School Fee VAT: Now that all of the political parties have published their manifestos, today I’m looking at one particular measure that has sparked furious debate across the political spectrum, namely Labour’s flagship promise to end the VAT exemption for private school fees.
This policy has created a huge amount of debate across all media; the TV, papers, radio and pretty much all of the social media channels. The discussion surrounding the ending of the long-standing VAT exemption, has already demonstrated that many of the details & complexities of the proposal have been overlooked. As always with VAT, the rollout of the policy will not be straightforward and to be successful, will require a much more nuanced approach and much greater understanding of the law on VAT.
School Fee VAT: Will the law have to change?
Probably, is the quick answer. Currently the supply of education when provided by an ‘eligible body’ is exempt. Eligible bodies include charities and not-for-profit entities limited by guarantee. Examples of ‘eligible bodies’ include universities, colleges and academies as well as private schools.
Any law change would need to differentiate between public sector eligible bodies, such as universities, which will remain VAT exempt and private schools which will become taxable. Keir Starmer has stated that he won’t remove charitable status from private schools, but even if he did, the change in status would not in itself stop the exemption, as an eligible body does not have to be a registered charity.
School Fee VAT: Definition of a private school
Section 4 of the relevant Public Notice (701/30) lists 4 eligible body definitions and amongst them is this gem: “A non-profit making organisation that incorporates a non-distribution of profit clause”. Private schools clearly fall into this category.
As Starmer has publicly stated that VAT will be applied immediately, perhaps his approach will be, not to change the law, but change the interpretation of the existing law. HMRC has a history of re-interpreting its own guidance or public notices, so perhaps this is what Sir Keir intends to do.
The problem staring him in the face is of course, how do you discriminate between a state funded school, a private funded school and the hundreds of charities and not-for-profit companies, which provide education for those within specific targeted sectors such as disabilities and religion?
Shadow education minister Bridget Phillipson recently suggested that Labour may try the simple solution of removing the exemption from not-for-profit schools where they teach children from the ages of 5 up to 18, which will keep nursery schools and colleges/universities exempt. This would work legally, but I believe that Bridget should think twice to avoid the furore from the disability and religious sectors.
All of this is pure conjecture, but I mention this issue to try and explain the difficult balancing act that is to come for an incoming Labour government, if the removal of the exemption targets only private schools.
As exemptions are meant to be narrowly defined, it will be very interesting to see how this plays out, as two of the biggest providers in this sector, Disability Rights UK and the Muslim Council of Great Britain, have already voiced their concerns and I don’t believe that Mr Starmer would like the negative publicity unless he comes up with a better ‘cunning plan’, so back to the drawing board Bridget!
School Fee VAT: Are there any legal means of avoiding 20% VAT?
For a start, we are probably not talking of the actual increase being a full 20% for parents. Schools will be able to reclaim input tax on overheads, equipment, heating, property maintenance etcetera, which experts have calculated will lop off around a quarter of the VAT charge.
- Other suggested strategies to circumvent the 20% VAT charge include:
- Pre-paying term fees in advance, perhaps for multiple years
- Parents making charitable donations rather than paying term fees
- Schools lending money to the parent who then pays the fees using the loaned money plus a little interest
School Fee VAT: Is this policy one of envy or logic?
The Institute of Fiscal Studies (IFS) have calculated that charging VAT on private schools would generate revenue of £1.6bn per year. The estimated tax does not however factor in the likely Input Tax offsets, which could reduce the revenue take by £400ml, nor does it reflect the probability that many parents may transfer their child back into the state system, which would make a serious dent in the revenue collected.
The IFS have also said that the average number of children in private schools has remained steady at 7% for the last 20 years despite real-term fee increases year-on-year. The 20% VAT would therefore only target a small proportion of students/parents. However, many private schools are small, in terms of overall student numbers, and are often faith-based. Whilst the media has focused on the headline 20% VAT, Labour has not talked about the wider implications for local fee-paying faith schools or specialist schools dealing with disabilities, where parents usually pay a means tested contribution.
Many parents make enormous sacrifices to fund their child’s schooling, which is of course optional, but the reasons behind it are not just aspirational. Many parents opt for private education because their child has other needs, often minor mental disorders which are not catered for in main-stream classes, especially as class numbers in state school are significantly greater than the private sector.
Perhaps Labour is counting on parents choosing to pay rather than withdrawing their child, but this feels like a tax on aspiration, which smacks of desperation. From a purely tax perspective, it is logical to tax optional services like private education which the state education system already provides and affects a relatively small group of taxpayers, as opposed to raising VAT by 2 or 3% which would generate more revenue but impact more citizens.
From a moral standpoint, the idea of taxing education is clearly regressive and pricing potential students out of education is not something society should really be aiming for, especially those kids with more modest special needs, for example those children on the autistic spectrum, who are often bullied and left behind in the state schools. There is consensus amongst experts that smaller class sizes, more targeted help and greater school disciplinary measures is a win-win situation for these children.
Tax Accountant’s view
I don’t believe that any government should benefit financially from an individual’s decision to pay for their child’s education, Clearly Sir Keir is playing to the Labour mantra of ‘the rich should pay more’, which I don’t have a serious argument with. A significant minority of parents who send their kids to private schools are not rich and for many it’s an ongoing financial struggle, but they do so because of the clear benefits for their child. So, for a net benefit to the exchequer of little more than £1bn, I’m sure Mr Starmer could find another way of extracting this money from ‘the rich’ rather than taxing education.
