The Labour Party is proposing to impose VAT (Value Added Tax) on private school fees and revoke their charitable status. This change would subject previously VAT-exempt private school fees to a 20% tax, potentially straining the financial operations of schools that rely on such relief to maintain balanced budgets.  

If your institution is affected by this proposal, here’s a 7-step plan to prepare for the changes. 

Step 1: Reforecast Finances and Cash Flow Management  

If VAT is implemented, schools must adjust their financial forecasting and cash flow management. Accountants should model scenarios such as lower enrolments or increased financial aid requests to ensure schools can meet obligations like payroll and maintenance without risking insolvency. We recommend conducting a Financial Impact Assessment with the team at Bracey’s. 

Step 2: Consider the Impact on Bursaries and Financial Aid   

Rising fees due to VAT will likely increase demand for bursaries and scholarships. Schools should reassess how much funding can be allocated to financial aid programs, possibly reallocating resources from other areas. Accountants need to consider this increased demand while assessing the school’s overall financial health. 

Step 3: Upskill or Outsource Tax Planning and Compliance 

Schools unfamiliar with VAT processes will face new administrative burdens, such as registration and filing returns. Institutions should prepare for VAT registration by implementing appropriate software and training staff in VAT compliance. Seeking guidance early is crucial before demand for these services increases. 

Step 4: Assess Existing Contracts 

Review contracts with suppliers and service providers to understand VAT implications. Where possible, renegotiate terms to include VAT considerations, especially for long-term agreements. 

Step 5: Consider Reclaiming VAT on Fixed Assets 

Private schools may be able to reclaim VAT on fixed assets purchased within the past four years, provided the assets are still in use for VAT-liable activities. VAT can be reclaimed on capital goods, like buildings or equipment, purchased up to four years prior to registration, and for services acquired up to six months before. However, schools must comply with partial exemption rules, meaning VAT can only be reclaimed for expenses related to VAT-taxable services, and proper documentation, such as VAT invoices, is essential. For large assets, the Capital Goods Scheme may require VAT adjustments over time depending on their use. 

Step 6: Contingency Planning 

Given the political nature of the proposal and existing legal challenges, schools should prepare for both scenarios: one where VAT is implemented and one where it is not. Accountants should help develop flexible contingency plans for rapid adjustment depending on election outcomes, considering various financial scenarios. 

Step 7: Seek Expertise Early 

Schools should consult legal and tax professionals specialising in VAT and education to gain insights into compliance and potential strategies for mitigating tax liabilities. Regular consultations will keep schools informed about changes in tax legislation that could impact operations. 

In Summary 

Schools must assess the financial impact of the VAT imposition early, revise budgets, and seek expertise to prepare for compliance with new tax regulations. This proposal, if implemented, will require private schools to be financially agile, focusing on cost controls, revenue diversification, and strategic planning to address economic and operational challenges. 

Bracey’s Accountants is a leading firm specialising in tax advisory and accounting services tailored for the education sector. With comprehensive expertise in tax regulations, including VAT and income tax, we can help you navigate these changes effectively. 

If you would like to discuss the implications of this article with our team, please contact us below for a free 30-minute consultation.