A leading VAT expert has called on private schools to review the accounting treatment of pre-paid school fees to avoid huge tax charges later.
This comes after news that Labour is planning to introduce measures to combat disruption over proposed VAT legislation for private schools. This would see the party reclaim VAT on pre-paid tuition fees paid after VAT comes into effect.
Now, Daphne Hemingway, VAT director at specialist tax firm Jeremiah Miller, is urging schools to redesign their finances and re-evaluate the accounting for VAT on prepayment schemes, as she believes many of these schemes are not robust enough. She says it is crucial for schools to act, as parents expect existing contracts to protect VAT relief on prepayment:
“There is much speculation that VAT may be imposed regardless of when the legislation is enacted. Without action, this could lead to schools facing large tax bills and even closure as a result of relatively minor VAT accounting errors. If the pupils concerned leave school when the rules are in place, it may not be possible to contact parents to recover the extra 20%.
Furthermore, not all parents can afford the fee increases, so pupils may be withdrawn from special education, creating another funding gap. So down payments will be crucial. VAT law is rarely clear or logical, and the correct accounting treatment can override the terms and conditions of many upfront charging schemes. Schools will be able to reclaim VAT on historical and ongoing expenses and may be able to reduce fees and thus pass on less than 20%.