HMRC intends to challenge the validity of prepayment arrangements used to avoid VAT on private school fees after anti-forestalling rules. Prepayments made on or after 29 July 2024 for terms from 1 January 2025 are subject to VAT, yet significant sums—estimated over £500 million—were paid by parents before that date. A tax point for VAT requires clarity about what will be supplied and the applicable fees. Lump-sum prepayments made years ahead without known future fees are unlikely to secure VAT-exempt treatment. Schools may still have an obligation to account for VAT, and ability to recover additional sums depends on how arrangements were presented.
Anti-forestalling provisions meant that prepayments made to private schools on or after 29 July 2024 for terms from 1 January 2025 were subject to VAT. However, many prepayment arrangements were introduced and encouraged by schools with significant sums of money, estimated at more than £500 million, paid by parents before 29 July 2024 to avoid having to pay the additional VAT charge.
However, prepayment will only create a tax point for VAT purposes where there is clarity over the precise nature of what will be supplied in return - this requires more than simply the school agreeing to provide education, the fees applicable and the extent of the education to be provided must be known. Where schools have taken lump-sum prepayments for many years in advance, without knowledge of the fees that will apply in the future, it is unlikely that the prepayment will be regarded as successfully locking in the VAT exempt treatment.
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