Autumn Budget 2024 – VAT and Plastic Packaging Tax

On 30 October 2024, the Chancellor delivered her Autumn Budget confirming the widely anticipated policy shift, that private schools in the UK will be subject to 20% VAT on fees for all school terms starting on or after 1 January 2025, including any pre-payments of fees made from 29 July 2024.

Additionally, for businesses subject to Plastic Packaging Tax (PPT), the government has confirmed that the PPT rate (which stands at GBP217.85 per tonne, effective from 1 April 2024) will increase in line with Consumer Price Index (CPI) inflation for 2025-26, and that businesses will be permitted to use a mass balance approach to evidence recycled content in chemically recycled plastic.

 

Private Schooling in the UK to be VATable from 1 January 2025

The UK Chancellor had previously announced that, starting from 1 January 2025, private school fees in the UK will be subject to 20% VAT. This marks a significant policy shift, as private schools have traditionally been VAT-exempt.

The government communicated this change in policy on 29 July 2024, through which it projects to generate between GBP1.3b and GBP1.5b annually which it intends to reinvest in state school education. The government had at the time published draft changes to VAT legislation and an Explanatory Note for technical consultation until 15 September 2024, inviting feedback from stakeholders on specific questions . Over the past few months, stakeholders raised several practical concerns, requested exemptions, and sought clarifications. For example, there were requests for properly defining the meaning of “private school” as well as “closely related” goods and services that may still be exempt. The ATT and CIOT had also called on the government to delay the implementation until September 2025 to give private schools (who have never had to worry about VAT) more time to adapt to new VAT accounting and compliance requirements, given that schools will suddenly be thrust into complex VAT compliance issues like partial exemption and the capital goods adjustment rules on little notice.

Despite numerous calls for a delay, the Chancellor has today unveiled the amended legislation, confirming the removal of VAT exemption for terms commencing on or after 1 January 2025, and extending exemption to certain schools / services following the technical consultation.

Key points from the amended legislation unveiled today:

• Effective Date: All education services, vocational training, and boarding services supplied by private schools will be subject to 20% VAT from 1 January 2025.
• Pre-Payments: To prevent parents from avoiding the additional VAT cost, any pre-payments of fees made from 29 July 2024 for school terms starting on or after 1 January 2025 will also be subject to 20% VAT.
• Exemptions: Following the technical consultation, the government has extended the exemption to certain providers/services. Supplies that will still be VAT-exempt include:
  • school meals, transport, and books and stationery, as “closely related” goods and services
  • private nurseries
  • the teaching of English as a foreign language
  • the provision of a Higher Education course
  • education provided by Further Education colleges
  • Independent Training Providers and Independent Learning Providers, i.e. providers that contract with, and are paid by Secretary of State, Medr (Commission for Tertiary Education and Research), the Department for the Economy in Northern Ireland, or Skills Development Scotland for providing education
• Despite calls for further exclusions from the VAT charge, the government has not extended the exemption to small faith schools, international schools and performing arts schools that offer full-time education to children of compulsory school age and/or 16-19 year olds.

The up-side is that private schools will, for the first time, be able to recover VAT on their costs (such as building works, IT equipment, rents, grounds maintenance, and overheads). This means they should not need to pass on the entire 20% VAT to parents. However, they will need to register for VAT, correctly classify VATable and exempt services, and take measures to maximize VAT recovery on costs to reduce the financial impact on both the schools and the parents. Additionally, schools will face significant administrative costs to update their accounting systems and ensure VAT compliance, adding to the financial burden. Considering all of these factors, the overall increase in fees for parents, including the VAT, is still expected to be substantial with some schools deciding to pass on the full 20% to parents, notwithstanding the right to partial input VAT recovery, and others passing on part of the VAT burden. The government says in its Policy Paper on 30 October that on average it expects private school fees to rise by 10% .

An area of debate remains whether prepaying fees prior to 29 July 2024 was successful in avoiding VAT. HMRC argue that to remain VAT-exempt, the prepaid amounts must be clearly linked to a particular term and could not be an undesignated payment. The right to a repayment (in the event of the pupil leaving) could also undermine the treatment of the payment. Any penalties and interest will fall on schools unless they have been passed on to the parents contractually and schools should now take advice to ensure their arrangements will not leave them vulnerable to challenge.

It has been reported that the number of children in private education has dropped. Wales is worst affected with a reported 5.2% drop, and otherwise it is reported the smallest schools are the worst hit. Legal challenges by parents with special needs children are reported. Further, private schools warn that this policy could make education less accessible, leading to increased pressure on state schools. The end of business rate relief for charitable schools will further strain their finances, impacting their ability to invest in educational quality.

It remains to be seen what the impact of the announcements will be.

 

Plastic Packaging Tax –Increase in Rate and Mass Balance Approach

For businesses subject to PPT, the Chancellor has confirmed the following.

The government will increase the PPT rate for 2025-26. PPT was initially introduced in the UK on 1 April 2022 at GBP200 per tonne, the rate was increased to GBP210.82 from 1 April 2023 and to GBP217.85 from 1 April 2024. With the announcement on 30 October, the rate will be increased again for 2025-26, in line with the Consumer Price Index (CPI) to maintain the real terms value of the tax and continue to incentivize the use of recycled plastic in packaging.

Businesses will be allowed to use a mass balance approach to evidence recycled content in chemically recycled plastic. Plastic packaging components containing at least 30% recycled plastic are exempt from PPT. Both mechanically and chemically recycled materials can contribute to this threshold. Due to the nature of chemical recycling, it is not always possible to determine the exact amount of recycled material in a specific output. A technical consultation in July 2023 sought views on allowing a mass balance approach for accounting for chemically recycled plastic in PPT. The government has now confirmed that the mass balance approach will be permissible. When these changes are introduced, pre-consumer waste will no longer be classified as recycled plastic for PPT purposes. HMRC will undertake technical engagements before confirming when these changes will take effect, and draft legislation will be published for technical consultation.

 

Should you have any queries on the Autumn Budget, please reach out to your usual UK tax contact or one of the following.