There is some confusion, and alarm, about the prospect of VAT being added to school fees. Is it right to be worried and what does it mean? Apologies if this is very dull but this is both very important, and, as often, very inaccurately portrayed in the media.
The Labour party have confirmed that if elected to government they will “end the tax breaks private schools enjoy” (Bridget Phillipson, Shadow Education Minister, September 2022).
The media have mostly interpreted this as meaning that Labour would remove charitable status from independent schools. Charitable status provides two tax benefits: all income is tax-free if used for charitable purposes and local council rates are reduced by an 80% rebate. In return profits cannot be distributed to owners or investors. Education is, by long convention and in law, a charitable purpose for public benefit. Whether that is so in practice is a difficult and complicated question, but not the point at stake here. Ironically most state schools are technically charities, although they are themselves exempt from registering with the Charity Commission.
But how many independent schools are charities? Wotton House is not – it is privately owned and funded, by myself and Sophie. There are approximately 2,500 independent schools in the UK (BESA). Roughly 1,300 of these are affiliated with the Independent Schools Council, as we are. But only about 75% of these have charitable status (ie around 1,000 schools). So the majority of independent schools are not charities.
So what other 'tax breaks' might a Labour government end? You will have seen the suggestion that VAT will be added to school fees. School and university fees are currently exempt from VAT; this is because schools and universities are 'eligible bodies' as defined in legislation, and not because they have charitable status (VAT Notice 701/30 if you want the full details). The confusion seems to have arisen because 'non-profit making organisations' can also be 'eligible bodies' if certain conditions are met. Some education providers, such as tutorial colleges and secretarial colleges are not eligible bodies and so have to charge VAT. Outdoor education centres, such as The Wilderness, also fall into this category.
So Wotton House school fees are exempt from VAT because it is an eligible body, like all schools, colleges and universities. But this also means that it is unable to reclaim the VAT it pays on its supplies, such as energy, or capital expenditures, such as new boilers. Ironically this does not apply to state funded schools which are all allowed to reclaim the VAT they pay on all their supplies. The 'tax break' in this instance is clearly in favour of state funded schools and against independent schools. If VAT was added to school fees then they would increase by the current rate, which is 20%. To offset this we would be able to reclaim the VAT we incur on costs but this would only amount to perhaps 2% of the total VAT we would have to charge.
What are the chances of this happening? The current probability of the Labour Party forming the next government is about 73% (Paddy Power's odds are Evens for a full majority and 100-30 for a minority government). The last possible date for the next general election is January 23 2025. This is thought to be unlikely as it would mean ruining Christmas for everyone. September 2024 is more likely, which is still almost 2 full years ahead – a lot can change in 2 years! General opinion in the education world seems to be that the Labour Party is likely to impose either the removal of charitable status or the imposition of VAT but not both. At the moment my money would be on the removal of charitable status as more likely to be a crowd pleaser – or at least removal of the tax advantages that go along with being a charity. However there is also talk of a general levy on school fees of around 10%, which would be much easier to adminster than a change to the very complicated VAT system.
What does it all mean for us as a school and you as parents? We will keep a close eye on developments, of course, but it is deeply worrying. We will continue to keep school fees as low as we can and to offer generous bursaries. We have come through Brexit, Covid, war in Ukraine, inflation, boilers breaking down – we will get through this as well.
UPDATE: March 2023
The prevailing opinion now appears to be that Labour will try to do both - remove charitable status AND add VAT to school fees. While I still hold out some hope that this is wrong, we need to consider the implications very carefully and seriously. Some suggest that only schools with fees over a certain threshold will be targeted; others suggest that schools with large numbers of SEN will be exempted; others that schools that can demonstrate authentic charitable work will be allowed to carry on as they are. Some think that it will take 5 year to implement anyway, others that it will be pushed through quickly. Who knows?
What we can be fairly sure about is that many small independent schools will be forced to close. One careful and informed estimate is that independent schools would lose about 20% of their pupils (this is the Baines and Cutler report for the ISC).
