Policy

Avoiding VAT is a risky strategy for private schools. Better advice is available

VAT avoidance schemes could backfire. Perhaps private schools should ask state school leaders for financial advice instead

VAT avoidance schemes could backfire. Perhaps private schools should ask state school leaders for financial advice instead

10 May 2024, 9:23

Labour has announced that it will levy VAT on school fees. I imagine few of my readers are directly affected – either as worried parents, or as worried heads or teachers. But heh, it is nice to look over the fence once in a while, especially when you can have a chuckle at a sector we are all too often envious of. 

A car costing three times as much as a Ford or Vauxhall is a luxury car. Private schools often cost three times a state school’s funding level; they too meet the common-sense definition of a luxury good.

VAT on private schools is perfectly defensible – even if part of me dislikes the idea of taxing any form of education. (“First they came for the private schools, and I did nothing, because I did not work in one. Then they came for hardback books, and I did nothing because I always bought paperbacks. Then they came for school lunches, and I did nothing because I always made a packed lunch at home…” and so on.)

Private schools, however, are not waiting around for the arguments to be made. Many are already offering ‘pay-in-advance deals’ because the law says if you pay now, today’s VAT rate applies. This looks like a winner and a poke in the eye to HMRC and the Labour Party.

But not so fast. The government can (and surely will) say that this general principle doesn’t apply this time. It is called ‘anti-forestalling’ and is well-established. At that point parents – or the school – will have to find the VAT. 

Even if the government does not do this, HMRC can take a school to court, arguing that it has created an artificial arrangement to avoid VAT. That seems plausible, particularly as the ‘pay now’ schemes look more like a loan than a purchase.

The price of schooling in three years’ time is not set now, for example, whereas it would be under a proper purchase agreement. Many schools are pushing ‘pay now’ this year and specifically mentioning the VAT saving, making it look like tax avoidance. 

If HMRC pursue this, schools immediately have to pay HMRC the full VAT owed. They will get it back if HMRC loses, but a court case could take years. 

That is democracy and we have to live with the decisions our politicians make

And HMRC have years to decide what to do. Imagine they decide to take action in five years’ time. If every parent had paid in advance, VAT at 20 per cent would mean an accumulated VAT liability equal to an entire year’s fees.

Of course not all parents will do this, but the liability could be large – enough, one would have thought, to worry an accountant in the intervening years about whether the school is a going concern. 

There are times in our lives when bad stuff happens. State schools did not want the Theresa May cuts in real-terms funding. Indeed, they didn’t want austerity at all. But you know what? That is democracy and we have to live with the decisions our politicians make.

State schools, starting from much lower levels of funding, managed to make ends meet. Good, valuable things were scrapped. Quite remarkably (at least until Covid) our schools and our children coped. Outcomes remained strong, measured by GCSE results, PISA and comparison with other parts of the UK. Our state schools can be proud of what they have achieved in tough times.

It is time for private schools to show the same resilience. Fees have risen a lot in recent years. If parents won’t pay 20 per cent more, private schools need to make austerity work. No more fancy new buildings. Hire out that swimming pool in the evenings. Maybe – whisper it quietly – close the pool altogether. 

And if they struggle to do that, perhaps they should approach their local state schools to ask how to cut costs without cutting standards. I am sure for the right fee our state school leaders, many of whom really are outstanding, would be willing to impart their wisdom.

No doubt they’d find a lot of savings to make. In fact, I’d bet a bottle of luxury sparkling wine on it.

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8 Comments

  1. Ah, another man with zero knowledge of the complex variety of independent schools in England who chooses to share his opinion. Which would be interesting if it were valid and he’d bothered to research the different types of private school out there.

    • Jack Mcinedin

      A rather sad indictment of the lack of ambition of the writer and his wishful thinking that harm comes to the private sector. Across multiple spheres the private option gives major satisfaction to its students and parents alike – who go without luxury to be able to afford it – avoiding the lottery of state school (if you can get into your local school).

      This writer appears not to have children given their lack of mention of students own wishes, and the harm this measure will cause when families have to choose to take their child out of a local private school to put them in a farther out crammed state school.

    • Rory MacDonald

      Actually the author worked in the Department of Education for some time in the last decade, so I don’t see how you can accuse him of ignorance.

