Advance fee-paying parents at private schools face potential tax claims by HMRC
In a move that could have significant implications for private schools and their wealthy parents, HM Revenue and Customs (HMRC) is currently investigating pre-paid fee schemes used to evade Value Added Tax (VAT) on school fees.
The surge in the use of these schemes, which allow parents to pay upfront for tuition fees for future school years with a potential discount, began in December 2023. Parents, particularly those with children at top private schools, started making strategic decisions to pre-pay fees to avoid a 20% VAT increase that took effect on January 1, 2025.
Top private schools collectively held over £515 million in prepaid fees in 2024, a sharp increase from £121 million in 2023. The sector-wide total for prepayments is estimated to exceed £1 billion. However, HMRC is now actively scrutinising these arrangements to assess their legality and whether VAT should be charged despite the prepayment timing.
The Treasury and HMRC believe many of these schemes may not withstand scrutiny, and are preparing for potential legal disputes and attempts to recover VAT on prepayments. This scrutiny threatens to reduce the effectiveness of these schemes in evading VAT and could result in unexpected tax bills for parents who prepaid fees.
The surge in prepayments poses a significant challenge to the government’s VAT revenue forecasts, as the large sums held upfront delay VAT payments and could reduce the policy’s intended fiscal impact. Despite official claims that prepayment behavior was factored into OBR projections, experts and analysts express skepticism about whether this was fully anticipated.
If HMRC unravels these advance fee schemes, the financial pressures facing private schools could be exacerbated. Smaller private schools, unable to benefit from such schemes, are already facing financial pressures, with some closures reported since the VAT increase came into force.
Meanwhile, the funding from the removal of tax breaks for private schools will help recruit 6,500 new teachers and improve standards in state schools, which educate 94 per cent of children.
This situation remains fluid as HMRC pursues enforcement actions and the government considers further measures to address lost VAT revenue. Professional advice is key for parents considering changes to their child's private education, as disputes arising from the VAT issue could potentially spark long-running, costly legal battles with schools.
[1] The Telegraph, "HMRC to probe advance-fee schemes used by parents of private school students", 2024. [2] The Guardian, "HMRC investigates pre-paid school fees as private schools face financial pressure", 2024. [3] The Financial Times, "Lost VAT revenue from private school prepayments raises questions", 2024. [4] The Independent, "Private schools face financial pressures as VAT hike takes effect", 2025. [5] BBC News, "Closures of private schools after VAT hike", 2025.
- In light of the HMRC investigation, business owners in the education-and-self-development sector, including private schools, might find it beneficial to seek professional advice on financial matters to ensure compliance with tax laws and avoid potential disputes.
- The ongoing scrutiny by HMRC over pre-paid fee schemes in the private education sector could lead to a shift in focus for some businesses in the finance industry, as more parents may seek financial advice to navigate their fees while staying clear of tax evasion allegations.
