At last, HMRC have finally published their updated guidance for the removal of VAT exemption for private school fees. The clarification on how the scheme will operate is of course clearly welcome, but having looked at the fine print, it’s clear that they’ve created something of a (‘Eton’) mess!
The lightning-fast introduction of these changes, a mere 8 weeks, means that schools will have had very little time to understand how the new VAT rules will impact them. Also, to make matters worse, the size of the challenge has been made worse by a distinct lack of detailed guidance from HMRC.
There are four areas that private schools desperately need clarification on: Welfare vs Education, Board & lodgings, Non-business charitable activities and Pre-registration input tax. I will look at the four areas and attempt to interpret the rather woolly guidance recently issued by HMRC.
Benefits v Education
The new legislation removes the school’s ability to apply VAT exemption to supplies of ‘education’ and ‘board & lodgings’, but leaves the provision of ‘welfare services’ available to claim an exemption from VAT.
Until now, schools have not had to worry about whether the services they were supplying should be categorised as education or welfare. However, schools now need to determine what, according to the new VAT law definitions, they are supplying and what the correct VAT treatment is. This means that schools will need to break down the different services they provide throughout the day and determine whether, at different times of the day, they are providing ‘education’ or welfare’.
HMRC’s manual defines education as being ‘a course or lesson of instruction or study in any subject’, the definition does not include supervision, nor services which simply facilitate learning. So, many of the services provided by a school outside the core school hours clearly do not meet HMRC’s definition of ‘education’ and so, in my opinion, should be treated as welfare services.
HMRC has updated its guidance to confirm that before and after-school care will continue to be exempt as welfare. However, precious little practical guidance is given on how this will apply in practice.
Board & Lodgings
The phrase ‘board & lodging’ is not defined in the legislation and therefore any interpretation of it should be based on its generally accepted everyday meaning, which is a lot narrower than the level of care usually provided by a school boarding house.
This of course raises the question of whether a substantial element of the supply is actually a welfare service. This distinction is brought even more into the light for schools which offer ‘day boarding’, where the student remains in school for evening meals, prep, and activities but goes home to sleep.
Non-business charitable activities
HMRC has not provided specific guidance on how it sees a school’s charitable activities could impact on its ability to recover input tax. This is important, as a VAT-registered business is required to restrict its input tax recovery if it undertakes non-business activities, which are defined as providing goods and or services, for no consideration.
In practice, this means that if a private school allows a local state school to use its facilities for no charge or to provide an individual from a poor family a 100% bursary, it will be undertaking a non-business activity. This of course means that in theory, it should restrict its recovery of input tax.
In practice HMRC has now verbally confirmed that they would not consider these examples and similar activities to be classed as non-business activities, provided that the majority of students are fee-paying. However, it has not yet confirmed this point in their published guidance.
Pre-registration input tax
HMRC’s guidance introduces the need for schools to apportion input tax over the economic life of goods that have been purchased in the past 4 years and are still in use at the date of registration. HMRC do not however provide any guidance as to how to determine the economic life of an asset, other than suggesting it is normally 5 years.
This guidance is in direct contrast to HMRC’s own internal manuals, which govern exactly how much VAT can be recovered by a newly VAT registered business on assets purchased prior to the date of registration. HMRC’s published notice VIT32000 (How to treat pre-registration claims to input tax) is an extract from their own manuals and offers completely different guidance on how much VAT can be recovered.
This notice confirms that a business can reclaim all the VAT on goods you bought up to 4 years before you registered for VAT providing that they’re still on hand. It also states that most services paid for in the six months prior to being registered, can be claimed for as well.
Accountant’s view
When Labour won the general election, I was genuinely looking forward to a government that would pursue policies based not on party dictat, but on fairness. I was therefore very disappointed, but not totally surprised, that Rachel Reeves had succumbed to tribal party politics when announcing her tax changes
It is crystal clear to most accountants that Labour party apparatchiks in government, have heavily lent on HMRC to produce guidance on private school fees, that at best is unclear and at its worse, is a deliberate attempt to punish a sector they see as ‘privileged’.
I therefore have no doubt that in the new year we will soon see a string of Tax Tribunal cases, that will surely expose this appalling and grossly unfair tax guidance.
