Value Added Tax on Independent School Fees

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At Otters Home Search, when listening to our clients housing needs, access to schools is often top of the list. That could be catchments for the best state schools but also school run distances to the excellent selection of independent schools across Bath and the West Country. We know the cost of schools fees will impact our clients choices, in particular holding back some budget to get a bigger head start on school fees pot, or seeking a location with an excellent primary school as the starting point before switching to independent school at a later than originally planned date.

Now that the General Election has been called for this summer and Labour are likely to be the incoming Government, Value Added Tax on independent school fees has come into clear focus.

We spoke to Edward Borton, ESB Consulting - Family and Education Consultants for their views on the impending changes.

Is UK private education subject to VAT? 

Currently, independent schools in the UK are exempt from charging VAT on school fees as ‘eligible bodies’ under VAT law, and if they have charitable status.  

Furthermore, schools are not required to charge VAT on the cost of school meals, school trips, boarding accommodation, after-school care, catering and transport, as these are all considered services ‘related to’ the supply of education.  

As a result of the VAT exemption on their income, independent schools are currently unable to reclaim VAT on their outgoings. 

A matter of when, not if? 

The Labour Party has proposed that, if elected, they would introduce VAT at the standard rate of 20% on school fees. 

Whilst it is important to remember that this is a significant climb down from the Corbyn-era’s aspiration to abolish private schools, discussions around VAT and school fees are featuring more and more in my consultations with parents and discussions with school Heads and Admissions teams. 

No doubt, VAT on school fees will feature in the national media, not to mention parental WhatsApp groups, as we head towards the election in early July. 

Levelling up or levelling down? 

Without wishing to weigh in too heavily into the politics of the policy, Labour’s ambition is to generate additional government revenue and create a more level playing field between the state and independent sectors.  

Ideology aside, proponents of the policy maintain that it will not significantly deter demand for private schooling as a majority of parents will be able to absorb the additional fees, with some schools playing their part and not passing on all of the costs to parents.  

They also argue that historical and recent independent school enrolment has remained relatively stable despite substantial fee increases of 55% since 2003, and year-on-year fee increases of c. 8% since the pandemic and global energy crisis.  

Furthermore, with increasingly low national birthrates, the potential for an increase in the proportion of children seeking primary school places may not be as significant a burden for government spending as it would have been 10-15 years ago. 

On the other hand, critics of the policy argue that taxing independent school fees will see a large number of families transfer immediately into the state sector; they argue the sector is not at all prepared for this surge in numbers.  

Secondly, many families pay ‘twice’, as c. 10% of their taxed-income goes towards state-funded education, and they then choose to pay school fees on top of their taxed-income.  

Finally, educating a child in a state school costs the government approximately £8,000 per year. This figure is significantly more than the potential revenue gained from VAT on school fees. 

Does this ideologically-driven policy make sense economically, let alone logistically? 

A(nother) shock to family finances? 

For many families who choose to invest in private education, the cost of school fees is already a substantial part of their budget.  

On average, annual fees for independent schools sit at £15,000 per child per year, with significantly higher rates in London, where a number of schools are breaching the £50,000 threshold per annum.  

Imposing VAT would increase an average set of fees by £3,000, assuming a family was paying £15,000 per year. For those towards the top end of the fee ladder, these fees could theoretically increase by £10,000 per year. 

For a family with three school-aged children in private education, they will already be paying on average £45,000 out of their post-tax income in school fees. The addition of VAT would see this figure increase by £9,000 annually, a considerable sum that could otherwise contribute to mortgage payments, savings, holidays, or other family expenses.  

The addition of VAT feels like it could be the straw that breaks the camel’s back for significant number of families. 

Paying in advance? 

Independent schools are increasingly offering parents (or grandparents) the option to ‘pay in advance’, where a lump sum is paid at a rate that would be lower than the estimated total amount of fees paid during a child’s 5, 10, or 15 year school journey. 

However, this service is not without risk, for example, if the school closes down, parents would not be able to recuperate their money, and some schools stipulate that the payment cannot be reclaimed if a child is expelled by the school, if a child does not pass internal school hurdles (e.g. the GCSE hurdle), or if a family decides to move their children to another school. 

More attention has been paid to this scheme in recent years, as it has been suggested that paying in advance could help families get around paying VAT.  

A smart move? Unlikely.  

Many legal and tax experts dispute the credibility of this ‘work-around’, suggesting new laws can be written in such a way as to impose VAT at the point the money is spent by the school rather than the point at which it was received. 

Similarly, suggestions that VAT can be avoided by paying school fees from an overseas account or residing overseas and putting a child into full boarding have also been dismissed as fanciful. 

