Labour seems set to introduce VAT on private school fees. We thought it would be helpful to set out the ways some private schools might try to avoid VAT, and our assessment of their prospects of success. We’ve identified some approaches which we’ve categorised as “good” (likely to succeed), “bad” (likely to fail) and “ugly” (highly inadvisable and maybe even criminal).
Please note two important caveats:
- We’ve written this to help advance the debate, and inform private schools and parents of the issues they may wish to consider. This is not legal or tax advice, and anyone considering implementing any of the approaches we discuss should speak to a suitably qualified tax professional.
- The question as to whether VAT should be charged on private school fees is a political question on which we take no position. The question as to the wider impact of charging VAT on the private and state sectors is an education policy question where we have no expertise (we wrote about the issues here). This article focuses solely on the question of how the VAT could be avoided.
Why VAT planning is high risk for private schools
Here’s the big problem: if a school takes any steps to reduce the overall VAT it charges parents, and that goes wrong, the school would have a very large liability.
The reason is that, if a private school doesn’t charge VAT, and HMRC disagrees, then HMRC will have at least four years to challenge the position. HMRC can then assess the school to VAT and it will then immediately have to pay.1It’s slightly more complicated than this; taxpayers have the right to first seek an internal HMRC review, but in practice that almost never changes the outcome.
The school would be able to appeal but, unlike income tax and other direct taxes, the school would have to pay up-front first, and then spend likely at least two years in an appeal process.
This creates a very significant practical risk for schools engaging in any VAT planning. The planning could appear to succeed and the school hear nothing for four years; then a sudden HMRC enquiry could result in it having to pay four years’ worth of VAT, plus interest, plus legal fees, all in one go. In other words, an amount broadly equal to one full year of fees (plus potentially penalties too).
In principle the school may be able to recover this from parents. That would however require specific wording in schools’ contract with parents, providing for an indemnity in the event HMRC asserts the school charged VAT incorrectly. The current standard form school contract doesn’t do this2There’s optional language saying fees are exclusive of tax, but that’s not enough to create a four year indemnity.
Even if the contract in principle enabled recovery from parents, the practicalities would be difficult. Some parents would be abroad. Others may not be able to pay. Many would have left the school. All will likely be unhappy. Parents may be able to argue that they are not bound by an indemnity, for example because the school did not fully disclose the risks, and the indemnity is therefore unenforceable (the Consumer Rights Act applies to private schools’ contracts with parents).
We therefore conclude that it is imprudent for any school to engage in VAT planning beyond the extremely simple and vanilla (the “good” items we identify below). Anything further presents a risk that any prudent school should regard as unacceptable.
Note that it doesn’t matter what advice a school obtains – accounting firms, KCs, whatever. If HMRC challenge the arrangement (and if it’s one of the ugly ones below, they will) the tax will have to be paid up-front. And in our view HMRC will win any appeal on these structures.
The good – a year’s fees in advance
Say the election is held in October 2024. What if parents pay a full year’s fees in September 2024 rather than, as is more normal, paying for each term shortly before it starts?
From a VAT point of view, VAT will be charged at the point an early payment is made. So the applicable VAT rules would be those in September 2024, and there would be no VAT. If there was an October 2024 Budget imposing VAT on private school fees, then that wouldn’t ordinarily change the VAT chargeable the previous month.
We say “ordinarily” because, in principle, Government could legislate retrospectively, so that fees paid in advance prior to the Budget became subject to the new 20% rate. That would be unusual, and we would be surprised if it were to happen. A prudent school may, nevertheless, wish to explicitly reserve the right to charge VAT if the legislation is retrospective.
On the other hand we will almost certainly see “anti-forestalling” rules. The Government might announce very quickly after the election that it will apply 20% VAT to private school fees. However the actual legislation would take some time to finalise and pass, particularly if (as would be wise) there is a consultation on the detail.3The usual timeline would be draft legislation published for consultation say in January, to go into the Finance Bill in March/April and obtain Royal Assent in July. That creates a protracted period during which people could seek to pay months and even years of fees in advance. A wise Government would therefore announce that any payment of more than a term’s fees in advance, from the date of the announcement, will be subject to VAT. This approach has been previously adopted for other VAT changes.
