The King’s Speech on 17 July included the expected confirmation that the government will impose VAT on private school fees. Subsequently, on 29 July, a technical consultation was published giving details of how the policy will be implemented.

Broad outline of the new rules

From 1 January 2025, the fees charged for all education services and vocational training provided by a private school (or a “connected person”), will be subject to VAT at the standard rate of 20%, as will any fees for closely related boarding services. The provision of other services closely related to education, such as school meals, transport, books and stationery will remain exempt from VAT, but the consultation makes clear that HMRC will challenge any schools that try to use “value shifting” (ie artificially assigning greater value to the exempt fees, rather than education and boarding fees) to avoid VAT.

Nurseries (both standalone nurseries and those attached to a private school) will remain exempt from VAT, as will non-maintained special schools (approved under section 342 of the Education Act 1996).

The five consultation questions dealt with the definitions of “private schools” and “connected persons” set out in the draft legislation (also published on 29 July), and whether the proposed approach would achieve the intended policy aims (outlined in the first chapter of the consultation) across all four UK nations.

The ICAS response

We did not have any detailed comments on the five specific consultation questions. Instead, our response concentrated on queries and practical issues raised with us relating to implementation and the application of the VAT rules.

The consultation (and the related Revenue and Customs Brief) included a welcome commitment that HMRC will produce bespoke guidance. This is a significant change to the VAT system, affecting one sector. We understand that there will be little experience or knowledge of VAT in many schools because of the current exemption – although some will have had VAT-registered trading subsidiaries.

Suggestions for guidance

We identified several areas where it would be helpful for HMRC to provide tailored guidance:

• Operation of the Capital Goods Scheme.
• Closely related services.
• Partial exemption.
• Bursaries, discounted fees and other forms of support with fees (provided by schools themselves or by others).

Practical issues

We also welcomed the commitment to ensuring a smooth registration process for schools from 30 October. However, HMRC service levels are already the key concern raised with us by members, so we stressed the need for HMRC to be given adequate resources to enable it to cope with the increased volume of registrations. This is vital to avoid a negative impact on schools trying to register – or on other taxpayers, if HMRC diverted resources away from other services to deal with school registrations.

We also commented that it would be useful for HMRC to email private schools with details of (and links to) any bespoke guidance it publishes, as well as any existing guidance that would be relevant and helpful.

Read the full response

The Employment Status Consultative Committee has requested a meeting with the new government

Is the current employment status framework fit for purpose?
This is the question that has been on the minds of employment taxes specialists for many years, but in recent times, it seems to have become increasingly complex and difficult for employers and agents to navigate. The judiciary has also commented in many decisions over the past few years that the current system is unworkable.

What does all this further difficulty mean in practice?
This essentially translates into barriers to doing business, complexities for inward investors in the UK, inflexibility in the labour market, exploitation of low-paid workers, increasing use of unregulated umbrella companies, and untold compliance risks, to name but a few. 

The over-complicated decision-making process connected to deciding whether someone is employed or self-employed for tax purposes – and employed, self-employed or a worker for employment law purposes – is burdensome in terms of administration and cost (including professional fees). And those who do get it wrong risk facing a challenge from HMRC or through an employment tribunal.

What can be done about it?
A group of employment tax experts from various professional and representative bodies recently decided to form the Employment Status Consultative Committee (ESCC). This will meet once a month to discuss how to tackle the problems inherent in employment status decision-making, to try to find a better way, which makes life easier for everyone – from the person on the street to the judiciary. A workable solution needs to be found as a matter of priority.

It’s a massive undertaking and is, as one member put it, like searching for the Holy Grail. But hope springs eternal and the group is determined to make this whole concept fit for the future – for everyone.

The first thing the ESCC has done is to write to the Exchequer Secretary to the Treasury, James Murray, asking him for a meeting. The committee agrees that for the framework to be deconstructed and redesigned, ministerial buy-in is a prerequisite, so that policy teams at HMRC, HM Treasury and the Department for Business and Trade can work with it to consider all aspects of the planning and implementation of any new systems.

Read the article in full