Date updated: Thursday 1st August 2024
We are now less than a month into the new Government and proposals for the removal of exemptions from business rates and from VAT have already been brought forward, with the intention that VAT will become chargeable with effect from 1 January 2025, and business rates from 1 April 2025. There have been plenty of other policy developments over the last few weeks, so here are our top tips for independent schools as we enter a period of significant change, challenge and adjustment.
Contrary to the original indication by Labour that they would not impose VAT part way through an academic year, schools will now need to charge VAT on fees with effect from 1 January 2025 (schools are advised to await further information on how to register if they are not already). This will apply to all education services and vocational training supplied by a private school, or connected person, including boarding services and extra-curricular activities outside of school hours and in holidays. Note the reference to connected persons, which is intended to prevent the use of subsidiary companies to make separate supplies of services potentially outside of the VAT regime. However, VAT will not be chargeable on meals, transport, books and stationery, nor will VAT be chargeable for nursery provision, non-maintained special schools, wrap around childcare, or childcare-based (rather than education-based) holiday clubs. Local authorities will be able to reclaim the VAT where pupils with EHCPs have funded places at independent schools.
The Government realises the administrative burden that this will bring, and has committed to provide support to schools, many of which will not have been previously registered for VAT. They have also made it clear that they expect schools to look carefully at their costs and not to simply look to pass the full amount of the net VAT charge to parents. This is clearly all well and good, but it very much depends on the individual circumstances of schools as to their ability to absorb any of the VAT increase or to make savings.
Now is therefore absolutely the time for schools to review and finalise their approach to VAT and to consider and finalise the extent of any structural or operational changes which may need to be made. However, the timing does not align with what has recently been expected, so schools may well need to plan for changes in stages, recognising that changes in this next academic year may be difficult or impossible to implement at such short notice.
Schools are advised to write to current parents to inform them of the Government announcement, further to which VAT will be added to fees as of 1 January 2025. It is important that schools check their current fees schedules/fees information pages and any relevant references in outward facing information on the school’s website or other marketing materials, since any reference to fees should be clear that fees currently listed are exclusive of VAT, otherwise they may be deemed to be inclusive. It may also be sensible to check the terms of the school parent contract in relation to the definition of fees, which may need to be revised in due course.
Fees invoiced or paid on or after 29 July 2024 which relate to school terms after 1 January 2025 will be subject to VAT. The headline is that fees paid before 29 July 2024 will not incur VAT. However, the technical note goes on to say that in many cases the structure of FIA schemes is such that the tax point has not yet passed, i.e. the detail of the terms to which the payment applied was not set, then the validity of lump sum payments already paid will be scrutinised and potentially challenged by HMRC. It is clear therefore that such schemes will come under scrutiny, so schools should now check with their accountants/solicitors as to whether they believe payments made under existing schemes may be at risk.
This potentially has less of an impact financially on schools than the removal of VAT exemption, but consideration should be given now to the impact of the removal of the business rates exemption from 1 April 2025. Note that there have been statements made about rates for those schools providing education for children with EHCPs, but there is no detail on this currently – watch this space.
This may be a time to ensure that there is close engagement with current parents, to understand their position, and understand where any financial difficulties may arise. This is particularly the case as VAT has been implemented earlier than many anticipated. Some schools have experienced an increase in parents enquiring about the possibility of bursary or hardship assistance, and it may be worth reviewing the school’s policies and procedures in this regard, including being aware of the restrictions around the ability to allow payment over an extended period (whilst the child remains at the school, rather than when it has crystallised as a debt), so that the school could not be seen as extending credit.
Schools should also be planning for the proposed employment law and practice changes, including in particular the following:
In their manifesto, the Government indicated an intention to make unfair dismissal a “day 1 right” – this is in contrast to the current position that employees cannot make an unfair dismissal claim until they have completed two years’ continuous service. Labour has indicated that probationary periods can still operate, although there is no detail around this. In anticipation of this, we recommend:
- Recruitment
- Review your recruitment processes: could they be more robust?
- Consider your recruitment timeline: is there sufficient time to follow up on references?
- Probation
- Review your employment contracts: do you currently have probation clauses?
- Do you have a probation policy or procedure?
- Are managers properly trained in managing probationary periods?
- Is the induction process adequate?
- Risk management
- Do you have insurance for tribunal claims?
Labour has stated an intention to end “fire and rehire” (also known as dismiss and reengage). As anyone who has been through TPS consultation will know, “fire and rehire” is an option available to employers if agreement cannot be reached on changing terms and conditions. As yet, there is little detail on how the policy will be implemented, and we can expect push-back from businesses. Nevertheless, given this policy may limit an employer’s ability to change terms and conditions, it is worth reviewing existing terms and conditions, particularly in the context of VAT and increased costs, to determine whether changes, and in turn savings, can be made. Consideration could be given to:
- Working hours;
- Sick pay entitlement;
- Pension entitlement; and
- Duties, and whether they can be extended.
Labour have pledged to introduce a School Support Staff Negotiating Body. Whilst this is likely to only apply in the state funded sector, any improvement to support staff terms and conditions will likely require reaction from independent schools in order to retain and attract staff. It is worthwhile undertaking an audit of support staff pay and conditions, particularly in comparison with current Green Book provisions. This would also provide an opportunity to address any unresolved holiday issues arising from the Harpur decision.
We are expecting a strengthening of trade union rights from the Labour Government. Whilst traditionally the trade unions have not been particularly active in the independent school sector, in recent years, particularly as a result of TPS consultations, union activity does seem to be increasing. It is therefore worthwhile considering whether positive steps can be taken to reduce the influence of unions in school. In particular, exploring options to accommodate the “staff voice”, for example with the use of employee councils or other positive staff engagement opportunities, may remove the “need” for union representation.
Labour have expressed a wish to make the National Minimum Wage (NMW) a “real living wage”, and further remove the age bands for current NMW rates. It would be prudent to undertake a pay audit to determine how many staff are on or around NMW, and in turn how any increase would impact on costs. It is also worth reviewing any outsourcing agreements (for example cleaning and catering) to determine whether the supplier bears the cost of increases, or whether they are passed back to the school.
For more information, please get in touch with our specialist Independent Schools Team.