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Advance Payment Schemes and VAT on Private School Fees Explained


As the proposed 20% VAT increase on private school fees looms, many parents are
understandably concerned about the financial impact. One strategy gaining popularity is the use
of advance payment schemes. However, while these schemes may seem like a potential
solution, they come with significant risks and complexities. In this article, we delve into the
details of advance payment schemes, the potential challenges posed by HMRC, and provide
guidance for parents considering this option.

Yet Another Thing for Parents to Worry About

Advance payment schemes have been part of the private school landscape for some time,
albeit with limited usage until recently. These schemes allow parents to pay for future tuition
fees upfront, often at a discounted rate. The funds are held in a separate account and drawn
down each term to cover the fees, acting more like a deposit rather than locking in the tuition

Recently, the adoption of these schemes has surged as parents seek to circumvent the
impending VAT increase. However, it is crucial to recognise the potential pitfalls and challenges
that may arise from HMRC scrutiny.

Legislative Ambiguity and Timing

One of the primary challenges surrounding the implementation of VAT on private school fees is
legislative ambiguity. HMRC holds the authority to introduce anti-forestalling measures, which
are designed to prevent taxpayers from avoiding new taxes by accelerating transactions before
the tax comes into effect. Such measures could specify that any prepayments made within a
certain period before VAT implementation will still be subject to the new tax, thus negating the
benefits of advance payment schemes.

Continuous Supply Rule

Under VAT law, education services are typically classified as continuous supplies, meaning VAT
liability is determined at the time the service is provided, not when the payment is made.
Therefore, even if parents pay for several years of tuition upfront, HMRC may argue that VAT is
due at the time each term’s education is delivered. This interpretation poses a significant risk, as
it undermines the fundamental premise of advance payment schemes.

Specific Identification of Services

For advance payments to be exempt from VAT, the services being paid for must be precisely
identified at the time of payment. While tuition fees generally qualify, complications may arise
regarding what is covered by these fees over multiple years. Any changes in the curriculum,

additional services, or adjustments in school policies could complicate the application of this
rule, giving HMRC grounds to challenge the scheme.

Anti-Avoidance Provisions

HMRC has a track record of implementing anti-avoidance provisions to address schemes
designed to circumvent tax obligations. These provisions could be broad and stringent,
specifically targeting arrangements that appear to be set up to avoid the new VAT charge. If the
government perceives advance payment schemes as a widespread tax avoidance tactic, it
could introduce specific legislation to counteract these efforts. Such provisions would likely be
retroactive, capturing any prepayments made in anticipation of the change.

Financial and Legal Risks

There are broader financial and legal risks associated with advance payment schemes:

Financial Viability of Schools: If a school faces financial difficulties or closure, parents risk losing
the prepaid fees. It is crucial to consider refund policies and the financial health of the institution.
Legal and Administrative Burdens: Schools need to ensure their contracts with parents are
airtight and comply with any potential future VAT obligations. This involves legal scrutiny and
possible adjustments to terms and conditions, adding administrative burden. If HMRC
challenges the schemes, it could lead to long legal battles and significant financial uncertainty
for both schools and parents.

What Parents Need to Know

The team at GJ believes that while advance payment schemes may appear attractive as a
solution to the impending VAT on private school fees, the associated risks must be carefully
considered. The legislative ambiguity, continuous supply rule, need for precise identification of
services, and potential anti-avoidance provisions all contribute to the complexity of these
schemes. The team recommends that parents and schools proceed with caution, stay informed
about legislative developments, and seek professional advice to navigate these challenges

FAQs Answered by Chris Wood, Director

In response to a series of messages from concerned parents, we took a moment with our
director and accounting expert, Chris Wood, to address your most frequently asked questions.
His insights aim to provide clarity and reassurance as you navigate this complex issue.

1. How do advance payment schemes for private school fees work?

Advance payment schemes allow parents to pay tuition fees upfront, often at a discounted rate.
The money is held in a separate account and drawn down each term to cover the fees. These
schemes do not lock in tuition prices but act more like a deposit against future invoices.

