Different schools of thought surround VAT on fees
by Ray McCann – JHA and Charter Tax
Ray McCann studies the lessons to be learned around the controversial proposals to introduce VAT on private-school fees.
One of the more controversial proposals from the government is to change the status of private schools so that the fees charged by the schools will be subject to VAT and the charitable status of the schools will end, bringing them into the charge to business rates.
Those against these changes have been very vocal accusing the government of threatening the very existence of independent schools, arguments bolstered by the news that a small number of schools have announced that they will close. The VAT proposal has been blamed for this, but it is far from clear that this is true, although it may be that VAT was the final straw in the face of falling pupil numbers and already declining fee income.
In terms of what it will raise in additional VAT, there is a credible argument that the VAT raised by this change will be so low as to not be worth the risk of the government losing political capital, let alone the stress and disruption from a change of status during the academic year, although it is possible that the start date may be deferred.
The original timing of the change, January 2025, does seem harsh, and it is possible that some relaxation of this will be announced, perhaps in the October Budget. The government has already announced that it will look carefully at those children who receive special needs education privately to ensure that there is no disruption to their education.
Costly lessons
The opponents of the change have portrayed many parents, especially those at lower income levels, in heroic terms – sacrificing everything to pay the fees in order to ensure a “decent education” for their children. Perhaps, but the fees charged by the independent school sector have a wide range of cost and the reality is that even the lowest-cost schools cannot fairly be described as cheap. And even if a school at the lower end of the fee scale can be found, it is no help if that school is hundreds of miles away.
There are a number of organisations that offer information on school fees across the country (some also offer tax and other planning advice through which fees can be paid). There is a certain detachment from reality in much of the information offered. One such organisation suggested that “affordability” was fees of £16,500 a year and while this might seem high, “keep in mind that there are many public schools whose fees are £45,000 a year and even some approaching £100,000 a year”.
According to the Institute for Fiscal Studies (IFS), the average private school fee in 2023 was £15,200 or £7,000 per pupil more than in the state sector. The IFS also put the likely top line yield at £1.6bn but with a net yield between £1.3bn and £1.5bn after adjusting for changes in demand and so on. What was also important from the IFS study was the finding that fees had increased 20% in real terms since 2010 and 55% in real terms since 2003. And, importantly, the numbers attending private schools have proved very resilient in spite of these fee increases.
The case against
Various arguments have been deployed against the government. Most common are:
- the measure will damage the private school sector causing many smaller schools to close, resulting in many children having to switch into the state sector so putting further pressure on the state schools
- it will actually reduce tax revenues since some parents relieved of the burden of school fees as a result of their children moving the state sector will work less
- it will do nothing to improve state education because what will be raised will not be enough
- it’s nothing but left-wing dogma and so on.
Where you stand on this issue will no doubt mean that you give more or less credence to each of these arguments. Your view will also be affected by whether you view charitable status and VAT exemption as tax relief? There can be no doubt that the criticism of the measure that it is a lot of controversary for not very much gain in terms of additional revenue is likely to be a rare area of common ground. Even the high-water mark suggested by the IFS is small change against total tax revenues of £800bn and what is needed to improve the state educational sector.
But – and it’s a big but – if the government finances are dire, against commitments not to increase tax on working people, it is necessary to very carefully look at expenditures. Providing VAT relief to private schools is a cost to the government, and it is likely that the government saw VAT on private education as an area where there could be a more or less immediate impact and the additional VAT revenue is already earmarked to fund various state school sector improvements.
Challenges ahead
In terms of cutting spending, the government will no doubt face tougher challenges in the coming months and years but this, and the winter fuel allowance, will be early tests of whether the government will stick by its decisions. On both some relaxations look inevitable, but we will need to wait and see what the Budget brings.
In the meantime, the fact remains that (despite what the protesters say) the biggest barrier to private school education is the fees. It has always been the fees. The above-inflation increases in those fees would seem to make clear that more of those who currently use private school education will join the 94% or so of parents who currently use the state sector. There will be many, both in and outside of government, who will see the criticism and pain of protest as worth it if they can bring about real improvements in the quality and safety of the state school system.
