Private schools, VAT and tax – waiting for the inevitable?

10 October 2023

The addition of VAT to private school fees has been a clear part of Labour’s manifesto and policy since 2017 – a measure which Labour has claimed could raise £1.7bn in tax revenue. While its most recent statements have said that it will not remove charitable status from private schools, Labour has doubled down on its plans to withdraw both their VAT exemption and their 80% relief on business rates should it win power at the next general election. 

This contrasts with the confirmation in the 2022 Autumn Statement that the current Conservative government does not intend to impose VAT on private school fees, so schools and parents are left waiting to find out whether, when and how the change will happen. 

Changing the VAT liability of private school fees sounds simple enough – one day the fees would be VAT exempt, the next they would have VAT applied (probably at the standard rate, which is currently 20%). However, in VAT, there is often a domino effect resulting in other VAT considerations which private schools need to be aware of. For example, applying VAT to these fees also means that VAT incurred by the schools on expenditure, previously irrecoverable, can now be offset against the VAT charged on their fees. This may include the possibility of large refunds for private schools who have undertaken large capital expenditure in the past ten years. 

A change in VAT liability also highlights the tax point rules which govern the date on which a supply takes place for VAT purposes. Could a VAT charge on private school fees be mitigated or removed by parents paying for their child’s entire school education in full before VAT became applicable? Or would a Labour government introduce anti-avoidance measures to prevent this (as is typically done immediately before a rise in the headline VAT rate takes effect)? 

There are also wider social changes to consider, not only would it suddenly be more expensive to send your children to private school, but the rise in fees is likely to price some families out of the private sector altogether. Research for the Independent Schools Council published in 2018 suggested that the movement of pupils into the state sector, plus the new entitlement for private schools to reclaim VAT, could cost the government more than £400m by its fifth year. 

Despite the Labour party’s statement that it will now not seek to remove the charitable status of many independent schools, it cannot be fully ruled out that a Labour government might also remove entitlement to use gift aid and corporate tax relief for private schools. Withdrawal of these reliefs would put yet more upward pressure on fees.  

Labour’s announcement stated that it would introduce tax changes “immediately” after the election, giving schools little time to prepare for the financial impact or to take action by increasing fees to mitigate the impact of the additional tax burden. It might therefore make sense for any VAT changes to be introduced in a phased approach, perhaps with the rate of VAT applicable starting at a rate lower than 20% to start with, allowing Labour to meet its pledge whilst also ensuring there is not a sharp shock to private schools.

The current political polls suggest it’s more a question of when rather than if tax rises will happen, therefore private schools should start preparing now. Schools should begin to assess the potential tax impact both negative (VAT on fees, removal of tax reliefs, etc) and positive (recovery of VAT on expenditure, possible clawback of historical VAT incurred on capital projects). Only once this assessment had been undertaken will schools be in a position to determine if they need to raise their fees, or if some of the VAT to be charged to parents can be absorbed as a result of an overall lower cost base. Once they understand the likely impact of tax changes on their current operating model, they will be in a much better position to manage delicate communications with parents and guardians.