Private schools who avoided Value Added Tax (VAT) on their fees with prepayment arrangements may be facing HMRC’s wrath, say leading audit, tax and business advisory firm, Blick Rothenberg.
Gabby Donald, a Partner at the firm, said: “The Government has made it clear that HMRC ‘stands ready to challenge’ the validity of private school’s prepayment arrangements implemented prior to the VAT anti-forestalling provisions.
“Anti-forestalling provisions meant that prepayments made to private schools on or after 29 July 2024 for terms from 1 January 2025 were subject to VAT. However, many prepayment arrangements were introduced and encouraged by schools with significant sums of money, estimated at more than £500 million, paid by parents before 29 July 2024 to avoid having to pay the additional VAT charge.
“The aim of prepaying for parents and schools in the run-up to 29 July was to lock in the VAT exemption on the basis that the payment had been received before the anti-forestalling provisions or the change in VAT treatment could take effect.
“However, prepayment will only create a tax point for VAT purposes where there is clarity over the precise nature of what will be supplied in return – this requires more than simply the school agreeing to provide education, the fees applicable and the extent of the education to be provided must be known.
“Where schools have taken lump-sum prepayments for many years in advance, without knowledge of the fees that will apply in the future, it is unlikely that the prepayment will be regarded as successfully locking in the VAT exempt treatment.”
She added: “In such circumstances, the supply of the education in the relevant year will still create an obligation for the school to account for VAT – whether it has the ability to go back to the parent to request the additional sums will depend on how the prepayment arrangement was presented. This is still likely to be a commercially sensitive matter, however, not to mention a practical challenge where children have since left the school.
“Schools that have taken an aggressive or cavalier approach to prepayment arrangements will likely face increased financial strain as HMRC seeks to charge them for the VAT they owe on parent’s payments.
“However, given the volume of schools and wide variety of prepayment arrangements introduced it is likely to take some time before HMRC starts enforcement action and legal challenges. But in the meantime, schools that received large sums of prepayments will be sitting on significant uncertainty unless they took advice at the time or seek it now.”
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