Are you finding it a challenge to secure payment for school fees?

The current government’s commitment to ending tax exemptions for independent schools came into force on 1 January 2025, making independent school fees subject to VAT. This landmark change is likely to make independent schools a less affordable option for some families who already have their children enrolled.

As a result, schools may expect increased difficulties with parents paying fees. There are many reasons for this: circumstances change, unemployment, and divorce, all leading to an inability to pay the children’s school fees. The increase of 20% on these fees will no doubt add to these pressures that parents face.

The traditional system of making payments for school fees once a term may leave many families struggling and having to ask for more flexible payment methods. There are several ways that independent schools can look to demonstrate support to parents during this time.

Deferred fees

Many governors and parents won’t be aware that, if parents are offered the right to pay fees in instalments, then such arrangements can fall within the Financial Services and Markets Act (regulated Activities Order) 2001 (the “FSMA”), along with all of the legal and practical requirements associated with them.

By entering into a deferred debt payment plan, the school may be engaging in a regulated activity that is prohibited unless it is authorised by the Financial Conduct Authority (“FCA”). This is because the school will effectively be acting as a lender by providing credit to individuals. Carrying out a prohibited activity without the appropriate authorisation is a criminal offence, can attract a fine and such agreements will be unenforceable against parents unless a court process is followed.

Schools may consider entering into agreements with parents whereby current unpaid fees and/or future anticipated fees are deferred and secured in the school’s favour against the parent’s home. In these circumstances, as a charge will be made against property, the school would be entering into a mortgage. These types of agreements are subject to tightened regulations over the last decade.

What are the regulations?

A regulated mortgage contract is an agreement whereby:

• A lender provides credit to an individual
• That agreement contains an obligation to secure the lending by way of a mortgage on the land which is in the UK
• At least 40% of that land is used or intended to be used as or in connection with a dwelling.

What is credit?

The provision of credit includes a cash loan and any other form of financial accommodation which involves a borrower, in this case parents, undertaking an obligation to repay it.

Generally, the test for identifying credit is wherever a debt is deferred and credit is extended. Such an agreement will allow the borrower to pay later than when the payment would otherwise be due under the express or implied terms of the agreement.

Therefore, a school is likely to be providing credit to parents where there is a contractual right but it has been deferred that is otherwise due immediately. For example, if parents are offered a payment plan for fees which allows a greater time for payment, this will stray into providing credit and may constitute a regulated agreement.

Do the regulations apply?

Crucially, if structured correctly, there are exemptions available which would avoid a school being required to have FCA authorisation. For example, the agreement will only be caught by the regulations if the school’s activity is being carried on by way of business. The test for whether this applies is where the purpose of the lending activity is to return a financial reward or have a significant impact on the school’s wider commercial activities.

Practical steps

Given the severity of entering into a regulated agreement without the appropriate authorisation, schools should tread carefully before agreeing payment plans with parents.

Before offering such agreements to parents, we recommend the circumstances of the proposed agreement be reviewed by a team that specialises in financial services to confirm whether the relevant exemptions can be applied.