Money saved using schemes to avoid paying VAT on private school fees could be clawed back by the government, tax experts have said, after it was revealed that the schemes had raised more than £500m.
Analysis by the Daily Telegraph found that the UK’s wealthiest private schools took in £500m last year through “fee in advance” schemes. Parents who paid before the official announcement that VAT would be added to school fees hoped to avoid paying the extra 20% applied from January this year.
But tax experts who spoke to the Guardian said HMRC would scrutinise the schemes to check whether they included specific details such as set prices, without which parents could be vulnerable to VAT being demanded in years to come.
It could result in some of England’s most well-known schools, such as Winchester and Eton, locked in legal battles with the government.
Dan Neidle, a tax lawyer and the founder of Tax Policy Associates, said many schools used fee in advance schemes like a deposit, meaning parents deposited a lump sum with the school, which then deducted each year’s fees.
“We reckoned [there’s] a high chance that didn’t work from a VAT perspective, because VAT then applies at the point each year’s fees are invoiced. The question is whether HMRC will be challenging these,” Neidle said.
The impact on VAT revenue was likely to be short-term, he added, with most parents paying only a year in advance. Even if the full £500m in pre-payments was allowed, it would represent only 5-6% in lost revenue for one year.
A government spokesperson said: “The Office for Budget Responsibility has already factored in the increased use of pre-payment schemes in its revenue forecasts. Removing tax breaks for private schools is expected to raise £1.8bn a year by 2029-30.
“This funding will help us recruit 6,500 new teachers and improve standards in state schools, which educate 94% of children.”
The government said it could not comment on individual schools but confirmed that the fee in advance schemes could be liable to VAT based on how they operated.
The key is how each scheme’s “tax point” – billing for each term’s fees – is defined. Government sources said that if the schemes failed to give details of what the money was buying at the time it was paid, then VAT was likely to be due.
Many private schools began prompting parents to use the schemes when it was clear Labour would win the 2024 election and it had pledged in its manifesto to introduce VAT on school fees. In the past, the schemes were a way of parents receiving a discount for fees paid upfront or as part of divorce settlements. But the levying of VAT created a one-off opportunity for parents to avoid the tax.
Tax lawyers said that any pre-payments made after 29 July 2024 – the date of the Treasury’s formal announcement adding VAT – were unlikely to avoid HMRC’s attention.
HMRC has no deadline to begin an investigation, although it usually takes between one and four years to do so, meaning that parents and schools could face a lengthy period of legal jeopardy.
The accounts for Brighton College show that it received £50m in fees in advance last year, compared with annual fee income of £60m. Eton received nearly £53m in advanced fees. Both schools charge about £63,000 a year for boarding school pupils, including VAT.
