Over the last few months, RSAcademics and Grant Thornton have been working together to provide information and opportunities for colleagues across the sector to join webinars and ask questions in relation to the removal of VAT exemption. This article distils the information shared at the most recent webinar.
Please do not hesitate to get in touch with either RSAcademics or Grant Thornton if we can be of further assistance. Contact details can be found at the end of this article.
Key updates on VAT legislation
The recent budget clarified the VAT measures for independent schools, set to take effect from 1st January. Schools will need to register for VAT if they expect to charge VAT on tuition and other fees. Certain previously exempt categories are now subject to VAT, altering financial planning and cash flow needs. Additionally, the timeline for other changes, like increased employer National Insurance rates (April 2025) and adjustments to business rate relief, requires schools to plan ahead.
Grant Thornton’s VAT expert, Irena Scullion, highlighted several critical points about this transition. Among the most urgent are deciding when to register for VAT and managing how VAT may impact tuition, staffing, and overall operational costs. For many schools, the responsibility of collecting VAT will necessitate adjustments in accounting practices, including new methods for managing payments and invoices.
Immediate considerations for schools
The immediate focus should be on registration. This must be completed by 1st January to avoid penalties for late registration. For most schools, invoicing and payment processes will need revision to align with the new requirements. Communicating these changes transparently with parents will help maintain trust and address any concerns about increased costs.
Another key point discussed was cost management. Schools must evaluate their spending to optimise VAT recovery on certain expenses. For instance, while nursery education remains VAT-exempt, VAT paid on inputs for nursery education may not be reclaimable. Similarly, schools providing English as a foreign language have an exemption, which is relevant for institutions serving international pupils. Each of these aspects needs thorough review to ensure accurate accounting and compliance.
Managing parental communication
One of the core themes of the discussion was the importance of clear communication with parents. As schools prepare to apply VAT to fees, ensuring parents understand that this is a government-imposed tax, not a fee increase set by the school, is crucial. There was some concern that parents may view VAT-driven increases as arbitrary. Therefore, it is essential to clarify that this is a legislative change affecting all independent schools.
Where possible, schools should also clarify how the introduction of VAT might influence fees in the long term. With parents understandably concerned about their financial commitments, schools will benefit from sharing specific actions they are taking to manage costs efficiently, thus reducing the VAT impact where feasible.
Strategic long-term planning
In addition to the immediate steps required, we also discussed essential long-term strategies. As VAT will impact income from certain periphery revenue streams, such as facility lettings, schools must evaluate the VAT implications of these activities. Schools may opt to ‘tax’ or exempt specific income sources, depending on their financial circumstances and lettings clients. For example, income from sports facilities and event spaces may require a VAT evaluation to ensure compliance.
Governors are encouraged to review their VAT strategy regularly. This involves looking at VAT impact in key operational areas like catering, capital goods, and staff expenditures. Furthermore, the approach taken in VAT applications will likely become a topic of interest for HM Revenue and Customs (HMRC) inspectors, especially as they are expected to expand their inspections within the education sector.
Supporting staff through change
Changes in VAT and employer’s National Insurance may cause some concern among staff. We encourage governors and senior leaders to communicate openly about how VAT will affect school operations and any potential impacts on staffing or services. We recommended that you include staff in these discussions to alleviate uncertainties and build support across the school community. HR advice and support will also be important if staffing changes are required.
Practical financial adjustments
Cashflow was a recurring theme in the webinar, especially as VAT registration shifts schools into the position of tax collectors. To manage this transition, schools should consider adjusting invoicing schedules to align with their VAT reporting periods. This will reduce potential cashflow disruptions from VAT payments due to HMRC before fees have been collected in full.
There were several questions around “partial exemption” for VAT recovery and the potential circumstances where schools may be able to claim back a portion of VAT on costs associated with both VAT-exempt and taxable services. The specifics of this approach will vary based on each school’s unique services and structure. Therefore, obtaining specialist advice is essential.
Preparing for HMRC inspections and compliance
With increased oversight expected, it is prudent for schools to be audit ready. As a matter of routine and best practice, schools need to have clear records of decisions taken and supporting documentation to ensure consistency in financial practices. Schools can expect HMRC inspectors with specific expertise in education to review VAT filings in the future. Preparing well for this by aligning on a standard VAT approach will benefit schools and ensure minimal disruption should an inspection occur.
If you would like to speak to experts at RSAcademics or Grant Thornton, please email the contacts below.
Heather Styche-Patel Irena Scullion
CEO, RSAcademics Director, Grant Thornton
heatherstyche-patel@rsacademics.com irena.mj.scullion@uk.gt.com
Recordings of the webinars can be accessed here:
Webinar 1: What we have learnt and what is to come
Webinar 2: What we have learnt from the final legislation
Both Grant Thornton and RSAcademics are here to help. Below are links to summary documents highlighting relevant services from each organisation to support you in the coming weeks and months: