VAT Calculation in the Education Sector Explained

Can businesses claim VAT on school fees paid for their employees' children? Many companies offer this as part of their employee benefits, but the rules surrounding VAT claims for these payments are often unclear.

In Saudi Arabia, the VAT treatment of school fees is a common point of confusion for businesses. Schools generally issue invoices for educational services directly to the parent or legal guardian of the student, not to the business. But what does this mean for businesses offering financial support to employees for their children’s school fees? Can VAT be claimed, or is this an area where businesses are excluded from tax recovery?

In this blog, we will break down the VAT treatment for school fees according to ZATCA guidelines, discuss whether businesses can claim VAT for such payments, and outline the specific invoicing requirements schools must adhere to.

Input VAT: Definition and How It Works

Input VAT refers to the value-added tax that businesses pay on purchases of goods and services used in the course of their operations. When a business buys goods or services, it is charged VAT by the supplier. This VAT paid on purchases is referred to as "input VAT," and businesses can generally reclaim it, provided it is directly related to taxable business activities.

However, businesses can only reclaim input VAT on expenses that are related to the supply of goods and services for which they charge VAT. The process for reclaiming input VAT involves documenting and reporting it in the company’s VAT returns, which can offset the output VAT (VAT charged to customers) the business collects.

Now, let's explore how this applies to school fees and understand the legal framework for such expenses under Saudi Arabia's VAT law.

VAT and School Fees in Saudi Arabia: The Legal Framework

Under Saudi VAT Law and the guidelines set by ZATCA, school fees are classified as B2C (Business-to-Consumer) services, meaning that businesses cannot claim VAT for these personal expenses. Here's a closer look at the VAT treatment for educational services:

Exemption for Saudi Nationals

As per Royal Order A/86 and the ZATCA circular, educational services provided to Saudi citizens are VAT-exempt. However, VAT exemption only applies to eligible Saudi nationals receiving education at accredited institutions. School fees for expatriate employees’ children are typically subjected to 15% VAT. This exemption does not change the invoicing requirements, which must be issued directly to the parent or legal guardian of the student.

Invoicing Guidelines

According to ZATCA guidelines, schools are required to issue invoices to the parent or guardian, not the business entity, since the service is rendered directly to the consumer (the parent). Therefore, businesses cannot request that VAT invoices for school fees be issued in the name of the business.

Also Read: Understanding VAT in Saudi Arabia: From Zakat to VAT Calculators

Now that we understand the VAT treatment for school fees, let's explore whether businesses can claim VAT on these payments and the reasoning behind this restriction.

Can Businesses Claim Input VAT on School Fees?

The short answer is no, businesses cannot claim VAT for school fees paid on behalf of their employees’ children. Here are the key reasons:

• Personal Benefit: School fees are considered a personal benefit for the employee, not a business-related expense. Under Saudi VAT law, businesses can only claim VAT on expenses directly related to their business activities. Educational expenses for an employee’s children do not meet this criterion as they are personal in nature.
• Business Expense vs. Employee Benefit: For VAT deductions, the expense must be deemed business-related. School fees are a non-taxable benefit for employees and do not support the business operations, making them ineligible for VAT recovery.
• Cash Allowances vs Direct Payments: Payments made by businesses to cover school fees are treated as employee benefits. Even when a business pays the fees directly, these are not business expenses for VAT purposes.

Also Read: HAL Edge: The Digital Backbone of Modern Schools in Saudi Arabia

While businesses cannot claim VAT for school fees, it’s important to understand the implications of VAT exemption for educational services provided to Saudi nationals. Let’s take a look at how this exemption works.

The Role of VAT Exemption for Educational Services

Saudi Arabia’s VAT exemption for educational services plays a significant role in this context. However, this exemption does not change the invoicing or VAT claim process. Here's how it works:

• VAT Exemption: Educational services provided to Saudi nationals are VAT-exempt, meaning schools do not charge VAT on fees paid by eligible Saudi students. This exemption applies to services such as tuition fees and the sale of textbooks.
• Invoicing Process: Despite the VAT exemption, schools must issue invoices directly to the parent or guardian of the student. Businesses are not permitted to request invoices in their name, as the VAT exemption applies only to the end user of the service (the student and their parent).
• Exemption Scope: The exemption covers tuition fees and textbooks sold by qualified schools. However, non-mandatory educational services such as short-term courses or training programs are excluded from this VAT exemption.

