Labour to block school fee VAT loophole

Labour to block school fee VAT loophole

Jul 5, 2024

Many parents sending their children to private school would be looking to pay the fees in full for future school years to save costs but Labour has a plan for this

If Labour were to win on 4 July it is likely that there will be anti-forestalling legislation put in place to block parents from avoiding the extra VAT charge.

This would likely be announced at the new government’s first Budget briefing, which is expected to be held in September.

However, any VAT charges will likely not come in until September 2025, as the 2024 school year would have started by the time of the announcement.

Shadown chancellor Rachel Reeves has confirmed that the fees would not be charged retrospectively, and the 2024/25 academic year would likely not have VAT attached.

The legislation the Labour party is expected to introduce means any fees paid for the 2025/26 school year and later before VAT is added in September 2025 can be recovered, leaving parents having to weigh up their options for their children’s education.

VAT being added to private school fees has been a Labour policy since 2021 which shadow education secretary Bridget Phillipson said private schools ‘have had ample time to prepare for’.

It is estimated the addition of VAT on private school fees will raise up to £1.7bn, which Sir Keir Starmer has said will go towards the state education system, with an influx of 6,500 teachers being hired as well as 8,500 mental health advisers and 1,000 career advisers for schools.

Historically anti forestalling provisions are included to prevent tax avoidance when a significant tax change is made.

Croner-i tax specialist Angela Bedi explained: ‘To prevent what HMRC considered to be avoidance of VAT, when there was a previous change in the liability or rate of VAT, anti-forestalling provisions were introduced.

‘When the standard rate of VAT increased from 17.5% to 20% on 4 January 2011, for example, Finance (No. 2) Act 2010, Such 2 introduced a supplementary charge on the date of the VAT change, rather than at the time of supply, on certain supplies spanning the date of the VAT change.

‘It is therefore reasonable to assume that similar provisions will apply in this instance, although that is not certain and the precise details cannot be known at this time.’

Many private schools have begun to update parents via their websites that VAT would have to be charged at a later date if it were to be added, but there may be a third fewer students attending due to the additional fees according to Premium Credit. However, some schools are open to covering some of the extra charges to retain students.