Hence it would be sensible for any advance payment of fees to be made well in advance of any announcement.
The theoretically good – several years’ fees in advance
In principle paying several years’ fees in advance of an election should be just as good as paying one year’s fees in advance.
However it seems less likely to happen, for several reasons:
- There will be a limited subset of people who can both afford to pay several years in advance, and care enough about the VAT cost to try to escape it.
- Schools may be wary about locking in the current level of fees for several years, particularly in a relatively high inflation environment.
- What if parents have to move out of the area, or otherwise withdraw their children from the school – would they get the fees back?
- More dramatically – parents may be concerned that the school could close or even fail, with no assurance they’d get their money back.
If that’s wrong, and we did see widespread payment of multiple years’ fees in advance, then the odds of retrospective legislation would increase. It may be unwise for private schools to push advance fee payments too far. It would certainly be a good idea for them to explicitly reserve the right to charge VAT if in fact legislation is retrospective.
The also good
There are other reasonably uncontroversial ways schools can respond to VAT on their fees:
- Schools will be able to recover VAT on their “input” costs, for example IT equipment, rent (not relevant to most schools) and the cost of building/maintaining buildings. This may require updating their accounting systems.
- Under the “capital goods” scheme, schools will be able to recover some VAT for capital projects paid for in the previous ten years – previously these VAT costs would have been entirely non-recoverable.
- Some school clubs have historically been run by external providers, invoicing separately (e.g. music lessons during school or after-school clubs). Where the providers aren’t subject to VAT (because they are exempt, zero rated, or their turnover is too small to attract VAT) then this will likely continue after school fees become subject to VAT. But see “unbundling” below.
- There would be nothing wrong with schools responding to the VAT change by trying to increase parents’ charitable donations (as Labour do not currently plan to end charitable status). Charitable donations aren’t subject to VAT; they also provide school and parents with gift aid (effectively adding up to 80% to the donation). In principle, the more donations a school receives, the less fees it needs to charge.
None of these are avoidance.
The bad – legal challenges
We may see attempts to challenge the imposition of VAT on private school fees.
Provided the legislation is enacted competently, we see no realistic basis on which such a challenge could be made:
- EU law would have made it unlawful to simply scrap the VAT exemption for private school fees.4Although the conditions in Article 133 of the VAT Directive could have been imposed, which in practice would probably have amounted to the same thing However, post-Brexit the UK faces no such constraints.
- EU law principles such as fiscal neutrality might also have been used to argue that the imposition of VAT on private school fees is unlawful (we are sceptical); but post-Brexit such principles can no longer override UK law.
- One might argue that the abolition of the private schools VAT exemption infringes the Human Rights Act/ECHR. However, even in principle, the Human Rights Act cannot override primary legislation – all a successful challenge would do is provide a “declaration of incompatibility“, asking Parliament to think again. And in practice, Courts have deferred to Parliament on tax questions, and no ECHR challenge has ever resulted in tax legislation behind held to be incompatible with Convention rights (even in the case of retrospective legislation). Any argument around private school fees would in our view be weaker than previous failed challenges.
We would therefore caution parents and schools against wasting large sums of money on legal challenges with little or no reasonable prospect of success.
The bad – unbundling
It’s been suggested some services such as boarding school accommodation, after-school clubs, sports activities and transport (e.g. school buses) could be “unbundled” and charged separately, and continue to be VAT exempt.
We are doubtful this will work. The technical question is whether there are two separate “supplies” for VAT purposes (e.g. accommodation with VAT at 0% plus education at 20%) or one supply (education at 20%). The courts have held that the key question is whether the two supplies are “distinct and independent”, but added that a single economic transaction should not be “artificially split”. HMRC have a useful summary of the issues here.
