But before sticking my head above the parapet, I will return to the first of these (to date) articles when I ventured into political punditry for the first time to speculate on how long schools might have to prepare for VAT on school fees and own up to losing the 50p bet I had on there being an Autumn General Election in October.
Rishi Sunak caught me completely off guard (along with, by all accounts, many of his own Party), as- at the time of writing this we are now five days after the election. October may still be significant, though now in the context of when the first Budget for the new Government is held.
But to return to Fees in Advance, schemes allowing for the payment of school fees in advance have been around since before VAT was invented. The advantage for parents was, in most cases, a small discount on school fees. For the school, it provided access to a pool of money which was cheaper than bank borrowing.
Other motivations included using bonuses to pay for school fees where a person had exceeded the limit for pension or ISA contributions, grandparents wishing to help out their children, or parents taking advantage of a windfall, such as an inheritance.
Since the possibility of VAT being introduced on school fees became more likely, the question of whether paying in advance could beat a VAT charge also became part of the equation.
The technical answer
Technically the answer is yes. The VAT legislation contains provisions which determine when a supply is made. There are good reasons for these, not least so a taxpayer knows when they have to declare VAT, i.e. the return when the supply was made.
The starting point for services is that a service is deemed to be made when it is performed. But the legislation goes on to say that if before that time, a VAT invoice is issued or payment is received, then the legislation says that the supply is deemed to be made at the earliest of these three dates:
- Date of performance of service.
- Date of issue of the VAT invoice.
- Date of receipt of payment.
With a service like education, which is performed over a period of time, the use of the date of performance to set the time of supply becomes even more problematic. The VAT regulations deal with “continuous supplies of services” in Regulation 90, which again refers to the date of issue of a VAT invoice, or the date of receipt of payment, as crystallising a time of supply to the extent covered by the invoice or payment.
But that’s the wrong answer!
From the point of view of an incoming Labour administration, that is unlikely to be welcome so the question of what, if anything, can be done about it remains.
It seems to me there are three possible lines of attack, retrospective legislation, a novel interpretation of existing legislation, or an attack on VAT avoidance grounds. If we look at these in turn my thoughts are as follows.
Retrospective legislation
This obviously cannot be ruled out, but shortly before the Election, the then Shadow Chancellor, Rachel Reeves, indicated that she had no intention of introducing retrospective legislation. If this commitment is adhered, then it deserves credit for being both morally right and also pragmatic.
From the moral point of view, to retrospectively penalise somebody for doing something which is entirely legal at the time they do it just doesn’t seem right.
But from the pragmatic point of view, realistically how much VAT will not be paid if parents do choose to pay in advance? I suspect the answer is not very much since it will only be the very wealthiest people who can choose to make payments in advance for many years. Some might be able to dip into savings, or remortgage to pay a year or so. But far more will simply not be able to afford to pay in advance as they struggle to afford the fees anyway.
Secondly, retrospective legislation is unlikely to be easy to achieve. There are two aspects to this. Firstly, human rights legislation guarantees an individual the right to the peaceful enjoyment of their possessions. There is a carve out which allows governments to take away your possessions in the form of taking money through taxation. But it is far from clear that the European Court of Human Rights (ECHR) would allow this to extend to giving a government the right to retrospectively impose a tax, and Labour, unlike the Conservatives, are unlikely to leave the ECHR.
The other UK Courts might also have something to say about this, as VAT remains largely governed by EU VAT legislation and this extends to what is now referred to as assimilated EU case law. The case which seems likely to be relevant here is that of Marks & Spencer [Case C-62/00]. The current time limit for correcting errors is four years, but prior to 1995, it was six years. HMCE (now HMRC) was concerned about the possible impact of a case going through the European Court of Justice (ECJ) and shortened the time limit from six years to three years with no notice.
The case they were concerned about came to nothing, but it did impact Marks & Spencer, who were in the process of making a claim for VAT they had overpaid on teacakes (not Jaffa Cakes!). The ECJ ruled that the Government had been wrong to shorten the time limit without an effective transitional period, as it retroactively deprived taxpayers of their right to make a claim.
Whilst the facts are different, the Court’s opposition to retrospective legislation does highlight the potential difficulties an attempt to implement it would face and it may well be that the Chancellor had concluded that for the amount of money at stake, it simply wasn’t worth trying it.
Retroactive legislation
However, whilst retrospective legislation seems to have been ruled out, retroactive legislation is highly likely in the shape of anti-forestalling provisions. This is nothing new and one only has to think back to old Budgets when we were told “fags and booze go up by a penny at midnight” for an example of an anti-forestalling provision in that the Provisional Collection of Taxes Act 1968allows for this tax to be collected, even though the Finance Bill still had to go through two readings in the Lords and Commons, and would not become a Finance Act until it had received Royal Assent, circa three months later.
