interest it earns…but it’s nowhere close to what your money would earn in a high interest savings account/investments. I think the main purpose of it is for very wealthy to minimise their IHT burden (ie better to spend a chunk of money now than have it taxed on death!)

This shower we have in at the moment are holding on to the car keys for as long as possible. I don't think we will have an election until the next school year (October) and it will take a bit of wrangling to sort out the policy Labour are introducing. DC will be in Y9 and Y11 when they get the car keys and it seems possible it won't start until the following September. Until it's actually on the cards there's little immediate worry here. It will be coming out of what we pay in IHT at the end anyway as it's all from inheritance which we've already been taxed on by this lot!

Some tax advisors argue that VAT might also apply upon payments for services. Also, schools will additionally charge you the inflated part of fee so they are not worse off either.

Multiple tax advisors have pointed out that pre-paid fees might be able to circumvent VAT, for e.g.

https://wsm.co.uk/blog/pay-fees-upfront-to-take-the-sting-out-of-private-school-vat/

https://www.moorebarlow.com/blog/vat-and-fees-in-advance-schemes/

Of course, this is by no means conclusive. We don't know for sure until we see the VAT bill but by that time, it will be certainly too late to act

In other words, paying school fees upfront could be a way to mitigate IHT

Rich people try to avoid paying taxes. Who'd have thought it?;

Do they mean even prepaying ‘before’ Labour get in won’t work?

VAT is currently due at point of payment. Labour would have to change VAT law specifically for Private schools (and retroactively) to make this not the case. Some experts believe this is unlikely. A lot of work to go after a handful who prepaid.

For OP’s benefit I have decided to prepay. I think it is a decision to be made based on your unique circumstances.

I still expect Fee rise ‘topup’ payments would be subject to VAT but those would be smaller amounts at that point.

Well, it's all going to the taxman at the end - we don't earn much and chose to use it to pay for DC's school rather than a nice house or whatever so we will only be leaving the DC the house we live in to split. We technically used the inheritance left over after IHT to avoid them having to pay for it again I suppose.

@QuirkyHam I think the issue is that many schools who accept prepayment put the money in a protected account and point of payment is actually when it is removed from that account and applied to fees (on an annual or termly basis)? Not an expert in tax law, but that was my understanding of a recent article on the subject. I suppose schools could change the way they take prepayment? But that might feel much riskier for parents who worry about getting their money back if child withdraws or school unexpectedly shuts.

I found this very worth watching

Yes in that case I’d say payment hasn’t actually occurred yet so the school is correct. VAT would apply as normal when each invoice is raised. So only benefit of prepaying in that situation is if the schools discount was worth it (our’s on its own isn’t).

At the school we are starting the funds go into the school’s general fund and are not ringfenced or protected. So I’m only doing it on the basis that I am adequately confident that I can’t see the school going bust and being unable to pay creditors from sale of their lands and buildings.

In essence, yes, fees in advance would work. They say that if you have to pay more for fee increases, those would be subject to VAT. Expert says they can't make it retrospective. Lots of people would have already paid before this year for future year before this was even mooted and they cannot force schools to collect VAT from them now. It would be chaos. So, if the school has a credible fees in advance scheme, you should be OK.

One thing I am curious about is if this will apply to 6th form because a lot of kids go off to private 6th form colleges which are currently VAT free. If they don't apply it to 6th form and they can't apply it to boarding that would be hilarious since people will be paying less VAT to go to Eton than many other through schools.

This explains a bit more -

https://www.farrer.co.uk/news-and-insights/vat-on-school-fees-qa/

I’m not 100 percent, but this was published in November of last year. Latest we had from the school (last week) was that legislation will close the ‘loophole’. Again, I’m not totally sure, but I’m certainly sure it’s not a given that fees on in advance can help families avoid VAT, unfortunately….

As Starmmmer has mentioned schools could decide whether to pass this VAT to parents, it seems such VAT may not be directly invoiced to parents. Some schools with deeper pockets even declared they will "absorb" this VAT. I would think the catch is if this VAT thing is happening some schools will choose to increase their fees more (say between 10-15%) each coming few years to so called "absorb" this hike. If it is the case that prepayment for VAT avoidance could become non-question.

I don’t quite understand what he means by this. As I understand it VAT is paid by the consumer of the good/service not the provider, regardless of whether it is shown as a separate line on the invoice.

Does he just mean that schools could cut their fees?

@Whatevers do “lots” of people really prepay multiple years, though? I would have thought the vast majority of parents are finding fees from earned income not savings.

Probably not. Certainly not until the recent inflation in fees and the prospect of VAT. I suppose everyone has particular circumstances.

I would be extremely wary.

My child was extremely happy in his school and we'd imagined they'd stay till 6th form, currently year 5....then a new boy arrived who is just awful, 4 children in his class have already given notice, we are looking now. New boy has a family member who is a governor......very tricky to get him out....didn't see that coming!!

Yes, they would have to cut fees. I think this would put a downward pressure on fees as well as a restructuring to take anything possible out of VAT liability as well as pushing up rates if SEN diagnosis

i would assume around 5~10% of parents pay in advance, that's tens of thousands already.

We had similar in a previous school - boarder with MH issues attacked 4 other boarders - school immediately made them all sign forms saying they were fine and felt safe, never 'found' the weapon, no suspensions, basically said it never happened. We left as did all others who were attacked. The school were so keen to keep the attacker (very good at maths) they lost 6 other boarders in the junior boarding house who heard it all. You need to be very confident in your school's ability to help/discourage and admit to poor behaviour before you invest. Current school has been amazing; never thought I'd be happy to hear that some kids have been seen vaping in the village etc - the honesty actually makes me very relieved!

This is the silliest response I've ever seen to a post. The poster usually feels they're being really clever, with their 'gotcha' comment. Are there specific topics designated for a 1st post? no! Something has to be the first post?

My understanding is you’ll be nobbled by the point of service rule, ie regardless on when you pay, vat will be calculated when each terms fee’s are due.
There will almost certainly be a lead time from when the vat is announced to being implemented so the govt will have time to close any loopholes
sadly i dont think paying in advance will help anyone