School Fees: What to do if private schools have to start paying VAT

There are plenty of people out there who believe that Labour will be in government by the end of this week. With that comes the possibility that private schools will have to start paying VAT. This has understandably caused quite a stir and there are plenty of families out there for whom this change could have a significant impact on their finances.

Whether I agree with this move or not, is not the focus here.  What I want to do is outline recommendations of how to best navigate the situation if it arises and shine a light on why you need to think carefully before you make your move.

Be careful about paying upfront.

Paying fees upfront may seem like a good way to circumnavigate the increase in school fees. But with many private school finances already on a knife edge (macro-economic factors have impacted their business as much as anyone else’s), the school going bust is a real issue. If enough parents have to pull their kids out as a result of the VAT change, you don’t want your money swallowed up without a trace.

Read the small print from the school.

You may think that the school won’t pass on the costs, but we have seen a number of cases now where embedded in the detail was a disclaimer that if VAT was imposed the parents may still have a liability as the school would pass the costs on, even if the parents have paid upfront.

Beware the inflation rate for the upfront payment.

Schools usually use an inflation rate of 4-5% when calculating how much you need to pay if paying in advance. From personal experience school fee inflation was more like 7-10% per annum. This means that there may still be additional payments due in the future, which combined with the VAT issue could cause a lot of sticking points.

Schools may turn a profit on your money.

Some of the schools we looked at have invested your prepaid fees in a gilt portfolio. The discount offered to parents was at 4% but when you model it based on a personal gilt portfolio … it seems like they are making a “turn” on the money. It is possible to create a gilt portfolio with varying maturity dates for clients so you, not the school, benefit from the “turn”.

How will prepaying impact your financial security?

Where clients have decided to use investments (and personal assets) to prepay, they are generally in a more precarious position with work, jobs and business, in high paid positions. Is losing these assets viable and in line with your preferred level of risk?  Do you want to jeopardise your finances if you’re feeling the pressure?

What happens if your kids leave or get excluded?

If you get a contract, read up on this – in some cases, we have noticed that the contract sets out when or if they pay back the fees if the child leaves or is expelled etc. If there’s no contract, you need to find out.

But most important of all considerations is that there is no guarantee this change will even happen or whether doing all this work will really mitigate the worries and concerns that you may have. Indeed, there was an article in the FT a few weeks ago suggesting HMRC would challenge these schemes.

If you would like to find out more, please do give us a call and we can look at your personal situation and help you find the best solution for you.