Be wary of silver bullets - seek professional advice before making any long-term financial decisions. 

A two-tiered independent school system? 

As part of our research and fact-finding on behalf of our current and future clients, I am fortunate to speak directly to a number of Heads and Admissions teams as part of our School Search and Advisory service. 

Discussions around VAT and fee-affordability are becoming more important, particularly understanding how they fit into school’s 5-year or 10-year plans. 

From my conversations, schools appear to be taking two approaches, or a combination of the two, when it comes to planning for VAT. 

The first approach, typically chosen by the highly-oversubscribed schools in London and the South East, is to pass on the vast majority of their costs to their fee-paying parents. These schools’ single aim is to continue to provide the highest quality education; they do not want to diminish the quality of their offering. 

The second approach is to protect fee-paying parents from the imposition of VAT, with the schools absorbing the majority of the costs (the real cost of VAT is likely to be 15% once schools have deduct the VAT they can claim back on their current and historical expenditure). Although this may initially sound like positive news, the reality is these schools are actively planning to water down or even cut their non-critical provision.  

Stated examples that have been shared with me include, increasing class sizes, slimming down the number of teaching and non-teaching staff, cutting the Arts and extra-curricular opportunities, being less able to support students with moderate to more complex Special Educational Needs (SEN), limiting investment in facilities, filling year groups with more international students, and reducing the provision of means-tested bursaries. 

Regardless of the approach, the most well-known household school names with annual incomes of £+100m are unlikely to be terminally impacted by VAT; I do worry about the longevity of many small, village-like independent schools with far more modest annual incomes in the £5m ballpark. 

For the purposes of ideology, I do not see the imposition of VAT hitting the ‘haves’ where it really hurts – this is simply another example of the ‘middle’ being ever-more squeezed. The policy will further widen the ever growing gap between the most well-known independent schools and the smaller schools, creating a two-tier Independent school system. 

All eyes on grammar school places? 

Some families will inevitably turn their attention to winning places at grammar schools. 

As a result, locations with grammar schools, such as Cheltenham, Gloucester, Stroud, and Salisbury, could become even more popular with relocators and local families, seeing demand for family-sized properties rise substantially. 

In their heyday, there were over 10,000 grammar schools in England – now there are just 163 spread unevenly across the country. Starting from the age of 11 (Year 7), these schools are highly-selective and highly-aspirational establishments, and are seen as a golden ticket by parents because they do not charge fees and attract a bright, hardworking cohort of students (and by definition parents with similar aspirations).  

Crucially, there is less of an emphasis on living within a narrow catchment area when it comes to applying to a grammar school (a great delight for property search agents!) – academic outcomes are the major driver behind school admissions. The biggest challenge is achieving a place, something ESB supports families with as part of our school placement service and admissions assessments. 

Conversely, when it comes to allocating primary and secondary school places, the use of a distance metric can be a source of great uncertainty and anxiety for parents (and for education consultants!). 

Whilst the approach claims to be a ‘fair’ way to allocating school places, in reality it creates significant house price distortion near schools rated ‘Outstanding’ by Ofsted, essentially a subtle way of creating ‘middle class enclaves’ and squeezing out low-income families from the ‘best’ schools. 

Coincidentally, our likely future PM is a leading example of a bright, aspirational child who ‘won’ an 11+ place at what was a grammar school… Social mobility in action! But, don’t expect an expansion of grammar schools any time soon. 

So, what next? 

My sense is those currently invested in independent education will do their best to see their children through their final school years, albeit more squeezed than ever before in some cases. 

The long term question for the independent sector is how do they continue to attract local, UK-based families with fees continuing to rise at a faster pace than wages? 

Will there be a new generation of state-plus or independent-lite schools, offering a middle ground for families who wish to invest in their children’s education? 

Linked to the question above, will we also see an increase in the number of private equity-backed education groups absorbing UK independent schools into their portfolio of schools? 

The educational landscape is likely to change rapidly in the years ahead, and seeking professional advice on the school, financial, and property-related front will become all the more important for families as they weigh up how and where they want to live, where they send their children to school, and how they choose to spend their money. 

ESB Consulting 

ESB Consulting is a London-based Family and Education consultancy, supporting families from 20 weeks of pregnancy into early parenthood and through the admissions hurdles and educational challenges of UK schooling. ESB is the brainchild of co-founders, Edward, a former senior leader at King’s College School, Wimbledon - one of the world’s leading independent schools, and Sabina, a gold-standard, royal-appointed Norland Nanny. 

Website: www.esbconsulting.co.uk  

IG: www.instagram.com/esbconsulting  

Email: enquiries@esbconsulting.co.uk  

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Abbie Long - 07400 736436

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