The issues are illustrated by the BPP case. One company provided tuition, with VAT charged at 20%. Another company in the same group provided textbooks intended to be used as part of the tuition, with VAT charged at 0%. BPP argued these were two separate supplies. It succeeded because the supplies were truly independent – a significant number of students bought the books without attending the course, and a significant number attended the course but bought the books elsewhere (and it would have succeeded even if the same company had provided both tuition and books).
Private schools will struggle to show that “unbundled” supplies are really independent – it is unlikely they will be purchased separately from the education. The most obvious example is boarding: it’s usually only available to pupils at the school, and is often part of the history and ethos of the school. Eton is not realistically going to open up boarding to people attending other schools (and if they did so in theory, with nobody taking it up, that would not assist them). Furthermore, any “unbundling” faces the significant challenge that it will clearly have been arranged in response to the VAT change.
There may be some cases where “unbundling” succeeds, but (as we note above) the risk will be on the school, and it’s a risk we believe prudent schools will not take.
Nevertheless, it may be wise for a Labour Government to introduce specific unbundling anti-avoidance rules, to serve as a clear “stay off the grass” warning sign.
The ugly – avoidance schemes
We can imagine a variety of different types of planning/schemes people might employ to avoid or reduce fees. We don’t believe any of these will work, and some could even result in prosecution:
- Any attempt to tie donations to the provision of education would likely make that “donation” a fee, subject to VAT. If schools went further, and disguised a fee as a donation, then could potentially amount to criminal tax evasion.
- For example, a school could try to game donations by quietly hinting that the children of people making large donations would receive full scholarships. But then the donation is, realistically, a fee, and subject to VAT. If the arrangement is hidden from HMRC then it could again be regarded as criminal.
- A few people have suggested creating offshore entities owning the schools. That wouldn’t change anything. VAT is charged based on where the school “belongs” which impact means where the education takes place. So if a school actually moves to Ireland, with teachers in Ireland and children educated Ireland, then that would indeed escape UK VAT. But just moving the company achieves nothing.
- A parent’s employer might think it could pay for their children’s education, and therefore recover the VAT cost. That doesn’t work, because the supply from a VAT perspective is from the school to the parent (reimbursed by the employer). The employer cannot recover the VAT. A variant on this would involve a company owned by the parents themselves – that risks heading into criminal territory.
- A variant on this: school could hint that if a parent’s company sponsors an event or building then their children would receive full scholarships. The company would ordinarily be able to recover VAT when it buys advertising/sponsorship. However again it would be clear the “sponsorship” is really the payment of school fees for the benefit of the parents. If hidden from HMRC the arrangement could be regarded as criminal.
- We don’t think unbundling is a very good idea, but an even worse idea would be to load a disproportionate amount of value into the unbundled items, for example charging thousands of pounds for textbooks or school uniforms, and asserting the 0% VAT rate applies. This again risks prosecution.
- Schemes where parents appear to pay several years of fees in advance, but in reality don’t. They keep the money and the school only gets it slightly ahead of each term, as it normally would. For example, you pay say five years’ of schooling up front with no VAT, but funded with a loan from the school. You pay the loan back over time with interest, and the payments just happen to equal the fees you would have paid normally. Any such scheme would be highly vulnerable to challenge (particularly if, as may be inevitable, failing to keep up with the interest payments means that your child can no longer go to the school – it is then clear that this is not interest, but a fee).
- We can imagine even more aggressive structures – for example a school moving to a model similar to hairdressers or a strip club, where each teacher/sports coach is an self-employed independent contractor sharing premises. The school provides billing and coordination services but the teachers don’t work for the school. Most of the teachers are under the VAT threshold (or the private tuition exemption applies), so all the teachers’ fees would be free of VAT. This, however, seems wildly impracticable – we doubt most schools could be run consistently with this model, although possibly very small schools could (e.g. with just two or three teachers).
