Leading private schools are reportedly suggesting a way parents might be able to avoid Labour’s proposed VAT levy on fees.
Sir Keir Starmer has pledged to end tax breaks for private schools if he becomes prime minister. The Institute for Fiscal Studies (IFS) estimates that removing the 20 per cent tax exemption for private schools would generate about £1.6 billion a year in extra tax revenue, although this figure has been disputed.
With the next general election expected by the end of 2024, the proposal has caused concern among some parents who face paying tens of thousands of pounds more for their children’s education within just a few years.
A parent paying the roughly £50,000-a-year fees for Eton College, for example, could end up paying an extra £10,000 a year if the full increase is passed on to parents. A number of other leading private schools have fees in the region of £50,000.
It is one of a number of changes to tax policy that could be introduced by a Labour government.
Could advance payment of school fees avoid VAT?
The Sunday Times reports that some schools, including St Dunstan’s College in south-east London, and Merchant Taylors’ School, in Hertfordshire, have made parents aware that they might be able to avoid the potential VAT-induced price hike by paying fees upfront.
St Dunstan’s head teacher Nick Hewlett reportedly wrote to parents earlier this year: ‘A potential form of mitigation is for parents to make use of our existing fees in advance scheme. This is not a new initiative, having been in place for many years and the discount offered remains the same as previously. We did not encourage parents to use the scheme and we did not give either financial or legal advice.’ Merchant Taylors’ School reportedly said its advance payment scheme ‘may provide parents with a degree of long-term assurance in the current climate’.
However, the Independent Schools’ Bursars Association (ISBA) has reportedly recommended making parents aware that there is a risk that a new government could choose to levy VAT from the point at which the money is spent, rather than when it is paid. This would mean VAT could become liable even if fees were paid in advance.
The ISBA noted advanced payment options are ‘perfectly legitimate’ and have been used for a number of years. It added: ‘There is still a lack of detail around Labour’s policy and so schools cannot yet advise parents on any specifics.’
Questions over how much the VAT levy would raise
There have also been questions around exactly how lucrative such a scheme would be.
Whether the estimated £1.6 billion figure is accurate depends on the number of parents who would move their children from private schools to the state sector in response to higher fees.
Based on a previous estimate from the IFS, the 2019 Labour Party manifesto suggested that the drop in private school attendees would only be 5 per cent. However, educational consultancy Baines Cutler predicted in a 2018 report that as many as a quarter of pupils could make the switch.
The shift would also place a far greater burden on the state. In June, research by educational thinktank EDSK found that if a quarter of pupils switched from private schools, the government might raise only a net £19 million. In a post on LinkedIn analysing Labour’s proposals, a pensions specialist at Aon, Paul McGlone, likened the party’s claims to the much-contested ‘£350 million a week’ figure emblazoned on the side of the Brexit bus.
The scheme has also faced widespread criticism. Writing in Spear’s earlier this year, Gareth Parker-Jones, the head of Rugby School, noted that adding VAT – and potentially making school fees 20 per cent more costly for families – ‘would inevitably mean that some hard-working parents are driven from the sector’.
He added: ‘Their children would then need to be educated by an already stretched state education system. Far from raising income for the Treasury, it has been calculated that by Year Five the policy would cost the taxpayer an additional £400 million a year.’