Paying private school fees years ahead may create VAT disputes, experts warn

<span>Tax experts are concerned that schools using the schemes could face legal challenges from HMRC.</span><span>Photograph: SolStock/Getty Images</span>
Tax experts are concerned that schools using the schemes could face legal challenges from HMRC.Photograph: SolStock/Getty Images

Parents paying seven years’ worth of private school fees in advance to escape Labour’s plans to add VAT could be “sleepwalking” into protracted tax disputes, experts have warned.

Advance payment schemes have been available for years at some independent schools. But since Labour confirmed its plans to add VAT of 20% to school fees, the uptake has gone up sharply as parents seek ways to keep costs down.

Tax experts are now concerned that schools using the schemes could face legal challenges from HM Revenue and Customs (HMRC) in the future, and be left with a huge tax bill that they could then try to pass on to parents.

Related: ‘It feels cynical’: how would Labour’s VAT policy affect private schools?

Dan Neidle, the head of the Tax Policy Associates thinktank, said schools that in the past only saw a couple of parents each year using the prepayment schemes now had dozens signing up, with the practice becoming more common.

“The schemes in many cases have been around for years. They weren’t used very often,” said Neidle. “They started to be used a lot more in the last couple of years and schools that didn’t have them before started introducing them as a way – they thought – to escape VAT on private school fees.”

He said the idea behind such schemes was that by paying several years’ fees in advance, the “time of supply” was now and parents could remain unaffected by the addition of VAT should Labour get into power.

Neidle said school advance fee schemes did not work in the same way as other advance payments. Parents paying school fees in advance were not paying an agreed sum and buying a product, they were paying a deposit with the school that was drawn on to pay each term’s fees. If fees increased, and the total was used up more quickly, the parents would have to pay more.

“It’s not really like a prepayment at all,” he said. “The question is: at what point are fees taxable? Is it at the point of prepayment, which is what they hope, or is it actually at the start of each term?

“Some schools are encouraging parents to pay multiple years in advance. It seems very ill advised because if this all goes wrong years in the future – and VAT disputes do take years before they go wrong – the school will have a very large bill.

“How’s the school going to pay that? They can try to recover the money from the parents. Will they be able to? Will the parents still be around? Will they be in the UK? Will the parents say, ‘no, you didn’t tell us about the risks’?

“People are not going into this with their eyes open. They’re sleepwalking into a potential dispute, doing something complicated without thinking about the risks. I think that’s a bad mistake.”

Many private schools advertise prepayment or advance payment schemes, with some schools potentially allowing prepayment of fees for 12 years, from the start of primary education to the end of sixth form.

With fees averaging £18,000 a year at traditional independent day schools, parents would need about £90,000 to pay five years in advance.

The Stamford school in Lincolnshire is among those allowing parents to pay up to seven years in advance. A spokesperson for Stamford school said it had run a fees in advance scheme for many years.

The spokesperson said: “There has been interest from parents this year in the scheme, but we have a number of parents who sign up to use this scheme every year. Stamford parents can pay fees in advance for up to 21 terms (seven school years). Until any legislation is in place regarding the proposed VAT on independent school fees, it would be hard for any governing body to confirm if extra payments would be required.”

A review of prepayment schemes offered found that the wording allows schools to charge parents VAT if required. The Girls’ Day School Trust, which operates a chain of independent schools, warns its parents that “prepayments may not be protected from any VAT charge and may become liable for additional amounts to cover any future VAT charge”.

Julie Green, a VAT consultant at Haines Watts accountancy, said a future government was likely to include “anti-forestalling” legislation, which would apply VAT on school fees at the time they were used rather than at the time of payment.

Green said George Osborne, while chancellor, had made use of anti-forestalling legislation, when he announced in 2010 that VAT would rise from 17.5% to 20% before the increase came into effect in January 2011.

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Private school fees do not attract VAT at present because of an exemption for education services. Labour has pledged to use the estimated £1.5bn in tax revenue to fund 6,500 new teachers for state schools.

Labour is yet to fully outline its plans but has promised that, under a future Labour government, the VAT rules will “operate in the usual way” to make sure that tax owed is fully paid.

A Labour party spokesperson said: “The next Labour government will break down the barriers to opportunity by investing in our state schools and recruiting over 6,500 new teachers through ending the tax breaks for private schools.

“We will operate VAT rules in the usual way and any government would ensure that the tax owed is properly paid, and we will set out our full plans in government.”