Private Schools Face Government Crackdown Over Prepaid Fees to Dodge VAT Hike

The British government is preparing to clamp down on private school parents after a dramatic rise in early fee payments intended to dodge the incoming 20 per cent VAT on school fees. New investigations by HMRC will scrutinise how top UK independent schools handled large prepayments from families, amid concerns that advance payment schemes may have been used to illegally avoid VAT liabilities.

Private schools have reported staggering increases in prepaid tuition fees. Brighton College recorded £50.1 million in advance fee payments last year, a sharp surge from just £4.1 million in 2023. At Eton College, the UK’s best-known public school, the total money paid in advance ballooned from £16.6 million to £52.7 million over the same period. Collectively, the 50 wealthiest private schools took in £515 million in advance fees in the last year, compared to £121 million the previous year, potentially bypassing £103 million in VAT.

This rapid acceleration was triggered by the Labour Party’s pledge, outlined in its election manifesto, to impose VAT on independent school fees starting from January 2025. As a result, parents moved swiftly to pay for several future years upfront—sometimes as many as five years’ worth. However, the Chancellor, Rachel Reeves, moved to close the door in July 2024, ruling that any prepayments made after 29 July would still incur VAT.

The Treasury now expects protracted legal battles between schools and HMRC, and between parents and schools, if it is found that advance payment schemes were not set up properly. The government intends to target schools whose schemes functioned more like general deposits or vague credits against undetermined future fees. Only those arrangements that applied to a “specific service at a specific price” are likely to escape the tax. Tax experts warn that if HMRC challenges the validity of schemes, schools might ask parents to stump up the overdue VAT, leading to disputes if parents argue they were not properly warned.

North London Collegiate School is one example where advance contracts soared to £19.4 million from just £651,000 a year before. Critics argue that such schemes have enabled the most affluent families to side-step the new tax, leaving the majority to bear the burden when the policy comes into force. This has occurred in spite of Labour’s insistence that the VAT measure was designed to target only the wealthiest.

Despite the prepayment surge, the government claims the Office for Budget Responsibility has accounted for such tactics in its revenue forecasts, estimating the VAT levy will add £1.8 billion a year to the public purse by 2029-30. These additional funds are earmarked to recruit 6,500 new teachers and to improve standards across state schools, which educate 94 per cent of British children.