What's The 'Toddler Tax' And Who Will End Up Paying It?

Parents could face paying VAT on nursery fees if a class contains just one child aged five, according to government guidance recently issued on the controversial new policy.

- TARA COBHAM

In what has been branded the “toddler tax”, HMRC confirmed earlier this month that a whole nursery class provided by a private school will be subject to 20 per cent VAT if children of compulsory school age attend. From January, the government will remove independent schools’ VAT exemption and business rates relief in a move Labour says will fund 6,500 new teachers for state schools.

Headteachers of smaller, specialist private schools have said they have little room in already-squeezed budgets to make cuts, leaving few alternatives but to hike fees by 20 per cent – leaving parents to foot the cost. Now, it has emerged that parents of children in nurseries also face an increase in fees by up to 20 per cent when the policy is implemented in the new year, drawing much criticism from independent school leaders.

With the plans set to go ahead in a couple of months, below we take a look at what the toddler tax is.

What is the ‘toddler tax’?

In documents published on 10 October, HMRC addressed the question of whether nurseries would be impacted by the VAT proposals. Referring to nursery classes provided by private schools, it stated: “Nursery classes made up wholly of children below compulsory school age remain exempt from VAT. “If the nursery contains children of compulsory school age who you receive a fee for, the whole of the class will be subject to VAT.”

A child is deemed to be of compulsory school age on whichever date out of 31 December, 31 March or 31 August falls closest after their fifth birthday.

Who might it affect?