What happens if VAT is charged on school fees?
Much has been made in the news recently about the future for private schools, particularly around increasing costs.
So, what’s happening?
The new prospective Labour government aren’t removing charitable status for private schools (this would require a change in law) but rather proposing to introduce a levy of 20% VAT on education services and a removal of discount on business rates.
How much are private school fees currently?
According to the Institute of Fiscal Studies, in 2022–23, average private school fees across the UK were £15,200 in today’s prices (net of bursaries and scholarships). This is £7,200 more than state school spending per student in the same year, which was £8,000. Moreover, the gap between private school fees and state school spending per student has more than doubled since 2010, when the gap was about 40% or £3,501.
How many students are educated in the private sector?
The number of students in the UK in private schools has remained around 6-7% for at least the last 20 years (or about 560,000–570,000 pupils in England). Importantly, this has occurred despite 20% real terms increase in average private school fees since 2010 and a 55% rise since 2003.
The ‘saving’ made by the government on not having to educate children in private school is estimated at about £4 billion.
This trend – private school attendance as being largely stable – contradicts the argument that introducing this policy would make independent schools even more elite by pricing out more parents who can’t afford it. The ISC (Independent Schools Council) says 20% of those independently educating their children will have to pull out of independent school. The IFS has evaluated private education as being largely price ‘inelastic’ meaning demand is not overly sensitive to price.
Unsurprisingly, private school attendance is almost entirely concentrated at the top of the income distribution level. Key evidence suggests that it is often motivated by wider factors, such as culture and values.
How much would the proposal raise for the government per year?
It is estimated that removing tax exemptions from private schools would raise about £1.6 billion a year in extra tax revenue (notably less than is saved by current private school students being educated within the private system).
This results from an effective VAT rate of 15% after allowing for input deductions, likely VAT on boarding fees and exemptions for specialist provision. It also includes extra revenue from business rates.
What effect might parents withdrawing from private school have on government revenue?
The Institute of Fiscal studies suggested that if the demand for private schooling were to reduce due to increases in post-tax fees, the additional overall tax revenue would likely be unaffected. This is because reduced revenue from VAT on private school fees would likely be made up for by higher VAT revenues on other goods and services. If parents did decide to stop paying for private school because of the extra VAT, this would release spending on fees that would likely be spent on other goods and services, generating extra VAT revenues.
How might the proposed changes affect state schools?
The best judgement of the IFS is that it is “reasonable to assume that an effective VAT rate of 15% would lead to a 3-7% reduction in private school attendance. This would likely generate a need for about £100-300 million in extra school spending per year in the medium to long run”. It is important to note that this contradicts the prediction of the ISC who estimate nearly a 20% drop off rate in parents sending their children to private school.
Therefore, in combining estimated tax revenues and needs for extra public spending, the IFS have estimated a net gain to the public finances of £1.3-1.5 billion in the medium term which corresponds to about a 2% increase in school spending in England. Labour has suggested this would be targeted at disadvantaged students.
How might the proposed changes affect private schools?
As has been mentioned, private schools may experience a drop-off in parents sending their children. There are concerns that some savings that a school might use to pay for the VAT might end up being made by reducing the provision of bursaries, discounted fees and outreach work with local schools.