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For almost a year, the private education sector in the UK has been undergoing one of its most significant financial changes in decades. The introduction of VAT on particular services and fees for private schools has created new challenges and reassessments. With around 2,500 private schools across the nation educating roughly 7% of all pupils, it’s crucial for the industry to handle these new operational and economic effects properly. 

In this article, we will aim to help those within the independent education sector understand how these changes may affect their insurance arrangements and declared values. We explore what private schools will need to consider to future proof themselves and remain adequately protected and compliant in this new landscape. 

What is the current VAT situation? 

As of 1st January 2025, education and boarding school services provided by private schools became subject to the 20% standard rate of VAT. Previously, private schools had been exempt since the introduction of VAT in the 1970s. This exemption was originally in place due to the Education Act which states that the provision of education by an eligible body is exempt from VAT charges. 

The reversal of this VAT exemption was announced in July 2024, giving schools plenty of time to prepare. 

This decision to place VAT onto private schools was brought in to help improve state school education. According to the Treasury, the VAT is expected to generate approximately £1.725 billion a year. This revenue is earmarked by the government towards delivering better standards and opportunities for the 90% of children in state school systems. 

Here’s a quick overview of which private school services have received VAT charges, and which remain exempt: 

  • Fees and tuitions: standard rate 20% VAT.
  • Boarding services: standard rate 20% VAT. 
  • Extra-curricular clubs: standard rate 20% VAT to only educational clubs, such as performing arts or sports lessons. Non-educational extra-curricular clubs remain exempt.
  • The purchase of educational supplies, such as school meals, books, stationery, and transport: generally remain exempt. However, boarding and lodging are now subject to the standard rate of 20% VAT.
  • Private schools with charitable status: became ineligible to continue receiving 80% business rates charitable relief as of April 2025.

Financial and operational implications for schools 

With the new increase to outgoings, school accountants and leadership teams need to manage finances and payments carefully to ensure continued profitability, whilst mitigating any risks or uncertainty. This financial restructure has several knock-on effects that directly impact the operation of private schools. 

With the 20% increase in private schools’ outgoings, financial planning will be impacted. Budgeting for the year ahead will need to change to accommodate this increased expense, particularly when managing VAT liabilities to HMRC and ensuring adequate cash flow.

Especially as the schools adjust to these new requirements, they may face unexpected additional expenses. For example, some schools may need to hire temporary additional staff or additional outsourced services to assist with the administrative tasks that come with maintaining VAT compliance. 

Long-term, schools will need to assess what else is included in their outgoings and how the new 20% VAT expense can fit into this to ensure that profits are still being made. 

Enrolment and fee structure changes

Fees and tuition now face the 20% VAT charge, increasing the price to parents and pupils and subsequently increasing the risk of reduced enrolment. Soon after the repeal of the VAT exemption, the ISC (the Independent Schools Council) reported some of its member private schools experiencing a 4.6% decrease in new pupils starting school in September 2024. The government also predicted that approximately 37,000 will move to state schools long-term. 

To mitigate this, private schools are looking at restructuring the fees, increasing bursary provision, absorbing the costs themselves, and other solutions. These changes will help to maintain both financial stability and continued enrolment. Private schools will need to decide the best resolution for their individual needs and pupils. 

Cost-cutting measures or staffing changes 

As part of the new budget planning process to account for the impact of the VAT change, private schools may implement more cost-cutting measures to save money where possible. A significant cost to schools is often its staff, so a possible measure is to reduce the number of staff or restructure the existing teams. 

With this, each individual private school will need to consider its own pupil to teacher ratio and what works best for their own capacities and capabilities. 

Deferral of maintenance or capital projects

Maintenance or capital projects, such as building new facilities or investing in new IT equipment, may need to be postponed to preserve costs. However, this poses a risk from an insurance perspective, as this can lead to increased likelihood of future claims – for example, electrical fires or water ingress. 

Increased financial pressure on reserves 

Especially at this time of financial change and uncertainty, schools’ reserves (unrestricted funds set aside to spend on the school’s needs) are more important than ever. Schools with lower reserves have a reduced capacity to self-insure by taking on higher deductibles in insurance policies. Therefore, maintaining accurate and crucial insurance coverage becomes essential for them.

Why does this matter for insurance and valuations? 

Previously, as part of the VAT exemption rules, private schools could not recover VAT on construction costs. In these situations buildings and contents needed to be insured for the gross reinstatement cost inclusive of VAT. 

The VAT registration of private schools has altered the landscape, introducing new risks concerning insurance coverage:

  • Overinsurance: if a school continues to insure for the gross amount, which includes 20% VAT as they would have done previously, they may be incurring higher premiums than necessary if they are now entitled to reclaim that VAT.
  • Underinsurance: on the other hand, if a school assumes they can reclaim all VAT and insure only for the net amount, they are at risk of being underinsured. Due to the differing regulations and partial exemptions throughout the sector, private schools may often only reclaim a percentage of the full VAT back. 

Insurance and valuation assessments often need to be done on a case-by-case basis. For example, a space for an educational extra-curricular club would be eligible for the 20% VAT recovery, whereas a nursery building that is still exempt would not receive VAT recovery. For insurance coverage, a one-size-fits-all approach across the private education sector is no longer sufficient. 

Checklist of key declared value considerations for private schools 

To help school leadership teams navigate this new complex landscape and assure adequate insurance in line with the new VAT rules, here is a handy checklist to consider: 

1. Review reinstatement valuations

It’s critical to ensure buildings are insured for their current rebuild costs. Historical costs or depreciated values could leave schools at risk of not having sufficient insurance cover. Insurers and surveyors recommend a full review of declared values every three years, with annual increases in the intervening years.

2. Assess business interruption cover

An indemnity period (the length of time an insurer will support the policyholder with lost or additional costs following an insured event) of 12 months is rarely sufficient, especially for large, complex or heritage assets. It is wise to regularly reconsider the duration of your business interruption cover with your insurance advisors. 

3. Re-evaluate asset registers

The values of equipment and supplies will often change over time. It’s important to confirm that teaching equipment, IT assets, specialist facilities, etc., are accurately documented and that declared values reflect the current costs. These may also need to reflect the school’s ability to recover VAT. 

4. Check for underinsurance risks

It’s essential to ensure that all insurable assets are included in declared values. For example, rented assets, sports pitches, donated facilities, and offsite supplies or accommodation may need to be considered in declarations to insurers. 

5. Consider changes in building usage

Any alterations to buildings, including repurposed properties or newly leased to third parties, need to be considered in insurance valuations. This can affect both cover and premiums, and alter the building’s VAT status.

6. Review governance and responsibilities

Trustees and governors should document that insurance arrangements and declared values have been reviewed in light of the new VAT changes. This demonstrates good governance and due diligence in protecting assets.

7. Consult your broker or insurer early

The complex VAT landscape requires conversations with your financial as well as insurance advisors. It’s important to discuss any operational or financial changes before renewal. This will prevent any surprises or flags in the case of a claim.

Time to assess your declared values and stay protected

The shift in VAT exemptions and regulations for private schools has introduced a period of uncertainty and adaptation over the last year. We encourage schools to see this time not just as a financial hurdle, but as an opportunity to review their declared values and ensure they are properly protected and positioned for the future. 

To help during this time, a professional valuation that specifically accounts for a school’s new VAT status will ensure that declared figures are acceptable and provide adequate cover in the event of a loss. At Charterfields, we specialise in reinstatement cost assessments, with particular expertise in the assessment of educational facilities. Feel free to get in touch with us if you’d like a no obligation proposal to assess your buildings and/or contents to ensure you’re adequately covered.