Now that we understand the VAT exemption for educational services, let's look at the practical implications for businesses, especially when paying for school fees on behalf of employees.

Practical Implications for Businesses

When businesses pay school fees for employees’ children, they must be cautious about VAT compliance. Here are the best practices for ensuring proper VAT treatment:

• Do Not Request VAT Invoices in the Business Name: Businesses should avoid asking schools to issue VAT invoices in their name, as this is not legally permissible under ZATCA guidelines.
• Classify Payments as Employee Benefits: Payments made for school fees should be classified as employee benefits rather than business expenses. This ensures businesses stay compliant with VAT law and avoid potential issues during audits.
• Review Employee Benefits: Update employee benefit policies to clearly state that school fees are personal expenses, not business expenses, and are not eligible for VAT deductions.
• Ensure Proper Documentation: Businesses should keep records of payments made for school fees to ensure transparency and to avoid any complications with VAT audits.

Also Read: The Benefits of Implementing E-Invoicing software for Businesses in Saudi Arabia

To stay compliant with VAT regulations, businesses must follow best practices for managing school fee payments. HAL ERP simplifies this by automating VAT management, helping businesses in the education sector meet VAT requirements smoothly and avoid audit complications. Let’s explore how HAL ERP ensures compliance effortlessly.

How HAL ERP Supports Compliance with VAT Regulations in Education

HAL ERP simplifies VAT management by automating the process of VAT calculation, reporting, and compliance. With HAL ERP, businesses in the education sector can ensure accurate VAT reporting and stay updated with the latest ZATCA guidelines. Here’s how HAL ERP ensures seamless compliance:

1. Automated VAT Calculation: HAL ERP automates VAT calculations in line with the ZATCA guidelines, reducing human error and ensuring that VAT is correctly applied on all transactions.
2. E-Invoicing Integration: Complying with the latest e-invoicing regulations is seamless with HAL ERP’. The system ensures that all VAT invoices are generated electronically, with necessary details such as the taxpayer’s ID, in compliance with ZATCA requirements.
3. Real-Time Reporting: HAL ERP offers concurrent VAT reporting features, allowing educational institutions to monitor their VAT liability accurately. Businesses can generate detailed VAT reports, which can be easily submitted to the authorities during audits.
4. Accurate Documentation: HAL ERP provides a comprehensive platform for managing invoices, receipts, and all related documentation. By automating record-keeping and ensuring proper invoice formatting, businesses can easily retrieve and submit tax records when required.
5. VAT Exemption Tracking for Educational Services: For educational services provided to Saudi nationals, HAL ERP integrates the VAT exemption process directly into the system, ensuring the correct VAT treatment (exempt or taxable) for each service.
6. Customizable VAT Configuration: HAL ERP allows users to configure VAT settings based on industry-specific needs. This ensures that educational institutions and businesses can tailor their VAT processes to meet local regulations and specific transaction types.

Also Read: IISR's Digital Transformation with HAL ERP

With these features, HAL ERP helps businesses in the education sector stay compliant, reducing the risk of costly errors and penalties. By automating VAT processes and ensuring accurate reporting, HAL ERP empowers businesses to focus on growth while ensuring tax compliance.

Conclusion

In Saudi Arabia, businesses cannot claim VAT on employee benefits like their children's school fees because these are considered personal expenses and not related to business activities. ZATCA guidelines require that school fees be invoiced directly to the parent or guardian, and not to the business entity. Businesses must ensure that these payments are classified as employee benefits to remain compliant with Saudi VAT regulations.

By understanding the VAT exemption for educational services and following the proper invoicing process, businesses can avoid costly mistakes and ensure that they are in full compliance with the tax authorities.

Ready to streamline your VAT processes and ensure compliance with Saudi regulations? Discover how HAL ERP can help your business automate and manage VAT calculations, ensuring smooth operations and tax compliance. Book a demo today to learn how HAL ERP’s comprehensive solutions can enhance your business’s tax management and optimize your workflow.