4 Mins
It’s not unusual for speculation on taxation matters to be widespread prior to upcoming ‘fiscal events’ – Budgets, Spring Statements & Spending Reviews – and often tax can be a significant doorstep topic for canvassers and voters alike at election times. But given that the latest possible date of the next General Election is mid-January 2025, it is unusual to see the levels of narrative currently being seen in respect of an Opposition (Labour) tax proposal to withdraw perceived tax benefits from Independent Schools, which are typically charities. That may be because it’s often difficult to get specifics out of an opposition party in the run-up to elections but for whatever reason, it looks like being a key feature in the taxation landscape leading into the next election.
Understanding Labour’s plan: removing charitable status from independent schools
Labour’s proposal appeared to be to remove charitable status from Independent schools, potentially impacting their rates positions but most directly seeing the removal of Exemption from VAT on the school fees.
In late September, the policy has been ‘clarified’ to have less focus on the removal of charitable status and more emphasis on ‘removing a tax break’ – specifically making school fees liable to VAT. The proposals have been opposed by those in the sector and a number of studies produced to support positions – reflecting the expected impacts on both the organisations themselves – with some fearing closure if pupil numbers are hit by higher fees – and the wider impact of pupils being ‘displaced’ into state education.
And then there’s the money – like most tax proposals, all is not straightforward; removing rates reliefs (£1 billion) and adding VAT at 20% to all independent school fees might generate revenue to the Government (£1.7 billion) based on Labour figures (and see below for the IFS view). It is not, however, clear whether the potential VAT revenue figure has not been properly reduced by VAT that the schools would then be entitled to reclaim on expenditure and the additional costs which would then be borne by state education providers who would be expected to take on additional pupils. That also leaves aside the impacts of change on educational attainment/class sizes etc.
Potential impact on education: effects on schools, pupils and state education
To date, much of the argument has been informed by parties with an interest in particular outcomes – Oxford Economics carried out an appraisal in December 2022 that highlighted that independent schools saved the Government £4.4 billion per year by providing an alternative to state provision, and generated £5.1 billion of tax revenues from the ~328,000 jobs in the independent school sector. That report was commissioned by the Independent Schools Council. And so, step forward the Institute for Fiscal Studies (‘IFS’), the independent non-political economics research institute and their July 2023 report on ‘Tax, private school fees & state school spending’. Key among their findings is that the share of pupils across the UK in independent schools v state schools is around 6-7% (as it has been over 20 years) – despite a 20% real terms increase in fee levels since 2010 and 55% rise since 2003.
Their view on the tax revenue gain of the addition of VAT to fees & potential withdrawal of rates reliefs is around £1.6b. They point out that if demand for places reduces as a result of the increased process, VAT revenues will not be impacted as spending is switched to other goods and services. They estimate that there would be a need for an additional £100m-£300m annual increase in state school spending in the medium to long term.
Analysing the net financial impact and funding for disadvantaged students
Taking all aspects of revenue & cost into account, the IFS estimate that the proposed changes would generate a net gain to public finances of around £1.3bn – £1.5bn per year in the medium to long term – money Labour earmarks for targeted disadvantaged students. None of the IFS key findings focuses (perhaps understandably given its role) on the ‘people’ aspects of the Labour proposal – the impacts on individual schools, individual pupils, learning class sizes, community provision, availability of bursaries and so on. Education in its widest sense is not all about the money but providing the best we can for our learners. Given the narrative to date, there is every chance that this topic could become an even hotter topic as an election draws closer.
Scotland’s independent school sector: challenges and considerations
And a final tartan ‘twist’ to consider for the independent school sector in Scotland. Most reports have focussed in very broad terms around the capacity of the wider state sector to cope with displaced independent school pupils. A study in 2018 by Biggar Economics reported that the 10 independent schools in Edinburgh educated 14% of Edinburgh primary & secondary aged pupils – DOUBLE the UK national average reported by the IFS. Whilst the theory suggests local authorities could cope on a national level, it’s difficult to see how that can be managed in that locale, certainly in the short term.