Independent school fees and VAT
Since 2017, Labour has consistently discussed their desire to scrap the value added tax (VAT) exemption for private school fees. It has been a topic included in manifestos, statements and during the General Election campaign. When asked, Sir Keir Starmer confirmed he wished to scrap the tax benefit “as soon as it can be done”. Now Labour is in office what does this mean.?
Currently, Private Schools benefit from a tax exemption in their nature of providing education. Most schools are registered as charities, which also have their own rules of tax exemption. Therefore, the fees received by independent schools benefit them outright. Many Labour and non-Labour representatives, such as former education secretary, Michael Gove, agree that this 20% discount to ‘advance children’s position in society is unjustified’.
Approximately 6-7% of children and young adults are educated in outside of the state sector. This equates to 560,000-570,000 pupils. Labour argue that the tax generated from the fees can be used to enhance the education sector for all. The economic benefit can be spent on the demands of an already pressured sector, especially by spreading out resources to state-funded schools. The Institute for Fiscal Studies (IFS) estimates that each private school pupil can generate an average of £5,900 for the education sector.
The Treasury published a technical note at the end of July 2024, a month ahead of a new academic year. The note confirmed that as of 1st January 2025, all educational services including vocational training supplied by a private school will be charged with VAT at the standard rate of 20%. Boarding fees supplied for by a private school will also be subject to the charge. It further went on to confirm that any fees paid after 29th July 2024 relating to the term beginning January 2025 will be subject to the changes. So, if you are thinking of paying ahead of the school year to avoid the tax charge, I would think again.
Furthermore, the government have confirmed to legislate the removal of private schools in England being eligible to make use of the business rates charitable rates relief. This means that private schools who hold a charitable status will no longer be eligible to claim the charitable rates and must now pay the full business rates liability. The change has only been applied to private schools in England. The Treasury have confirmed that they require further consultation prior to a final proposal on this particular change. They need to identify the impact on those institutions that offer a specialised service only provided by certain independent schools.
There is no doubt that the changes are controversial but at a time when there appears to be a massive hole in the Government’s finances the education sector requires a much needed injection of funds.