2. What are the potential risks associated with using an advance payment scheme?

Risks include financial loss if the school faces difficulties or closure, complications if HMRC
introduces anti-forestalling measures or challenges the scheme, and legal or administrative
burdens in ensuring compliance with future VAT obligations. Parents must also consider
changes in school policies or curriculum that could affect the prepaid services.

3. How might HMRC’s anti-forestalling measures impact advance payments?

HMRC can implement anti-forestalling measures to prevent tax avoidance by making advance
payments. These measures could stipulate that prepayments made within a specified period
before the VAT implementation are still subject to the new tax, negating the benefits of the

4. What legal steps should I take before participating in an advance payment scheme?

I can’t stress enough that parents should ensure that their contracts with the school are legally
sound and comply with potential future VAT obligations. This may involve seeking professional
legal advice, understanding the terms and conditions thoroughly, and ensuring there are clear
refund policies in case of financial issues or changes in school operations.

5. Are there alternative ways to mitigate the impact of the proposed VAT on private
school fees?

Alternatives include financial planning tools, budgeting for potential cost increases, exploring
scholarships, grants, or financial aid options, and possibly negotiating payment plans with the
school. Consulting with a financial advisor can also help parents develop a strategy to manage
the increased costs effectively.

At Grenfell James, our expert accountants are ready to help you make informed decisions that
benefit your financial health. Contact us today to discover how we can support you through
these challenging times and provide tailored advice for your specific situation.

Grenfell James Technology Adoption Index

How does your business perform against others adopting financial tech? Find out with our interactive diagnostic:


How does your business receive invoices?


Invoices are mainly received in paper form


Invoices are mainly received by email


Invoices are emailed then automatically forwarded to a designated mailbox


How are purchase invoices processed?


Invoices are entered manually


Invoices are attached to manually raised invoices


Automated software (e.g. ReceiptBank, 1Tap, HubDoc etc) collates invoices


How are accounts processed?


Using Excel/paper-based


Using Computer-based, offline software


Using cloud-based accountancy software


How often is business data revised?


Data is updated annually


Data is updated quarterly


Data is updated monthly or more often


How is banking updated for your business?


Banking is updated manually


Banking is updated by imports


Banking is updated via a live feed


How are bank payments made?


Bank payments are manual


Bank payments are made using bulk imports


Bank payments are made directly via accounting software


How are bank receipts reconciled?


Receipts are chased and reconciled manually


Receipts are chased and reconciled automatically


A third-party platform is used to chase debts and collect fees


How often are management reports produced?


No reports are provided


Reports are provided but often too late to be valuable


Reports are automated with real-time information

Score 8-12:

Curious Exploration

Your financial technology phase is Curious Exploration

% of respondent businesses are in this phase too.

Switching accountancy systems may seem like an upheaval, but can be much more straightforward than most businesses imagine. From talking to our clients, they have found moving from paper invoicing and desktop-based accounting software to the cloud and apps quickly makes the transition process a worthwhile investment of time. Digital accounting solutions bring in streamlined processes, up-to-date business data and greater confidence in the accuracy of information when making financial decisions.

Grenfell James works with your team to fully assess the needs of your business and minimise the impact of any transitions for solutions we recommend.

Find out more about App Advisory


Score 13-19:

Measured Discovery

Your financial technology phase is Measured Discovery

% of respondent businesses are in this phase too.

Once cloud accountancy software is in place, there’s still plenty of scope to improve your accountancy processes and make sure your business is maximising the benefits of adopting a digital accounting solution. Grenfell James assesses each business to understand how any implemented solutions are being used, identify areas for improvement and the needs of the business overall to support your business goals and achieve success.

Our team of experts can discuss a range of time-saving automation and get different apps and cloud-based solutions talking to create and manage a digital accountancy eco-system to help your business grow.

Find out more about App Advisory


Score 20-24:

Bold Innovation

Your financial technology phase is Bold Innovation

% of respondent businesses are in this phase too.

You know the benefits of accounting technology and the impact it can have on your business goals. If you want to take it a step further, our team can conduct a systematic review of your processes, apps and business goals to ensure your digital accountancy ecosystem is keeping pace with the changing needs of a growing business.