Under Keir Starmer, Labour is planning to impose VAT on private school fees. Currently, these fees are VAT exempt, keeping private education more affordable for parents.
Labour’s proposal seeks to add the standard 20% VAT to these fees. However, because schools would then be able to reclaim VAT on their purchases, the actual increase in fees to parents is estimated to be around 15%. Under the current VAT system, VAT-exempt entities, like private schools, do not charge VAT on their services and cannot reclaim VAT on their purchases.
The Institute for Fiscal Studies (IFS) estimates that this change could raise about £1.6 billion annually in the medium to long term, which Labour plans to invest in state schools with the recruitment of 6,500 additional teachers, mental health services and 3000 new nurseries. The goal is to support disadvantaged students and reduce educational inequality.
However, the Adam Smith Institute believes that the net gain will be nil or there may even be a net loss to the Exchequer of £1.6bn, depending on what percentage of children leave the independent schools and require state funded education.
In contrast, state funded schools receive grants from the government and are currently able to recover the VAT charged on their costs.
What does removing the VAT exemption mean for schools and parents?
By removing the VAT exemption, private schools will need to charge VAT on their fees but will also be able to recover VAT on their expenses, potentially balancing some or all of the costs depending on the level of capital expenditure.
There are concerns among parents and private schools about the financial impact. Increased fees might make private education less affordable for many families. Some parents may consider pre-paying fees before the change to avoid higher costs. However, Labour may plan to introduce anti-forestalling legislation, meaning VAT would apply for the relevant school year regardless of prepayment, ensuring the intended revenue is collected.
Changing the VAT status of private schools will require amendments to current primary legislation, which will need to be scrutinised in both Houses of Parliament. These changes are rumoured to take place as early as January 2025 in the middle of an academic year where schools may not have planned to include VAT in the fees. Thus, leaving little time for any legal adjustments and planning.
Removing VAT exemption and business rates relief for private schools could widen the gap between state and private education. Smaller private schools with lower fees and less capital expenditure might struggle more, potentially leading to closures or a shift of students to state schools. When Greece introduced a similar policy in 2015, it led to widespread school closures, teacher redundancy and an overwhelmed state sector. The Greek Government then had to repeal the VAT charge. Over half of the private schools who are members of the Independent Schools Council have 300 pupils or less on their roll, making any savings in terms of VAT to be passed onto pupils very hard for those schools.
Schools that have recently made significant capital investments might benefit from VAT recovery under the Capital Goods Scheme, which could help offset some of the increased costs. This scheme allows for VAT recovery on capital expenses over a period of time. International students will also be affected by the increased fees. Parents considering sending their children to UK private schools will need to account for the additional costs when planning and applying for student visas. This could deter some families from choosing the UK for private education. Equally, many UK parents may consider sending their children to boarding school overseas where there are lower fees. This will lead to a loss of potential skills in the future. (This happened when universities put up their fees as courses are taught in English in many EU countries and the fees are lower.)
Private schools will need to reassess their financial strategies. They may need to increase fees to cover the new VAT costs while also looking for savings through VAT recovery on eligible expenses. This could involve a detailed review of their expenditures and investments to maximize VAT reclaim opportunities. Parents will also have to adjust their financial planning to accommodate higher fees, possibly re-evaluating budgets and seeking alternative financial support or scholarships offered by schools to mitigate the impact of the fee increase.
However, if schools are trying to part-fund the VAT on fees, they will have less available to fund those that are less well off.
What might the wider impact of this policy be?
Labour’s proposal aims to reduce educational inequality by reallocating funds from private to state education. This could enhance resources and opportunities for students in state schools, particularly those from disadvantaged backgrounds. The policy reflects a broader aim to create a more balanced and fair education system in the UK. However, a House of Lords report identified that the state education sector was already benefitting from the expertise and resources provided by independent schools and it found that 5% of pupils received some type of fee support from an independent school in 2024. 7.8% received means tested support and 10.6% received non-means tested scholarships. The total value of means-tested fee support provided by schools was £539mn in 2024.
Many working parents need to send their children to an independent school because the state sector does not provide a long enough school day to enable them to work. In London and the South East many lower income families have both parents working in order to pay the rent or mortgage and feed their family. This is really difficult in the state sector and parents then need to oversee homework etc after a day at work. Many families who send their children to independent schools are “middle earners”. They may receive financial support from the school to enable them to be able to work. Until the state sector addresses the length of the school day, some families may face the choice of moving to a cheaper area and losing a place where they have existing childcare or paying for increased after school private childcare.
Other parents feel they have no choice because their child has an educational need not met by state schools but that need does not amount to requiring a Educational Health Care Plan. (e.g. a child may thrive better in a smaller class due to social issues or previous bullying). Labour says only schools with an EHCP will be exempt from the VAT charge, leaving out the rest. But out of over 110,000 private sector special school pupils, just 7,646 are funded by EHCPs. Most parents are already stretched thin financially, covering these costs themselves.
In conclusion, Labour’s plan to impose VAT on private school fees is a significant policy claiming to generate substantial revenue for state schools and addressing educational inequality. However, it presents challenges and adjustments for private schools, parents, education authorities and students. The success of this policy will depend on careful implementation, legislative adjustments, and the ability of all parties involved to adapt to the new financial landscape. We have a team of personal tax and VAT experts who are on hand to discuss these proposals and their financial implications with individuals and schools.
