Labour’s Controversial VAT Raid on Private School Fees

Labour VAT Private School

While the majority of British families rely on state-funded schools to educate their children, a significant portion of those who can afford it opt for private education.

It’s not just the super rich. My other half and I worked out that what we spend on nursery fees is only 30% less than annual school fees in our area – and we are not rich!

So Labour’s proposed policy to levy a 20% VAT on private school fees has sparked intense debate, with proponents lauding its potential to bolster state education funding and critics warning of unintended consequences.

In this comprehensive analysis, we explore the intricacies of this contentious plan, investigating its mechanics, anticipated impact, and the myriad perspectives surrounding its implementation.

Labour’s Vision: Bridging the Educational Divide

Labour’s flagship policy aims to introduce a 20% VAT on private school fees, a move projected to generate an additional £1.6 billion in revenue annually.

This windfall, according to the party, would be channeled towards improving state education outcomes, a long-standing priority for a government committed to “smashing the class ceiling” and fostering greater social mobility.

It wouldn’t be a simple switch though, as the current mechanics of the VAT exemption covers more than just private school.

Currently, private schools are classified as “eligible bodies” under the VAT Act, granting them exemption from VAT on educational services and closely related provisions like accommodation, catering, and transportation.

To implement the proposed VAT, Labour would need to surgically remove this exemption without inadvertently impacting specialist education providers, such as those catering to students with special educational needs.

Anticipated Revenue

The £1.6 billion revenue estimate is grounded in assumptions outlined by the Institute for Fiscal Studies (IFS) report, “Tax, private school fees and state school spending.”

Key considerations include:

  • VAT applicability to both day and boarding fees
  • Exclusion of nursery fees, presuming coverage under existing childcare provisions
  • Inclusion of fees paid by international students
  • Deduction of approximately £340 million to account for VAT recovery on private schools’ costs
  • Continued VAT exemption for specialist educational provisions

Potential Pitfalls and Unintended Consequences

Private School Students

While Labour’s intentions are well-meaning, critics have raised concerns about potential unintended consequences.

One such risk is the possibility of increased class sizes in state schools, as an exodus of students from private institutions could strain already-stretched resources.

The Association of School and College Leaders (ASCL) has called for thorough research into such ramifications before policy implementation.

There is also the argument that this would simple create a bigger divide between the rich and everybody else. An extra 20% would be affordable to those with plenty to spend, but those on regular incomes who are saving every last penny to send their children to the best schools will be priced out.

This means private schools become even more exclusive than they are already.

Demand for Places

Proponents argue that demand for private education has remained relatively inelastic, citing unchanged domestic enrolment despite a 55% real increase in tuition costs since 2003.

However, recent data suggests a 2.7% decline in admissions and a shift towards recruiting wealthy international students, potentially signaling growing price sensitivity amidst fears of impending VAT.

Faced with the cumulative £80,000 VAT burden for two children over 13, some affluent families may opt to relocate near high-performing state schools rather than absorbing the additional costs.

This trend could exacerbate the existing challenges of less affluent students accessing top-tier state education, as classroom sizes increase and the quality of state education declines as a result.

How to Get Around the VAT

Teacher at Private School

Assuming Labour are elected and implement the added tax, we shouldn’t assume that private schools will simply roll over and pay them. Private schools are expected to explore various strategies to mitigate the VAT impact.

Richer institutions investing in new facilities may deduct VAT paid to contractors from their VAT liabilities. Boarding schools could potentially restructure fees, shifting a larger portion to VAT-exempt lodging charges.

Bursars may evolve into “VAT mitigation specialists,” adept at minimizing tax burdens.

There has even been talk about parents paying their children’s school fees in advance to avoid paying the VAT in the future.

Anticipating potential fee prepayments, Labour has signaled its intention to backdate the policy’s implementation, citing precedents from the 2011 VAT rate increase.

However, such retroactive measures typically follow Budget announcements, raising questions about the legality of predating enforcement beyond the general election.

Proactive Planning for Private Schools

As private schools brace for potential changes, proactive measures can also help mitigate the impact.

These include:

  • Updating accounting software to separately record VAT on costs, facilitating future VAT recovery
  • Documenting major renovation projects over the past decade to secure partial VAT recovery
  • Assessing the proportion of costs subject to VAT, as the IFS assumes 20%
  • Considering limited-term fee prepayment offers, pending clarity on policy implementation timelines
  • Strategically timing capital works to optimize VAT recovery opportunities

Bursary Alternatives: A Compromise Solution?

Labour’s policy is rather heavy handed, something of a blunt instrument. There are more creative ways to tackle the issue that would have better outcomes.

For example, rather than imposing VAT, Labour could consider mandating private schools to offer low-income students full bursaries equal to 20% of revenues.

This approach could directly benefit approximately 100,000 underprivileged students, improving educational outcomes and fostering greater social and demographic diversity within exclusive private institutions.

Over time, this would close the divide between the haves and have nots, and increase equality nationwide.

Conclusion: A Balanced Approach for Educational Excellence

Labour’s VAT policy, though well-intentioned, remains an incomplete solution fraught with potential pitfalls.

A more holistic approach, carefully weighing unintended consequences and exploring alternatives like mandated bursaries, could better serve the dual goals of improving state education outcomes and fostering an inclusive, socially mobile society.

As the nation gears up for the general election, a nuanced, evidence-based debate on this contentious issue is paramount to shaping a truly equitable educational landscape for all.

As it stands, the policy seems likely to cause more problems than it solves.