- Independent special schools would likely be exempt from the new rules. There is a designation process for these schools – it is possible some schools might try to obtain a special school designation that should not be applicable to them. Again that could amount to criminal tax evasion.
- A school could split into multiple separate companies, each below the £85k threshold. There is specific anti-avoidance legislation to stop this, and it’s an area where HMRC is very active.
- We might even see “structured” solutions, such as converting a school into an company with parents subscribing for shares – the subscription of shares is not normally subject to VAT. Or perhaps an LLP with teachers and parents as members. All such structures are highly unlikely to succeed given the obvious reality of the arrangement – that the parents are paying to receive a service.
We don’t think specific rules are necessary to prevent any of these schemes, as we believe all would clearly fail. There will probably still be some people who try them, but that would be the case regardless of what anti-avoidance is introduced.
The bottom line
Whenever engaging in any tax planning, or indeed any legal transaction of any kind, a good question to ask is: “What’s the worst that could happen, and what would my liability be?”. The answers in this case suggest that trying to avoid VAT on private school fees will almost always be a bad idea.
Thanks to C for the first draft of this article and V for HRA/ECHR input. Thanks to Q for reading through the final draft. Most of all, thanks to all the people who contributed avoidance ideas on my original Twitter and LinkedIn threads.
Piggy bank image (c) exampapersplus.co.uk and distributed under a Creative Commons licence.
- 1It’s slightly more complicated than this; taxpayers have the right to first seek an internal HMRC review, but in practice that almost never changes the outcome.
- 2There’s optional language saying fees are exclusive of tax, but that’s not enough to create a four year indemnity
- 3The usual timeline would be draft legislation published for consultation say in January, to go into the Finance Bill in March/April and obtain Royal Assent in July.
- 4Although the conditions in Article 133 of the VAT Directive could have been imposed, which in practice would probably have amounted to the same thing
40 responses to “How to avoid VAT on private school fees, and how attempts at avoidance could go very expensively wrong”
If a parent paid in advance – ie January 2024 before all the announcements / discussions where do they stand legally ? Would the school have to pay VAT on the funds received before all this started ?
Many private schools are charities so would they be exempt from the legislation under current rules on the taxation of charities- in addition what is the position for pre school? Wrap around care nurseries are privately run generally for working parents and are funded by fees either with some LA support or wholly from parents is this eatable private education as it would mean that many parents can no longer go to work before their children reach school age ? Finally many private schools provide this early years provision for 2-4 year olds, would these classes be vatable in the private school compared to the playgroups which also command fees or would there be an age that vat on fees starts so from nursery or reception for example? What about voluntary aided schools surely this is a form of selective education -would they pay VAT on amount they contribute to running of the school in the interest of levelling the playing field? Finally even with no private schools education will not be equal as the best schools are in a postcode lottery and the wealthiest people can afford to live in those postcodes, just ask Keir Starmer where his children went (primary) and indeed still go (secondary). I end in the words of George Orwell from his famous book- Animal farm’ All animals are equal, but some animals are more equal than others.’
there is no VAT exemption for charities. The VAT position for charitable schools is exactly the same as non-charitable.
I don’t believe the VAT treatment of pre-school would change.
Query – Kids funded by international trusts, if the trust paying the school fees is overseas then the fees should be VAT free?
no, it doesn’t matter where the money comes from. If the education is physically happening in the UK, there will be UK VAT.
if possible to pay school fees in advance – consider pay 2-3 years fees in advance and than
as if take interest free loan back from school which would help those with not enough cash flow – assuming child is going to same school and there is a insurance policy that school will not close down and if does refund fees ??
The other factor with VAT avoidance is the possible impact of the “Halifax” ECJ decision on the application of “abuse of right”. So the more outrageous schemes could be struck down following Halifax.
I think that paying more than one year’s fees is risky as schools have a nasty habit of closing with little warning. I re call acting for Customs in the Faith Construction case many years ago which was the first payment and loan back cases. Successful but I doubt it is appropriate in the schools situation.
