Parents pay £500m to beat private school VAT raid

Telegraph

a day ago

Parents at Britain's top private schools have defied Labour's VAT raid by paying fees in advance.
Telegraph analysis shows the most expensive private schools received hundreds of millions of pounds in fees upfront last year as parents scrambled to avoid the 20 per cent tax raid, which came into force on Jan 1 2025.
The scale of the advance payments has stunned tax experts, who warned it posed a challenge to Labour's revenue-raising plans. Sources suggested that the Chancellor would consider ways to claw back the lost VAT.
The top 50 independent schools held £515m last year in advance fee schemes, which are used to pay school costs one or more years before they fall due. This was up from £121m in 2023, according to the latest annual accounts.
It means the wealthiest parents alone may have avoided up to £103m in VAT, since they are thought to have handed over the fees before a government-imposed deadline when tax would start to be charged on advance fees.
There are more than 2,600 private schools across the UK, meaning the total figure is expected to be significantly higher.
The Treasury said that the Office for Budget Responsibility (OBR) factored the use of prepayment schemes into its forecasts for how much money would be raised by the VAT raid.
However, the vast sums poured into advance fee schemes are likely to eclipse expectations and will raise serious questions over official predictions.
Brighton College, the most expensive private school in the UK, recorded total prepaid fees of £50.1m in last year's accounts – up from £4.1m in 2023.
The number of pupils covered by the school's fees in advance scheme jumped from 86 in 2023 to 819 last year.
At Eton College, where fees will reach more than £63,000 next year, the total money in its prepayment scheme rose from £16.6m in 2023 to £52.7m last year.
Winchester College's fees in advance scheme leapt from £4.4m in 2023 to £19m in 2024, according to its latest accounts.
The sums cover parents paying in advance for both one year of school fees and for multiple years.
Telegraph analysis shows parents at many schools tried to cover the bill for as many as five years' fees upfront before last summer's deadline, meaning they may avoid Labour's tax raid altogether if it is cancelled by a future Reform or Tory government.
Experts said the figures were 'extremely high' and the Government could face expensive legal battles if it tried to recoup the money.
Labour confirmed concrete plans to charge VAT on private schools in its election manifesto, triggering a rush by families and schools to prepare.
The Government was elected on July 4, but Rachel Reeves did not spell out plans for the policy until July 29. She said that all prepayments from that date would be subject to VAT.
Mairéad Warren de Búrca, managing director at Alvarez and Marsal Tax, said: 'It's not surprising that schools would have done this type of thing with parents and maybe encouraged parents to jump on the prepayment bandwagon.
'Only the very rich can afford to make those advance payments, or those with extensive wealth … so I'm not entirely sure they [the Government] have managed to do what they intended to do.'
Labour has repeatedly stated that its VAT raid on private schools will target the wealthiest families in Britain and raise more than £1.8bn a year for state schools by the end of the decade.
But smaller private schools have said that the policy will hit them the hardest and leave the most prestigious institutions largely unaffected.
More than 50 independent schools have shut or announced they are closing since the VAT raid came into effect, with the Government predicting that 100 schools will buckle over the next three years as a direct result of the policy.
Most private schools offer pre-payment schemes for parents, which allow them to pay fees in advance and at a discount.
Until now, these have typically been leant on by less well-off families, but Telegraph analysis shows an explosion in them being used as a potential loophole at top public schools in the run-up to the VAT raid.
Private schools' latest annual accounts, most of which cover the 12 months up to July 31 2024, suggest hundreds of millions of pounds may have flooded into the schemes unscathed.
HMRC could go after 'deposits'
The Telegraph understands the Government will still try to reclaim VAT on some of these payments by trying to prove they were used illegitimately.
For payments to be counted as genuine fees in advance, they must contractually apply to a specific service at a specific price.
Dan Neidle, the founder of Tax Policy Associates, said: 'The level of prepaid fees identified by the Telegraph is extremely high. HMRC cannot apply VAT to fees prepaid before July 29 2024. There isn't a matter of discretion on the part of HMRC, and certainly not the Government. It's the law.
'However, we warned last May that many 'prepayment' schemes were not actually prepayments. They looked more like deposits…
'The question is whether HMRC are going to go after the 'deposit' schemes. If they do, it will be a huge financial headache for schools and parents.'
Other tax experts said it was highly unlikely HMRC would be able to go down this route, meaning the wealthiest parents at the most expensive schools could avoid paying VAT on fees.
North London Collegiate School recorded £19.4m in new contracts in its fees in advance scheme last year – up from £651,000 the year before.
Seven in 10 of those payments – amounting to around £13.5m – were for multiple years' fees, according to the school's latest accounts.
Paul Ridout, a solicitor at Moore Barlow law firm, said: 'My view is that it is really unlikely that HMRC would have any success in trying to get schools to account for VAT on money paid into these schemes before 29 July 2024.
'The schemes that have been operated by schools pre-date Labour's policy, so they can't really be described as tax avoidance schemes.'
The Telegraph understands that many schools opened prepayment schemes when speculation over Labour's VAT policy mounted in the run-up to the general election, while others such as Eton College have had them in place for decades.
Ms Warren de Búrca said it meant 'the more sophisticated schools' were more likely to have the right paperwork to fight off challenges from HMRC, while 'the middle ground private schools probably wouldn't have had the wherewithal of getting all of this set up' in time.
A government spokesman said: 'The Office for Budget Responsibility has already factored in the increased use of prepayment schemes in its revenue forecasts.
'Removing tax breaks for private schools is expected to raise £1.8bn a year by 2029-30.
'This funding will help us recruit 6,500 new teachers and improve standards in state schools, which educate 94 per cent of children.'