Tax authorities are planning to review early payment deals at private schools after it emerged that many wealthy families paid large sums upfront to avoid the new VAT on school fees.
HM Revenue and Customs will be looking into schools where parents paid for several years of tuition in advance, dodging the 20 per cent VAT that came into force in January 2025.
Officials believe some of these arrangements may not meet tax rules and could still be taxed, even though the payments were made early.
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It comes after reports showed that upfront payments at the UK’s top 50 private schools hit £515million last year, up from £121million in 2023.
Government insiders indicated that the tax authority would conduct thorough examinations of these pre-payment arrangements, particularly where concerns exist about potential misuse to circumvent VAT obligations.
Financial records showed that Eton College's advance payment programme expanded from £16.6million in 2023 to £52.7million last year, ahead of the institution's annual charges rising above £63,000.
Brighton College, which charges the highest fees in Britain, saw its pre-paid tuition funds increase from £4.1million to £50.1million over the same period.
The Chancellor, Rachel Reeves, declared on July 29, 2024 that advance payments made from that date would attract VAT.
However, the analysis revealed that families had already transferred millions in upfront payments before this announcement, hoping to escape the new charge.
More than 50 private schools have closed since Labour imposed VAT on private school fees | PAThe advance payments at the 50 largest independent schools alone could represent approximately £103million in foregone tax revenue, potentially undermining the Treasury's projections for income from the VAT policy.
Internal Treasury documents obtained by The Telegraph indicate that ministers anticipate protracted legal proceedings between the tax authority and independent schools over the matter.
A briefing prepared for the Chancellor's team last summer stated that "the more egregious the [prepayment] scheme, the more easily we would expect HMRC to be able to recoup the revenue".
Whitehall sources suggest investigators will focus on institutions that hastily established advance fee programmes before the policy took effect, or those operating arrangements resembling deposits rather than genuine pre-payments.
Christian schools seeks exemption from Labour's 'oppressive' VAT raid | GB NEWS/PAFor advance payments to qualify as legitimate, they must be contractually linked to specific services at predetermined prices, rather than representing undefined amounts for future allocation.
This requirement could affect numerous prestigious schools that accepted upfront payments in return for "credits" against undetermined future fees.
Treasury guidance provided to ministers in July warned: "We expect this to lead to some litigation between HMRC and affected schools, but also disputes between schools and parents over who ultimately bears a potentially unexpected VAT liability."
Tax specialists warned that families could receive demands for substantial unpaid VAT bills years after making their payments.
Tax investigations by HMRC typically require several years to conclude
| GETTYDan Neidle, founder of Tax Policy Associates, explained that whilst schools would technically bear responsibility for unpaid VAT, "schools' terms and conditions usually say parents have to pay".
He added: "But parents would be in a good position to contest this, and say they weren't warned about the risk, the school structured the arrangement wrongly, and so they won't pay."
Tax investigations by HMRC typically require several years to conclude, potentially leaving families facing extended legal disputes regarding their children's education costs.