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Labour will apply a 20 per cent VAT charge to private education and boarding schools from January 2025, drawing a line under intense speculation over when the policy would come into force.
The government announced in 2021 that it would cut the tax perk for private schools and impose business rates if it came to power. The party estimates the move will raise up to £1.5bn for state sector investment, including on recruiting 6,500 teachers.
The Treasury announced on Monday that VAT would apply to payments made in advance for school terms starting after January 1 2025, including any payments made on or after Monday.
The Financial Times reported earlier this year that private schools had, ahead of the general election on July 4, started to advertise schemes allowing parents to pay fees several years in advance to circumvent Labour’s VAT plan.
Tim Stovold, head of tax at Moore Kingston Smith, said: “Those who have [already] pre-paid school fees in the hope that they would avoid the VAT may have got lucky.”
The plan to remove the VAT exemption from private education has triggered a backlash from institutions and parents who fear it will make pupil fees unaffordable and precipitate the closure of some smaller schools.
The government said VAT costs would not apply to pupils with the “most acute special educational needs, where their needs can only be met in private schools”, or where a pupils’ education costs were funded by a local authority. In those instances local councils would be able to reclaim the VAT, it said.
The Treasury said that VAT would apply to education and boarding costs but not further supplies and wraparound services, such as nursery care, childcare, school meals and holiday clubs. State boarding schools will continue to be exempt from VAT.
A technical note accompanying the Treasury announcement said “the government does not expect fees to go up by 20 per cent as a result of this policy change”.
“The government expects private schools to take steps to minimise fee increases,” it said, adding that they could do so by reducing their surpluses or reserves and by “cutting back on non-essential expenditure”.
Schools would also be able to recoup some of these costs by reclaiming VAT they pay on goods and services used in the production of their “taxable supplies”, including capital investment in buildings.
The government is also pressing ahead with plans to end business rates relief for private schools, which it said would come into force from April 2025, subject to new legislation being passed.
The government said changes to the VAT status of independent schools would be made through its finance bill, to be introduced following the Autumn Budget in late October. Changes to business rates will be legislated for through a local government finance bill.