What Schools Need to Know About VAT and Taxation

Understanding VAT Reclaim Processes and Tax Obligations

Over the past year, the way VAT applies to education in the UK has changed significantly, with one of the most high-profile shifts being the removal of the VAT exemption for independent school fees. From 1 January 2025, independent schools must now charge VAT at the standard rate of 20% on education and boarding. It’s a big change to a long-standing rule, and while state-funded schools like academies and maintained schools are not directly caught by this, there are still important implications for everyone in the sector to understand.

Teachers and school leaders already deal with complex timetables, safeguarding, curriculum demands and accountability measures. But VAT and taxation can feel like another language entirely. This article is designed to explain, in plain English, what has changed, what the rules are now, and what practical steps schools should take to stay on the right side of HMRC while making the most of VAT reclaim opportunities.

The Finance Act 2025 made the new VAT rules for independent schools law, following the 2024 Budget announcement. Importantly, the change doesn’t just apply to fees charged after January. Any payments received on or after 29 July 2024 for tuition or boarding that takes place after 1 January 2025 are treated as VAT-inclusive, even if they were collected in advance. The Treasury has been clear that the extra revenue—estimated to be between £1.5 and £1.7 billion a year—will be channelled back into state education.

For independent schools, the practical impact has been complex. Many have had to rethink how they set fees. While the headline VAT rate is 20%, most schools are not passing the full cost to parents. Government estimates suggest fee rises will average closer to 10%, with schools absorbing some of the increase to remain competitive.

One unexpected outcome is that some schools will now be able to reclaim VAT on spending where they couldn’t before. Larger, well-resourced schools with frequent capital projects—building works, refurbishments, new facilities—could see substantial VAT recoveries. This is because they are now making taxable supplies and can therefore reclaim VAT on costs linked to those activities.

For smaller independent schools, though, the picture is different. If they don’t have much taxable expenditure to offset the VAT they charge, they may feel the change more keenly. There is also the added complication that services historically treated as “closely related” to exempt education—such as catering or residential trips—may no longer be exempt. The rules are tightening, and schools need to check rather than assume past treatments still apply.

VAT recovery can be boosted through the Capital Goods Scheme, which allows schools to reclaim VAT on major capital purchases—those over £250,000 excluding VAT—over a ten-year adjustment period. If the use of the asset changes, the VAT reclaimed is adjusted accordingly. Schools can also claim VAT on goods bought up to four years before VAT registration and services from the previous six months, provided they are still in use for taxable activities. That initial reclaim can be significant, particularly for schools registering for VAT for the first time.

There is, however, a catch. Most independent schools will now be classed as “partially exempt” because they make both taxable supplies (like fee-paying education) and exempt supplies (like some funded educational activities). Partial exemption means that only the VAT related to taxable activities can be fully reclaimed, with the rest either restricted or subject to a proportionate recovery. The calculations can be fiddly, and in many cases schools will need specialist help to get them right.

For state-funded schools, including academies and maintained schools, VAT works differently. These schools don’t generally make taxable supplies, so they don’t register for VAT like a business would. Instead, they can reclaim most VAT incurred on goods and services for their educational activities through special provisions in VAT law—Section 33 for local authorities and Section 33B for academy trusts. This means the majority of VAT paid by state schools can be claimed back through monthly or quarterly returns handled by the local authority or the trust’s central finance team. There are a few exceptions, usually where a school is carrying out more commercial activities—such as extensive sports hall lettings to external groups—where VAT may need to be charged.

In the run-up to the VAT change, some independent schools offered advance payment schemes to parents so they could pay several years’ fees before the VAT start date. The idea was to lock in the exemption before the rules changed. HMRC is now investigating many of these schemes, and if it decides they were designed primarily to avoid VAT, it could demand payment on those advance sums. Reports suggest the total in such schemes may exceed £500 million, making this a significant compliance issue for the sector.

For schools that still hold advance payments, the key is to ensure the paperwork is watertight. Contracts must match the reality of the arrangements, and the terms should be legally sound. Any mismatch between contract wording and how payments are actually treated can give HMRC grounds to challenge the VAT position.

For school and trust leaders, the following actions will help manage VAT and taxation effectively: first, review your VAT status and determine whether you are making taxable supplies. Second, make sure your finance systems are set up to record VAT on purchases properly, so you can reclaim what you’re entitled to. Third, if you are partially exempt, establish clear processes for calculating recoveries and monitoring large capital projects under the Capital Goods Scheme. Fourth, check the terms of any advance payment or fee arrangements to make sure they are transparent and legally compliant. Fifth, don’t hesitate to take specialist advice—VAT in education is a niche area, and mistakes can be costly. And finally, help your teams understand the basics of VAT. While most staff don’t need to know the technical detail, a basic awareness can help avoid procurement decisions or trip arrangements that inadvertently create VAT costs.

The introduction of VAT on independent school fees is one of the most significant education finance changes in recent years. For private schools, it creates both an administrative burden and an opportunity to reclaim costs that were previously lost. For state schools, it’s a reminder to keep VAT reclaim processes efficient and to watch out for areas where taxable activities could arise. For Multi Academy Trusts, it’s another reason to take a strategic, informed approach to finance, ensuring compliance while making the most of every pound available. In the current climate, understanding VAT isn’t just the job of finance managers—it’s part of building a financially sustainable and well-run school system.