Labour Party: VAT on private school fees but no loss of charitable status

What are the details of Labour’s proposal?

The Labour Party has recently clarified its policy proposals in respect of private schools, walking back its intention to strip private schools of charitable status, which could have led to a number of unintended consequences for educational charities. The party does however intend to apply VAT to private school fees, arguing that this would generate an anticipated £1.3 billion per year. These funds, according to the Labour Party, would be used to increase spending on state schools with a particular focus on schools and pupils in disadvantaged areas. Labour’s proposal has led to much debate, including to what extent private schools would have to pass VAT liability onto parents, and potential corporate structuring that private schools could use to alleviate or avoid VAT liability.

How will this proposal alter the tax burden on private schools?

The Labour Party has proposed applying VAT to private school fees at the standard rate (i.e. 20%). However, there are a number of factors to consider when assessing the impact on private schools, for example:

• private schools would be able to offset VAT on school fees against input costs on the provision of schooling (initial research undertaken by the Institute for Fiscal Studies suggests approximately one-fifth of private school costs would be deductible);
• private schools in England and Wales currently enjoy an 80% reduction in business rates, which the Labour Party is also proposing to abolish;
• private schools may not wish to pass the full increase in VAT onto parents, as initial polling suggests that some parents would transfer their children to state schools if required to pay 20% higher school fees, but the indication is that the number of children transferring to the state sector will be low;
• the general presumption is that Labour’s policy would apply to private schooling for pupils aged 5-18 however, until the wording of the legislation is available, there is a risk surrounding the extent to which the change could inadvertently impact other forms of ‘private’ education provision, including private tutoring services, after-schools clubs, and apprenticeships provided by educational training providers.

How are private schools seeking to mitigate this potential VAT charge?

Private schools may look towards alternate income streams to try to minimise the impact a VAT levy would have on their finances. For example, private schools may look to encourage parents, alumni, or others to provide donations or gifts to increase non-taxed income, which may allow them to pass less of the VAT burden on fees to parents. Also, schools may look to embark on, or increase, their overseas activity to generate a return for schools in the UK.

A number of private schools currently make use of payment structuring known as ‘fees in advance’, which allows parents to pay fees in advance of when they would otherwise fall due. The private school can then invest these fees without sustaining a tax liability, essentially offering a discount on termly fees. In the event that Labour were able to implement the VAT policy proposal, private schools may try to make use of a ‘fees in advance’ scheme to collect school fees from parents prior to the implementation date of the VAT change, but this will be subject to what is permissible by tax law.

It is likely that there will be increased scrutiny of private schools’ fees and donation structuring to prevent any potential VAT avoidance by schools. The full extent to which the VAT costs must be passed on to parents and how private schools might be able to mitigate the financial impact of this policy remain to be seen pending further details on this policy in the run-up to the next general election.