You mention teachers charging parents individually which as you say, seems unworkable. But if providing education becomes vatable could teachers become suppliers rather than employees, and charge the school VAT on their supply of education (that the school could then recover as input VAT)?
The level of direction/control that a school has over their teachers means I think realistically they will always be employees.
Surely that isn’t the issue. Say a school sought to convert its salary payment of £60,000 into a taxable supply to itself by engaging the teacher through a personal service company such that it could recover the VAT on its expenditure. For that to happen, the teacher’s company must charge the school VAT. But as the company has to pay the VAT it charges over to HMRC then to have £60,000 for the teacher, it must charge £60,000 plus VAT. And while the VAT is recoverable by the school, its net expenditure remains the same.
At least a 1/3 of the children at my son’s private school have special needs including, my own. He will lead a full and active life and gain an education, rather than probably failing in the state system which we had to remove him from. Unlike a huge number of special needs children we can afford private school, large numbers of special children are expelled from state schools, maybe the government should be forced to give a basic education to these children in state system ?
If/when Labour bring in VAT for private school fees/accommodation, then would they then have to charge VAT for parents whose children attend the 3 dozen state boarding schools.
Same applies to university accommodation and fees.
Great article – which I’m arriving a bit late to. My question is a bit different and goes back to VAT law. What is it that allows educational services providers not to have to charge VAT as things stand right now (ie pre-Labour)? My understanding is that they have to be an “eligible body”. Is this something that anyone can assume iif they think they are educating or does it have a definition and does it have to be conferred by HMRC?
the definition keys off the Education Act. Not my area, but I don’t think there’s any doubt private schools qualify.
Dan, I’m not so sure your “limited subset of people who can both afford to pay several years in advance, and care enough about the VAT cost to try to escape it” is as limited as you might think. In fact, from talking to colleagues and friends facing this ‘issue’ (admittedly also a limited subset of private school parents), the venn diagram of those who can afford to pay all fees in advance and who care very much about saving the £100k+ per child that it might save approaches a circle. It’s no secret that this is coming, and the routes to avoid it are the ones you’ve set out above. You’d have to be truly mind bogglingly rich to not care about that sort of thing, and at that point I expect you’d have someone to care about it for you.
It’s the “we’re certain that our children will stay in School X” that is the limiting factor, not the “we don’t care about saving VAT”.
interesting – thank you! Personally I wouldn’t do it, as it would feel risky paying that much up-front, but by nature I’m a cautious tax lawyer…
I think Ofstedian may be right. Won’t it look bad for Labour if charging VAT on school fees is largely avoided, at least for children who are already in the school pipeline, and only succeeds in punishing parents who struggle and economise to pay for each term, or by shaking their children out into the state sector?
The Labour Party has indicated that they will not allow Private Schools to recover VAT under the Capital Goods Scheme- in effect it will close this loophole. Private schools were hoping to use this recovered VAT to mitigate the impact on parents.
Do you see a legal challenge?
Have they? Not something I’ve seen, and I’m sceptical.
Could they do it? Yes, Parliament can do what it likes, and if enacted through primary legislation there could be no legal challenge.
Should they do it? No, terrible idea. This isn’t not a loophole – it’s how VAT works. VAT is charged on value added – it’s not a punitive tax we make up as we go along to hurt people we don’t like.
What is to stop the Govt from introducing a new 20% levy on fees, similar to VAT but not VAT. Education then remains exempt thus preventing recovery of input tax and presumably you also then avoid the problems of defining things in and out of VAT – admittedly you shift them to the new tax but presumably it would be much easier to “get it right”.
Personally (along with the abolition of non-Dom status) I doubt whether this will raise anywhere near the amount of money that Labour anticipate, but it seems to have become an article of faith. Part of me will roll my eyes at the tribalists of the Left loving every minute of it, but at the same time part of me will quite enjoy the squealing of those who can pay but would rather not – especially if they are members of Labour’s new core metropolitan vote!
