ETON PARENTS RUSH TO PAY SCHOOL FEES IN ADVANCE AS TAX HIT LOOMS

(Bloomberg) -- Some parents at Eton College, the elite British boarding school which has taught generations of UK prime ministers, are paying for years of education upfront in an attempt to protect themselves from a hefty tax bill should the Labour Party win the general election July 4.

New contracts for prepaid fees at Eton jumped to a total value of £10.1 million ($12.8 million) last year — almost a fourfold increase from £2.64 million in 2022, according to Eton’s financial statements filed with the Charity Commission.

Labour, which is projected to win a huge majority when UK voters go to the polls, has said it will scrap elite UK private schools’ tax-exempt status, requiring parents to pay a 20% value-added tax on their fees. Keir Starmer’s opposition party plans to channel the additional tax income into the country’s state school system, recruiting around 6,500 new teachers, increasing training for educators and moving forward with other school initiatives. 

While the proposed policy has spurred opponents to warn that some families barely able to afford tuition will have to pull their children from private schools, the super-wealthy are now looking for ways to dodge the planned VAT increase, at least temporarily. Although prepaid-fee plans have existed at Eton for at least 75 years, last year’s jump was notably larger than in any other period in a decade. 

An increase on that scale “must be down to VAT,” said Dan Neidle, a tax expert and founder of Tax Policy Associates, an independent think tank. “The basic idea of the advance-fee schemes is that, by paying several years’ fees in advance, the time of supply is now, and parents can ‘lock in’ today’s VAT rules and be entirely unaffected by any subsequent imposition of VAT on school fees.” 

A representative for Eton declined to comment on the surge in new prepayment contracts.

If a payment is made before a service is supplied, VAT is normally charged at the point of payment. Theoretically, it’s possible to get ahead of a future change in VAT rules if money for multiple years of fees is set aside in advance.   

“There’s a huge chance of getting away without paying the VAT payment if you pay in advance,” said Akwasi Duodu, founder and managing director of wealth-management firm Sterling & Law. Some clients have already taken such action, he said, adding that potential attempts by Labour to retroactively recoup the tax on prepaid fees would be “hugely unpopular.”

But paying in advance is no guarantee for avoiding the proposed tax hike, Neidle said. If there’s a chance of a significant loss of taxes through prepayment plans before legislation is passed, HM Revenue and Customs could challenge some of them.

“The whole situation is fraught with uncertainty,” said Malcom James, lecturer on taxation policy at Cardiff Metropolitan University. The parents who are prepaying fees are “accelerating the tax point, but I don’t think anyone has tried to accelerate it by this amount of time before.”

Filings with the Charity Commission show that parents at Eton — or The Kynge’s College of Our Ladye of Eton Besyde Windesore, as the school is officially known — are outliers in signing new contracts for prepaid plans in a significant way. At other private schools long associated with the ruling class — including Rugby, Shrewsbury and Charterhouse — new prepaid-contract totals either fell last year or rose by far smaller amounts.

Windsor-based Eton, which educated Prince William and the Duke of Sussex, is one of the most prestigious schools in the world. For those without financial aid, parents shell out at least £50,000 per year to send a child to Eton.

Shadow Chancellor Rachel Reeves suggested last week that Labour would not impose VAT on private-school fees until at least 2025 if the party wins the general election.

“We’re not going to have a retrospective tax,” she told The Times CEO Summit. “I don’t think that would be the right thing to do. So these changes would be in our first budget, but they would come in after that, not retrospectively.”

Labour has long said it will clamp down on some of the privileges enjoyed by the UK’s private schools, which educate about 7% of schoolchildren in the UK but typically offer a significant advantage in terms of accessing top universities and jobs. Still, the party last year reversed plans to scrap private schools’ charitable status completely, allowing them to keep some tax breaks.

The VAT increase has been one of Labour’s most-discussed policies, with concerns raised that the change will primarily impact parents who can barely afford fees while wealthier parents will simply absorb the higher costs. Some schools say they’ll have to cut bursary programs that help low-income families access private education should the party follow through on charging schools a VAT. The Institute for Fiscal Studies, however, predicts little impact on private-school enrollments.

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2024-06-28T04:23:05Z dg43tfdfdgfd