HMRC could claw back millions in tax from parents

Parents who paid private school fees in advance to dodge Labour’s new VAT levy could be hit with unexpected tax bills, experts have warned.

More than £500 million was handed over in upfront payments to elite schools last year as wealthy families raced to beat the 20% VAT charge that took effect in January.

But leading tax advisers now say those families could still be landed with VAT demands in the coming years - if HMRC decides their prepayment arrangements were not legally watertight.

Dan Neidle, a former tax partner and founder of think tank Tax Policy Associates, said VAT should normally be levied and paid at the time a service or product is delivered, rather than in advance.

He said: “The question is whether HMRC will be challenging these.”

Mr Neidle added: “It is absolutely possible that some parents will have to pay VAT in 2026 or 2027 when the education is delivered.”

Introducing VAT on private school fees is expected to raise £1.8 billion a year by 2029, with Labour pledging to use the proceeds to fund improvements in the state education system, including the recruitment of more teachers.

Private schools such as Eton, Brighton College, and Winchester saw staggering surges in advance payments in 2024, according to new filings.

Eton raked in £52.7 million, Brighton College took £50.1 million, and Winchester saw prepayments leap from £4.4 million in 2023 to £19 million.

Analysis suggests that the top 50 independent schools received £515 million in advance fees last year - more than four times the £121 million taken the year before.

The spike came after Labour confirmed that VAT would be slapped on private school fees if it won the general election, triggering panic among parents and a flurry of offers from schools to accept multi-year prepayments.

But experts say not all such deals may pass the test. Unless the fees were contractually fixed, and invoiced properly before the VAT cut-off, HMRC could rule that VAT still applies when services are delivered.

Some schools, like Wellington College, have explicitly told parents they “can’t guarantee” that the fees will be VAT-free, depending on how HMRC interprets the arrangements.

At the same time, dozens of smaller independent schools have already closed, citing financial pressures and uncertainty over the VAT policy. According to sector figures, more than 50 private schools have shut down, and insiders fear up to 100 more may go under within three years.

A government spokesperson said: “The independent OBR forecast includes assumptions for increased use of prepayment schemes by parents.”

Labour says the policy is about “levelling the playing field,” and raising money to support the more than 90% of children educated in state schools.