Independent schools roundtable: challenges and change for the sector

Heads of finance, bursars and governors at independent schools from across the South East joined Kreston Reeves on 18 October for a roundtable discussion on the changes facing independent schools.

The roundtable was chaired by Kreston Reeves partner Lucy Hammond, who captured the discussions.

Change is imminent

At a previous round table hosted by Kreston Reeves 13 months ago we discussed the wave after wave of challenges facing the sector.  The imminent introduction of VAT is likely to have a substantial impact, especially on fee structures and family decisions regarding education. It can be summed up in one word – movement.    

As fees become unmanageable for some, there will be movement of pupils out of the sector and movement within the sector itself.  

Will we see movement when families enter the independent sector – will this still be at reception, year 2, 6 or 7? Opportunities may arise for some, where the addition of VAT to fees at the more expensive, larger private schools becomes an insurmountable challenge, with pupils moving to smaller independent schools with more manageable fees.   

Families might indeed reconsider when and where they enter the independent sector, potentially leading to shifts in enrolment patterns. Larger, more expensive schools could see a decline in admissions, while smaller, more affordable independent schools might become more attractive options. This could create a dynamic environment with increased movement of pupils and possibly staff. 

There will be movement, I am sure, in terms of mergers and collaborations, which could become more common as schools seek to pool resources and navigate these financial pressures together.  

Change brings both challenges and opportunities for innovation and adaptation in the sector.  

The hot topic is VAT, and our VAT expert Rupert Moyle has shared an update on this here.

However, there are some key takeaways from the roundtable discussion to note:

• VAT registration is open from 30 October 2024 – there may be delays in processing an application at HMRC and so bear this in mind in planning when to apply. 
• The importance of documentation of how you are treating the different income sources for VAT purposes cannot be understated. Ensure the finance team understands this. Consider having an income matrix to follow with backing justifications.
• Any fees received after 30 October that breach the registration threshold will lead to a registration requirement before the VAT change comes in on 1 January. Any fees in advance of terms after January received between 29 July and 30 October have also been subject to VAT but in practice are only accounted for at the first day of the term to which they relate.
• Pay close attention to transport, catering, boarding, school supplies (such as pens pencils, books etc) as they may follow the fees and be subject to VAT, or possibly treated differently.
• Trips – if educational, they will be taxable.  If they are considered “welfare”, for example taking boarding pupils out at the weekend, they may be exempt, subject to meeting the VAT definition.
• Rental or letting income is not straightforward and there are a lot of “it depends” so do watch out for these. They will need to be considered on a case-by-case basis as it can depend on what you are providing and the type of organisation that you are letting your facilities/hall/grounds to.

Whilst not discussed at the roundtable there are a couple of themes that are worth noting.

Strategic planning

Income diversification has been an area that many schools have been looking at over recent years.  It will be important to consider the impact of being VAT registered on these income streams. From a corporation tax perspective, schools need also to consider whether the income generated is ancillary trading income, i.e. related to education, or is non–related trading income, which would potentially be taxable.  A charity can generate trading income up to £85,000 which is covered by the small charity trading exemptions. 

Future proofing and adapting

This is an area very much linked to strategic planning, financial housekeeping and maintenance.  Adapting will include responding to changes in technology in a positive way, and embracing this as a way forward, whilst ensuring that you have the appropriate safeguards and controls in place that this will require.   

Sustainability covers a huge range, including technology, but also encompasses wellbeing, the environment, renewable energy and sustainable practices, the list could go on.  How can these be incorporated into your polices and your daily lives, and what benefits can your pupils have from being part of a sustainable school? 

Financial housekeeping and maintenance

During times of uncertainty and change, keeping your house in order is critical to ensure that you can react to change.  Ensuring you have the appropriate policies, procedures and controls in place to respond is vital. In an environment which is becoming increasingly regulated and scrutinised, getting these basics right is fundamental.  The Charity Commission has been refreshing its guidance.  Our charity newsletter is going to cover some topical areas relating to this such as CC27.   

Our Key Audit Findings sector update is going to cover the following:

• Cyber security
• Business continuity planning
• GDPR
• Other regulations such as food hygiene

Whilst this feels like a daunting time, especially with the complexities around VAT, we are here to help and support you to work through these challenges, so that you can concentrate on continuing to provide an excellent educational experience to your pupils. 

If you would like to know more about our charity sector roundtables or any topics discussed, please contact us.