That seems a terrible idea. VAT works the way it does for a reason. If you want to ban private schools then argue for banning private schools. There is a principled argument for that (and of course one against). There’s a principled argument for applying VAT to private schools (ditto). I see no principled argument for a special punitive tax specifically on private schools.
“Schools will be able to recover VAT on their “input” costs, for example IT equipment, rent (not relevant to most schools) and the cost of building/maintaining buildings.”
“Under the “capital goods” scheme, schools will be able to recover some VAT for capital projects paid for in the previous ten years – previously these VAT costs would have been entirely non-recoverable.”
I live near 4 very expensive private schools all of which have undertaken massive building work in the last 4-5 years. If they can claim the VAT back from these projects, it would run into the millions, more than the VAT on fees the government would receive.
That’s most unlikely, because of the way the capital goods scheme works. A simplified example: say the work was carried out 4 years before the VAT rate changes. In each of the six years after the change, the school will be able to recover 1/10th of the VAT cost of the building work. So total recovery of 60% of the VAT cost, but spread over time. I doubt 1/10th of the building cost exceeds their annual gross fees.
Yes, the school I teach at has spent at least £40 million on facilities in the last few years. By my calculations it should be able to claim over £8m back. That’s not more than the VAT they’d spend on fees, but it’s still a lot of money.
bear in mind they have to recover over a ten year period, and some of of those years have already gone. £8m if the figure, receivable over ten years, if they spent all £40m right before VAT on fees is introduced.
Labour should consider waiving/reducing VAT for parents of children with Education, Health and Care Plans (EHCPs) in place. Many children with autism, ADHD and other conditions can still benefit from mainstream schooling as long as the student-teacher ratio is low enough. Pushing these children back into the state sector will require considerable SEN provision at public expense. Or, more likely in the short term, it would increase demand for already oversubscribed special schools and/or increase school refusal/trauma. Could a Labour government implement such an exception lawfully?
Wouldn’t that create a massive artificial demand for EHCPs?
I believe you linked to this previously https://ifs.org.uk/publications/tax-private-school-fees-and-state-school-spending showing around a 16-17% increase in fees as a result of the net VAT change.
I note incidentally my daughter just told me that none of the upper sixth at her private school got Oxbridge offers. She asked ‘do universities favour state educated pupils?’ I said ‘yes’.
It strikes me that a big increase in fees (VAT plus inflation/pension costs) along with the worsening outcomes (universities) will put schools out of business.
My children went to private school because I had the cash at the time and did not put my affairs in order to play the state school admissions game, but in future (and this is not a hypothetical point) I would not repeat this, but directly target the contextual measures that schools and employers are using by going state and paying for private services.
I wonder if the foreign parents whose children are an increasingly large % of boarding school pupils will be subject to VAT?
With regard to anti-forestalling it strikes me that one might decide to withdraw one’s child from private school in response to a 20% increase in fees, but it would typically be a breach of contract to do so without providing one term’s notice. In addition, parents will have signed agreements with the school that will provide for annual increases, which occur without fail each September (usually announced a few months ahead), but for a new government to be elected in say October, and enforce the increase from January, when parents would have no other choice, seems a little unreasonable. One would think it more reasonable to provide notice (say, an announcement in October in respect of fees from the following September), to allow parents to make alternative arrangements, but then again if no such arrangements exist (if there are no state school places available), then perhaps this is intentional.
The private School I teach at had approximately 20 Oxbridge offers this year. Oxbridge are offering fewer places to privately educated pupils each year, but the percentage (31% of 2023 offers at Oxbrigde, for example) far outweighs the percentage of U6 pupils at private schools. It’s therefore factually incorrect to say that the universities favour state schools.
I have always been a huge fan of Tax Policy org, that has been severely diminished by this article. If a government policy is in place to raise taxes from those more wealthy than others to help fund public services why would you advise otherwise? Irrespective of your caveat, that’s what you have done. The fact that public schools have charitable status is an anomaly and although often people ( mostly Tories) talk about choice, there is none if parents cannot afford to send their children to a public school. This is made clear by the fact that only 7% of children go to them, with all the attendant inequality that results in society from them. You have, despite the comments in the article, politicised your organisation and I am extremely disappointed in you all.