For schools, what is likely to happen is that the Chancellor will make a statement announcing the date that the change in VAT legislation is to take effect from (now likely to be September 2025), and that payments made after the date of the statement, but relating to education supplied after the date of the change in legislation, will be subject to VAT.
The difference between retrospective and retroactive legislation is that in the latter you are being told in advance that something will be taxed from a future date, but with retroactive effect, as opposed to being told after the event that something you did will now be taxed.
A new interpretation of existing legislation
If payment in advance cannot be stopped by retrospective legislation, the next question is could it be stopped by a novel interpretation of existing legislation?
It seems to me that there are two possible arguments. The first of these would be to seek to argue that the time of supply rules should be set aside and that any payment received in advance should be deemed to relate to the period for which it is paid, e.g. £5,000 paid now for education in the spring term of 2026 should be brought to account in spring 2026 and is therefore subject to VAT.
A difficulty with this argument is that it is contrary to what HMRC has recently successfully argued before the Court of Appeal. The case involved was the Prudential case (Prudential Assurance Company Ltd v Commissioners for Her Majesty’s Revenue and Customs) which concerned fund management services supplied by one company in the s VAT group to another. Supplies between members of the same VAT group are disregarded, so at the time the work was done, no VAT was chargeable.
The company which had supplied the investment management services subsequently left the VAT group following a management buy out and about seven years later, became liable to receive some additional fees based on the performance of the investments it had managed. As it was now outside the VAT group, it issued VAT invoices charging VAT on the amounts it was due. The Prudential challenged this, saying that no VAT was due because the work was done at the time it was in the VAT group and HMRC supported the company that was due the performance related fees by saying VAT was due because the issue of the VAT invoice and receipt of the performance related fee created a new time of supply.
The Prudential won at both First and Upper Tribunal, but HMRC succeeded by a 2:1 majority decision at the Court of Appeal which held that the deemed time of supply created by the bonus overrode the time the actual work was done because there was no supply in respect of it at that earlier time.
It would therefore be difficult for HMRC to now argue that you can ignore what the law says unless, of course, the case is appealed to the Supreme Court and the Prudential win.
The other possible novel interpretation of the time of supply rules dates back to a case which started in the late nineties, where in anticipation of the removal of the zero-rate from certain drugs and prostheses, a company in one of BUPA’s VAT groups entered into a pre-payment scheme with an associated company. The ECJ held that for the pre-payment scheme to be effective, the specific goods or services must be specifically identified at the time the payment is made.
The question then is whether this could prevent a pre-payment from crystallising a time of supply. The difference of course is quite significant in that in the BUPA case, the pre-payment would be called off against undetermined drugs or different types of prostheses to be decided upon at a later date.
Here the payment is specifically for a supply of education, so the services have been identified at the time the payment is made.
VAT avoidance
That leaves the question of whether a Fees In Advance scheme could be attacked as VAT avoidance. The lead case here is the principle advanced in the Halifax case by the ECJ [Case 255/02] of “abuse of rights”. This allows a tax authority to recategorise a transaction which has been entered into to obtain a tax advantage which it should not be able to obtain.
In the case of the Halifax, they were seeking to reclaim VAT on costs, even though those costs were overwhelmingly used in making exempt supplies. The Court held that, where this principle applied, a tax authority could remake or recategorise the transaction to what it should have been. In the case of fees in advance, HMRC could use it to allocate pre-payments to the relevant terms after a change in legislation.
However, the key point in the Halifax case is that recategorisation only applies where a transaction is entered into solely to avoid VAT, and in the case of fees in advance, as set out above, such schemes have been around for many years and other reasons.
Clearly, some parents fortunate enough to be able to make an advance payment will do so in the hope of paying no or less VAT. But, that is not the motivation of the school for operating the scheme, or for the parents who have been availing themselves of Fees in Advance schemes before.
It seems to me that Fees in Advance schemes could only be attacked on Halifax avoidance grounds if it had been set up just for parents to avoid paying VAT and the school had been publicising it as such, but even then, the school derives no VAT advantage from it.
Conclusion
Whilst we cannot rule out an attack on payments made in advance of a change in legislation, it does seem unlikely that such an attack would be successful, and it does not look as though the new Government intends to, though they will almost certainly seek to curtail it through anti-forestalling legislation.
The real downside to this is that it does reinforce the stereotype that Independent Schools are for the very privileged who can afford to stump up tens of thousands of pounds in advance, which is far from being true for very many parents who struggle to put their children through independent schools.
Perhaps the answer to that would be for Labour to have been more honest by increasing Income Tax for the very wealthiest who will be able to afford to pay VAT on school fees, with perhaps a levy on overseas pupils who would not otherwise pay UK Income Tax.
For further advice, contact Phil Salmon directly or a member of the VAT team.
