Many parents thought they had beaten the system by paying their children’s private school fees upfront to dodge this year’s VAT hike.
But now, HM Revenue and Customs (HMRC) is preparing to scrutinise those advance payments — and families could find themselves with an unexpected bill.
How the Rush to Prepay Began
Advance fee schemes have existed for years in the private school sector, allowing parents to pay several years of tuition upfront, often at a discount.
But things changed dramatically after Labour’s manifesto announced the end of VAT exemptions for private schools — a 20% tax hit that came into force in January 2025.
From December 2023 onwards, demand for these schemes surged.
Parents hoped that paying in advance would lock in tax-free fees before the change kicked in.
At the country’s top 50 private schools alone, advance payments reached £515 million last year — more than four times the £121 million recorded the year before.
Billions at Stake for Families and Schools
The Treasury could have missed out on as much as £103 million in tax from those top schools alone. Nationwide, the figure could be much higher.
But HMRC believes some of these schemes may still be liable for VAT because of how they were structured — particularly those that acted more like a deposit than a full payment or were hastily set up just before the tax deadline.
Officials have told the Telegraph they will “carefully scrutinise” these arrangements.
Investigations could take years, but the consequences might be severe.
If VAT is found to apply to the year fees are invoiced, parents who thought they had sidestepped the tax could be facing large, unexpected bills.
Legal Battles on the Horizon
If HMRC does pursue backdated VAT, it could trigger messy legal disputes.
Parents may argue that schools misled them about the benefits of prepayment.
In turn, schools could be dragged into court over who should cover the tax — the parents or the institution.
Tax experts are already warning of the uncertainty.
Alex Pugh, a financial planner at Saltus, said many parents began making strategic advance payments as far back as December 2023, but “the efficacy of these schemes is now in doubt.”
He noted that two in five parents are already planning changes to their child’s education before the September term, and that number could grow if the taxman closes in.
The Government’s Stance
The government has already tried to curb the rush by making any prepayments after July 29, 2024, subject to VAT.
But that didn’t stop millions being paid in beforehand.
A government spokesperson said the Office for Budget Responsibility had already factored the prepayment surge into revenue forecasts.
Removing the private school VAT break is expected to raise £1.8 billion annually by 2029/30 — money the government says will fund 6,500 new teachers and improve standards in state schools, which educate 94% of UK children.
A Tax Change That Can’t Be Avoided
Experts warn that, no matter the outcome of these investigations, the long-term financial pressure on private schools is here to stay.
If HMRC succeeds in clawing back VAT from past advance fees, both parents and schools could be hit hard — and the legal wrangling could last for years.