How Children’s Activity Providers Can Benefit from VAT Exemption – Insights from the ICAP Webinar with the dt group
The Institute of Children’s Activity Providers (ICAP) recently hosted a webinar featuring Jack Hayes and Shivan Vaya from the dt group, discussing the Private Tuition VAT Exemption and its significant financial advantages for children’s activity providers.
Many businesses in this sector struggle when they reach the VAT threshold, often limiting their growth to avoid additional tax burdens. However, VAT exemption offers a strategic way to reduce costs, increase profitability, and expand without VAT restrictions.
This blog summarises the key takeaways from the webinar and explores how restructuring as a Limited Liability Partnership (LLP) can help businesses qualify for VAT exemption and achieve long-term financial growth.
Understanding VAT and Its Challenges for Children’s Activity Providers
Value Added Tax (VAT) is a 20% tax applied to goods and services in the UK. Once a business’s turnover reaches £90,000, it must register for VAT and charge customers an additional 20%.
For children’s activity providers, this creates challenges such as:
Higher prices for parents, which can reduce customer retention
Growth limitations, as businesses may stay under the VAT threshold
Increased administrative work, including VAT filings and compliance
The Private Tuition VAT Exemption offers a way for businesses to legally avoid VAT, provided they meet specific educational criteria.
The Private Tuition VAT Exemption: What You Need to Know
The Private Tuition VAT Exemption allows businesses to operate without charging VAT, provided they offer educational services that are ordinarily taught in schools.
Which Activities Qualify?
The exemption applies to subjects that are commonly taught in schools, including:
English, Maths, Science
Music Lessons
Language Classes
STEM-Based Activities (Science, Coding, Robotics, etc.)
Drama and Performing Arts
Martial Arts (such as Karate, if structured as an educational course)
Cooking Classes (if following a curriculum with assessment criteria)
For a business to qualify, it must:
Deliver structured tuition
Follow a recognised curriculum or examination board
Ensure that classes are non-recreational and focused on skill transfer
Activities that are purely childcare-focused (e.g., after-school clubs without structured tuition) do not qualify for the exemption.
How VAT Exemption Benefits Children’s Activity Providers
Lower Prices for Parents – No VAT charge means more affordability.
Higher Profitability – Businesses keep a larger portion of their revenue.
Freedom to Scale – Avoiding VAT allows businesses to grow beyond the threshold.
Competitive Edge – Many competitors are unaware of this exemption and charge VAT unnecessarily.
The immediate financial impact of VAT exemption can be as high as 18–20% in profitability, giving businesses a significant advantage in pricing and growth potential.
Key Reasons LLPs Work Best for VAT Exemption
Easier Qualification – LLPs naturally meet VAT exemption criteria.
Profit Distribution Flexibility – LLPs avoid corporation tax; profits go directly to partners.
Tax planning opportunities are available
HMRC have agreed the LLP structure is suitable for the private tuition exemption.
Lower Staff Turnover – Junior partners in LLPs feel more invested in the business.
The Importance of an LLP Agreement
An LLP agreement is essential for defining the roles and profit distribution among partners.
Two designated partners are required – Many sole traders add a family member as the second partner.
Junior partners (e.g., teachers) receive profit shares, ensuring they remain invested in the business.
Non-teaching staff can still be employed, with payroll options available.
By carefully structuring an LLP, businesses can maximise tax efficiency and staff retention while benefiting from VAT exemption.
Expanding with VAT Exemption: How LLPs Allow National Growth
A major advantage of LLPs is that businesses can open multiple LLPs across different locations, enabling nationwide expansion while maintaining VAT exemption.
This allows providers to grow without VAT restrictions, unlike limited companies that must charge VAT after crossing the threshold.
Many franchise businesses struggle to scale because they try to stay under the VAT threshold. However, with an LLP structure, businesses can:
Expand into multiple locations while maintaining tax efficiency.
Offer competitive pricing without VAT increasing costs.
Retain staff longer by offering junior partnership incentives.
Key Tax Considerations for LLPs
LLPs Must Distribute All Profits Annually – Unlike limited companies, LLPs cannot retain profits.
Partners Are Taxed on Profit Allocations, Not Drawings – This requires careful cash flow management.
Tax Year-End Alignment is Recommended – HMRC rule changes mean aligning LLP year-end with the UK tax year is best for tax efficiency.
Junior Partners Must Claim Expenses Through the LLP – This ensures full tax compliance.
The dt group assists businesses in setting up and managing LLPs, ensuring that partners can maximise their tax deductions and financial benefits.
Final Thoughts: Should You Apply for VAT Exemption?
If your business provides educational activities similar to those taught in schools, VAT exemption could be a game-changer.
Lower costs, higher profits, and more room for growth
No VAT on tuition fees, ensuring compliance and financial stability
Opportunities to expand nationally with multiple LLPs
To take advantage of this opportunity, businesses should seek professional advice from VAT specialists like the dt group.
Considering VAT exemption for your business? Get in touch with the dt group for expert guidance or book a meeting here.
ICAP members can access the full recording of the webinar by clicking here.
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