      • Al Dev

        Certainly, not many people are aware, but Greece attempted this, and even The Economist described it as “Mayhem”, as seen here: https://www.economist.com/europe/2015/10/30/greece-reconsiders-a-tax-on-private-education . Taxing merit goods such as healthcare and education is fundamentally flawed. I advocate for increased investment in education, achievable by raising the higher tax rate. The children transitioning to state schools would be those whose parents either leveraged their homes to afford private education or received scholarships. From a macroeconomic perspective, the private education sector is nearly self-contained, with the majority of expenditures remaining within the UK. Moreover, it contributes to the economy through the enrolment of foreign students, effectively exporting education services. However, with the implementation of an education tax, foreign students may opt for countries where their tuition fees aren’t subjected to a 20% diversion from their children’s education.

        Let me be unequivocal: any potential increase in tax revenue, estimated at a maximum of £0.5 billion, would be outweighed by the economic repercussions on a £17 billion industry. Furthermore, the taxation of merit goods would lead to a reduction in professionals, such as doctors, resulting in a multi-billion pound loss. Merit goods inherently provide substantial economic benefits and should be incentivised. Germany and Sweden, for instance, subsidise private education. To illustrate the impact of merit goods, consider the following calculation:

        Individuals graduating from private schools typically earn £156 more per week. Investing in education is undeniably beneficial. With approximately 51,000 students attending private schools annually, this translates to an additional earning of £414 million per year (156 * 51,000 * 52 weeks), resulting in approximately £250 million in tax revenue annually (414 * (40% income tax + 20% VAT)). Thus, even a modest 20% decrease in attendance by the 10th year would result in an annual loss of £0.5 billion, with a cumulative loss of £13.75 billion. A 40% reduction in attendance would lead to £0.5 billion annual losses in just 5 years, with tax revenues plummeting to £0.3 billion.

        While some may argue that reallocating VAT revenue to the public sector constitutes increased investment in merit goods, overall spending would decrease. Instead, increased investment in education could be achieved by raising the top tax rate or taxing luxury items such as cars and long-haul flights. Taxing merit goods is inherently illogical.

  2. Slightly too smug, not least because so many MATs actually run as ‘for profit’ whereas most independent schools do not. You also cherry pick the PISA data too easily to support your argument, it is known that the UK’s position is heavily inflated at the moment because of how few UK schools took part post COVID and of those only mostly higher performing schools did so.

    Most independent schools already support their local communities by making their facilities available, and also support local state schools through their charitable status. Those are the savings that will be made first.

    The issue not being addressed is the equality issue. Ignore all the money arguments, established evidence is that at best this policy will break even or raise such a small amount money (in national terms) to be largely irrelevant.

    It is not arguable that Independent schools entrench social inequality, they clearly do, and so for moral reasons the policy is easy to get behind. However, at the moment the biggest reason for this Inequality is how poor the public education and early help sectors have become, which has re-entrenched deprivation at the basic level. In my opinion, put the funding back in to these sectors for 5-7 years first, then change the independent sector’s status when the difference in standards has been brought closer together.

  3. Christian

    It’s easy to be smug about private schools. The reality is that the state school system doesn’t deliver consistently, and further, parents who put their kids in private schools don’t burden the state schools.

    In Germany you get a tax discount if you send your kids to private school, since you don’t occupy a spot in a state school. So yes, I think VAT on private schools can work, but I then would like an equal tax break to compensate for not using state resources. I’m already paying double for my kids to go through school, the way it is set up now.

  4. I work in a very small independent school where the majority of our children come to us because they have special educational needs, emotional needs or have been bullied in other state schools. Our parents are not privileged, some giving up family holidays to be able to send their child to a school that will meet their child’s needs where the state system has failed them. Teachers get paid just above the living wage in order to keep school fees as low as possible and affordable. We work there because we see the need. It costs parents less to send the children to us than it does the average state school to educate them. We do not make a profit and do lots of fundraising in order to provide what the children need. If VAT is imposed on small schools like ours we may have to close and the local authority will not only need to find spaces for 180 children in already over stretched schools, but they will also have to foot the bill. Our children will also run the risk of having to go back into a system that has spectacularly already failed them. I think the author of this article should spend some time in the many schools just like ours all around the country before passing judgement.

  5. I suggest VAT be added to the Masters Qualifications offered by LSE. At £36,480, this is also a luxury product. Maybe the inflated salaries at LSE could be cut to pay for this bloated, profiteering sector.