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.

I don't have children in private school but think it would be fairer if vat changes did not apply to existing students. Is anyone campaigning for this? At least you would know when enrolling new students what the fees would be.

i don't think exempting all existing pupils from VAT is an viable policy option tbh

Agree that wouldn’t be viable. Schools tend to give a term’s notice of fee increases and so they say during Easter holidays what the cost of the next academic year will be, meaning the parent can give notice before the new fees kick in.

I certainly write contracts (not for schools) that say £x plus any applicable taxes, so that we are covered for changes in the law.

I think the fees would need heavily restructed, there are still many issues under debate on whether VAT could apply to separate elements like school meals, extraciricular provsions, boarding, etc. A 20% VAT line directly invoiced of the current full fees will be very less likely.

You really should be. Independents are slowly pulling out of TPS. There is a knock on effect in terms of recruitment. Lots of teachers will not give up the benefits of the pension scheme and will not shift to the sector in the numbers they previously did. I work in a good, solid local independent and recruitment is a nightmare in a way it wasn't 5 years ago. And we are not (yet) out of TPS. .

On the point of whether Labour would back date the policy to catch fees paid up front, I can't see how they could justifiably back date to point in time when they were not the elected Government.

On previous back dating in legislation what tends to happen is that in order to catch people trying to get around incoming legislation or taxes the effectivene date is back dated to point that the Govt first tables legislation on this tax rise etc. I have never seen tax increase legislation backdated to an effective date under a previous Govt.

Labour old change the VAT charging point from point of payment to point of use of service, but you would need to change it for other services as well creating a bureaucratic mess.

Hmmm.... but it would only be a mess for other services where there had been a change in VAT status, and I am not sure there would be any.

If at work, I choose to, say, pay a training company upfront for a year to allow my staff to do different courses through the year, I might get a small discount for a bulk payment but I would still pay VAT on the upfront.

@SheilaFentiman

"If at work, I choose to, say, pay a training company upfront for a year to allow my staff to do different courses through the year, I might get a small discount for a bulk payment but I would still pay VAT on the upfront."

Correct. But if the rules were changed to VAT being chargeable at point of use rather than point of payment then this opens up a bureaucratic nightmare.

For example say your company paid £50k for 2 years of training plus £10k VAT.

What if the training wasn't evenly split say roughly £40k worth was in the first year and £10k in the second year. What if this mix changed. What if additional training was provided in year 3 at no additional charge but wrapped into the original payment.

Quite simply it becomes impossible to manage which is why it is easier to have VAT payable at point of payment.

I think you need to look in detail at the structure of your specific school’s pre-payment arrangements. For example, some schools hold pre payments in a separate, ring fenced, fund. This has the benefit of the funds being protected if the school closed, if my understanding is correct. Those funds are then released termly when the school invoice is raised. The termly invoices are settled out of the fund. In that situation, I can’t see how the VAT would be avoided because the school would need to add VAT to the termly invoice. The pre paid fees are refundable in many cases, if your child leaves, but the funds might only be released termly going forwards (not as a bulk payment). In other words, it would take a few years to get your pre paid funds back.

You also need to check re the arrangements for fee increases in future years. Some plans only cover a certain percentage of fee increases in future years. You are still liable for any increase above a certain level.

It seems to me a far better arrangement to offer to insure the payment so that if circumstances change and the child has to leave or the school goes bankrupt, the insurance company provides the refund. That way, the school gets the full money up front and can invest it and thus provide the basis for an early payment discount. I don’t see the advantage for a school to hold money in a prepayment account which they can’t touch

I’m not sure of the reasoning to be honest. I suppose any insurance would add to school costs. It’s definitely how some pre payment arrangements work though. Different schools seem to do it differently.

It's an absolutely ludicrous policy. The average fee for a private school pupil this year is £15,200, the VAT on which comes to £3,040. The average spent on educating pupils in the state sector is £8,000. If this is how badly the rest of Labour's fiscal policy is thought through, we are utterly screwed as a country.

We're paying upfront 7 years across 2 x children. Our school has plentiful reserves and land reserves and has capped any increase to 5% even if VAT comes in. A grandparent is considering contributing too.

Perhaps pay up a few years and see what happens?

@goingdownfighting - for the majority of schools, paying fees in advance doesn’t actually protect you against future fee rises - you still have to make up the difference later if the fees go up: ie the cost of fees are not fixed forever at the price one buys. The advantage is actually either for an eventual deduction of the small amount of interest that is earned on the cash while the school holds the cash, or more broadly, it can work for those avoiding IHT by gifting lump sums now (wealthy grandparents etc).

It’s great that your school has reserves and can be clear with parents…I know Eton have said they won’t raise the fees in line with VAT because their large endowment covers it. Not the case for a lot of indies though…x

This article posted on another thread is worth reading if you’re thinking of paying up front fees https://taxpolicy.org.uk/2024/01/26/school_fee_vat_avoidance/

@fluro123 - “I know Eton have said they won’t raise the fees in line with VAT because their large endowment covers it”

This appears to be a false rumour on MN? That school is focussed on bursaries and state school partnerships at this point.

At this point absolutely everything is speculation because nothing specific has been put in place yet. A school like Eton will never ever in a million years have written to its parent group stating they will cover VAT. Imagine the press fall out if that were the case. The endowment is for charitable purposes!

Private school bursars tend to be conservative. At any whiff of prepayment possibly attracting VAT at some point in the future if HMRC were to threaten to investigate Every Prepayment scheme- they would have to raise a VAT invoice. I really do hope the Labour Party starts considering the potential costs to Council and HMRC time in this ludicrous policy.

Our school (not eton) has written to us to explain how they intend to phase in the fee increases linked to Vat.

The only way schools can phase in is to reduce the base fee so that the VAT is paid on a lower amount and the total cost to the parent is either the same or - in our case - higher but not as much as 20% higher until the end of the 3 year phasing period.

But the net amount ie income the school gets from fees will be lower for the phasing period

Obviously in the background they will be mitigating this by reclaiming any VAT they can, looking at bursary levels etc.

I think private school is a luxury for the few unless children have special needs like dyslexia for example then private school would be a great benefit to them. there are loans for school fees. I know grandparents going without luxuries they looked forward to all their lives to pay grandchildren school fees with no particular thanks just entitlement from the offspring.

@Araminta1003 - sorry for slow reply. I have a good friend with a son at Eton so I'm quoting her directly! I doubt the bursar wrote to all parents saying 'our endowment means we will absorb the VAT burden entirely' at this point, but that is how she currently understands it and was quite clear that's the case.

I guess their internal thinking would be that the endowment is for charitable purposes, education is a charity.... so why not use the endowment to save the parents effectively paying business rates?

Eton have over £600 million and the total cost of VAT will be £12.5 million per year without considering bursaries. I think they could do it on a voluntary basis. In any case, Eton could cover it easily out of investment returns on the endowment.

Thanks to everyone who supported the idea of prepayment. With the government's announcement, it looks like those who prepaid before July 29 will be shielded from the new VAT policy (with certain caveats) . Really appreciate all the helpful advice!