VAT on Independent School Fees – What Next?

The Labour Party’s proposal to remove the VAT exemption from independent schools is projected to raise significant revenue – estimated between £1.3bn and £1.5bn. However, this decision could also impact on the schools themselves, their students and the broader education landscape.

In the 2022-23 academic year, the average fee for independent schools was £15,200 per student, compared to £8,000 spent per pupil in state schools. Since 2010, the disparity in funding between independent and state schools has more than doubled, leading to Labour’s call for change. They believe the increase in funding derived from charging VAT would enhance educational standards throughout the school system.

However, it is also possible that additional costs could be a barrier to many young people accessing education, as well as eroding funds and surpluses for many education organisations.

The Financial impact on independent schools

Currently, independent schools are exempt from charging VAT on their fees due to a specific exemption for educational services. This exemption also prevents these schools from reclaiming VAT paid to their suppliers.

Independent schools, which currently are exempt of VAT would face significant financial challenges. The removal of this status would likely increase the cost of education at these institutions, potentially leading to higher fees, especially if Labour chooses to charge the full 20% VAT rate. The Institute for Fiscal Studies (IFS) estimates that if tax exemptions for independent schools were removed, the effective VAT rate would be around 15% – after accounting for deductions such as VAT paid onboarding fees and exemptions for specialised educational services.

This could reduce the affordability of independent education for many families, particularly affecting smaller schools operating with tight margins.

Economic considerations

Although the plans would raise further revenue through fees, economic forecasts are mixed about the net benefit to the Government’s finances, considering the potential costs of absorbing additional students into the state system if private school enrolments decline significantly.

For example, the 2018 Baines Cutler report forecasted that abolishing VAT exemptions could result in a net loss to UK taxpayers, suggesting that each student transferring from an independent to a state school would incur an ongoing Government cost of £10,000 annually, plus a one-time expense of £10,000. Furthermore, the Adam Smith Institute argue that removing VAT exemptions might not generate any net revenue and could potentially result in a loss of up to £1.6 billion.

Unfortunately, the true impact is not fully known as all analysis is based on limited data and doesn’t account for the unpredictability of parental decisions in response to fee increases.

Demographic Shifts and Market Response

The imposition of VAT is thought to potentially cause a decline in student numbers at independent schools, as increased costs may deter enrolment.

Research suggests a potential decrease of 3-7 per cent, which could be gradual as parents assess the value proposition of private versus state education.

The shift could lead to increased demand in the state sector, where resources are already stretched, while equally eroding the funds of private schools, which may restrict existing partnerships with state schools.

Impact on educational outcomes

Independent schools are known for their high academic standards and resources, which contribute significantly to the UK’s educational outcomes and international competitiveness. A decline in these institutions could impact these standards, although it would potentially lead to a more equitable educational landscape across public and private sectors.

For a potential Labour Government focused on social mobility and equality of opportunity, they may believe that the funds gained could help to level the playing field for state school pupils.

However, some fear that it could also limit access to specialised education that independent schools often provide, particularly for students with specific learning needs or those seeking a religious or culturally specific curriculum.

Here to help

On 19^th June, Haslers hosted a live webinar for independent school leaders. The session aimed to address and explain the potential financial implications of Labour’s intentions to remove the VAT exemption on school fees. The webinar was hosted by three of the partners at Haslers: Laura Ambrose (Business Services Group Partner), Debra Dougal (VAT Partner) and Michael Watts (Corporate Finance Partner)

Together the team provided an overview of what we already know about the potential changes as well as the team’s expectations of the changes. The team also detailed the practical steps schools should be considering and taking in readiness, complete with forecasting planning suggestions and the importance of comprehensive modelling.

You can download the presentation slides here: https://mailchi.mp/haslers/school_fees
For further information and advice around the potential incoming changes, please contact our education team at advice@haslers.com