VAT on fees – looking at the year ahead

Courteney Donaldson looks at how the school sales market could be affected by VAT on fees

By Courteney Donaldson. 1 week ago

4 minute read

Courteney Donaldson, Christie and Co
Sponsored

The year 2024 has been a significant one for the independent school sector – from the anticipation of a general election and the eventual “landslide” Labour victory in July, to Chancellor Rachel Reeves’ autumn budget confirming that VAT on private school fees would be introduced in January 2025.

This, combined with increasing Capital Gains Tax (CGT), National Insurance (NI) and National Living Wage (NLW), and the removal of business rates relief for independent schools from April 2025, is expected to have a major impact on the sector going forward.

Market impact in 2024

While each new year ordinarily sees a surge in buyer and investor activity, this pledge has increasingly been at the forefront of many independent school buyers, investors and funders’ minds since the start of this year.

One of the most significant unknown variables will be parental reactions and behaviours.

In the first six months of 2024, in the run-up to the General Election, while there continued to be a fair amount of market activity, buyers have been much more selective when appraising new opportunities to buy independent schools, merge or indeed create formal partnerships with other schools.

Mindful of Labour’s intention to remove VAT exemption on school fees, buyers sought to appraise what impact such a policy could have on independent schools, most notably on pupil numbers and a school’s financial sustainability and forward-looking prospects thereafter.

Future-proofing

For many schools, no matter how well prepared they may be, in striving to mitigate the potential risks presented by this structural policy change, one of the most significant unknown variables will be parental reactions and behaviours. A key factor will be how schools implement and/or communicate changes and the impact of those changes on existing and new pupils with parents.

Many schools have reported new enrolments in September 2024 being lower than forecast.

Every school is different in terms of location, size, demographic, unique selling points, reputation, relationship and degree of “goodwill” held with parents. They will be unique in terms of the nature of operations and financial capabilities regarding financial sustainability, earnings/surplus generated and reserves. All of those above, plus many further factors and considerations will feature in each school’s own strategic plan regarding VAT implementation.  

Many schools that we work with have reported new enrolments in September 2024 being lower than initially forecast. What is yet to be seen is whether some schools see a surge in parents serving a term’s notice in the autumn term ahead of VAT introduction in January 2025 – much will depend on decisions made by schools and communications in this respect with parents.

Looking at the year ahead

Many schools continue to work through the details, ahead of implementation in January 2025. However, it’s important to note that every school is different, and the impact of these changes will vary between schools. Large prestigious schools are likely to fare significantly better than some smaller provincial schools, as are schools serving large ECEC cohorts and those supporting children with ECHPs.

We would not anticipate any shortage of buyers for those schools that do close.

Looking ahead at market predictions in the short to medium term, we see something akin to the trend seen over the past few years in the UK’s early years education market: In locations where schools close, other schools in those vicinities could be well-positioned to take on pupils and indeed staff, thus bolstering their pupil rolls which will aid their financial sustainability.

Based on the sales processes we have successfully facilitated over the past five years, we would not anticipate any shortage of buyers for those schools that ultimately do close, especially those that own land and buildings held on unencumbered freeholds.

Despite this, buyer appetite remains. While change can be potentially daunting, it can also bring new, strategic opportunities and for these reasons, we expect to see continued interest from established buyers and new entrants alike.

If you’d like to hear more about the UK Childcare & Education market or to have a confidential chat about your business, contact Courteney Donaldson: / +44 7831 099 985