> This is made clear by the fact that only 7% of children go to them,
This is not accurate. 7% of all school pupils at any one time are at private schools. However, at A Level age it is 18%.
The 7% reflects the much lower demand for private primary education.
There is a difference between advising that something be done, and analysing how it might be done…this article could for example be used by Labour to close loopholes in their proposals.
I think you have misunderstood this article.
I think Dan is pointing the next Labour government and HMRC to the potential avoidance loopholes that need closing when legislating.
“often people ( mostly Tories) talk about choice, there is none if parents cannot afford to send their children to a public school. This is made clear by the fact that only 7% of children go to them”
That’s not a proof that it isn’t a choice. Maybe only 7% of adults are vegan but it’s still a choice. Likewise, very very few working age Brits chose to exercise their FOM and work in EU but it was still a choice. Parents can choose to both work, chase promotions, forego vacations, new cars or apply for an assisted place for their gifted child. They can choose to get up earlier and coordinate drop off / pick up, or they can spend a little longer in bed and let the child walk to the nearest school. All sorts of choices are possible.
Great article as ever Dan, agree with everything you have said.
Obviously it goes without saying that the tax law is not filled with manifesto promises. Sometimes the ‘gentle explanations’ by the Mandarins post election can dampen many a radical idea, or more likely find a way to consult and then abandon it. Think of Sir Humprey sitting Jim down… We are in strange times though with our Politicians…
The actual tax that can be obtained from this idea, factoring in the consequent increase in the money needed to deal with those that go back to state education, and the input tax recovery (this will be a brand new shiny exciting toy and creatives are, quite creative) I don’t think will raise that much. This could cause an ever greater funding crisis in the state sector.
The final point is that many people who are ‘in’ that private school system operate on the basis they are a cut above ‘normal’ people, so don’t under estimate how that can play out in a willingness to try all kinds of things. Just look at the myriad of wheezes people tried and failed to implement to deal with the reverse charge issue that arose on overseas agents fees (the overseas market is massive) a few years ago.
How is gift aid “effectively adding up to 80% to the donation”? Can’t it be more? If I gift £800, the charity will collect £200 in Gift Aid for a total of £1000. If I my income is £101,000, then this gift reduces my taxable income by £1000 and so I will pay £600 less tax (after taking account of the personal allowance removal effect). So I suppose we could say my £400 reduction in after tax income is increased by £600 to become £1000 received by the charity. 600/400 means an increase of 150% more than the cost to me.
Hi Tod,
The “avoidance” ideas I’m the article are not complex or advanced. Virtually all private schools will have professional tax advisors and these ideas will be known to them. As Dan makes clear, these ideas are the “usual culprits” when something becomes VATable. Despite that, some nefarious charlatans might try to sell them to some of the more naive schools. Dan pointing out that they a) don’t work and b) that is particularly catastrophic with VAT warns schools, and parents, of that fact.
You should not less this article lower your opinion.
Jack
In relation to the paying several years in advance option you say “Schools may be wary about locking in the current level of fees for several years, particularly in a relatively high inflation environment.”
I have experience of a school that permits you to pay up to 5 years in advance, in return for this they give a fixed % benefit (I suppose equivalent to a (very) small amount of interest). However, the yearly fees over that 5 years may increase (and invariably have over the last 5 years), so there is always still a residual shortfall which you are asked to meet each year.
Are there any additional issues, in the context of ‘escaping’ VAT, so far as this type of arrangement is concerned?
Is the current logic that the discount (= interest) is not taxable?
I’m surprised that parents are willing to take the credit risk, but if they are, then this does seem to have some genuineness.
The problem with the topping up is that HMRC might try to say that it is indeed a loan accruing (taxable) interest.