Adding VAT to private school fees could raise “very little” new revenue if a quarter of pupils leave the independent school sector, a think tank has said.
Forcing private schools to charge VAT on their fees is likely to have the least impact on the most expensive schools and the wealthiest parents, according to education think tank EDSK.
It comes after the Labour Party has said it would end the tax breaks enjoyed by private schools, most of which have charitable status, giving them at least 80% relief on business rates.
In September 2021, the party said a Labour government would end the charitable status of England’s private schools, raising an estimated £1.6 billion from VAT and £100 million from business rates.
But the research paper from the think tank finds that charging VAT on private school fees is likely to raise far less than £1.6 billion a year.
Changing VAT rules with the sole aim of targeting private schools could lead to many unintended consequences that result in a government raising much less money than intended— Tom Richmond, director of EDSK
It claims that the calculations behind the £1.6 billion figure do not take into account a drop-off in demand for private schools if VAT is added to fees – which would require extra spending to educate these pupils in state schools.
The paper suggests that even under a “best case” scenario – based on the projection that 5% of pupils would leave private schools – the addition of VAT to private school fees would only raise around £1 billion a year.
Under a “worst case” scenario – in which 25% of pupils leave private schools – adding VAT to fees would raise very little new revenue, especially when additional administration costs for HMRC are taken into account.
The think tank also warns that forcing private schools to charge VAT on their fees may lead to several unintended consequences.
It says some wealthier parents may choose to pay the school fees in advance to try to avoid incurring VAT on them under a new government.
Private schools that have built new swimming pools, sports halls, music and drama studios, laboratories or lecture halls could be given a possible “tax windfall” on major building or refurbishment projects, the report adds.
Scrapping tax breaks for private schools would amount to a small, somewhat symbolic but overall positive step towards addressing the educational inequality caused by the two-tiered education system in England and Wales— Francis Green, co-founder of Private Education Policy Forum
Tom Richmond, director of EDSK and author of the report, said: “Claims of £1.6 billion a year being raised from adding VAT to private school fees look far too optimistic, particularly if any more than a small number of pupils end up leaving private schools and moving to the state sector instead.
“What’s more, changing VAT rules with the sole aim of targeting private schools could lead to many unintended consequences that result in a government raising much less money than intended.”
Mr Richmond, a former ministerial adviser at the Department for Education (DfE) said: “Adding VAT on fees is also likely to have the least impact on the most expensive private schools and the wealthiest parents. This could reduce the level of public support that any government can expect to gain from such a move.”
Julie Robinson, chief executive of the Independent Schools Council (ISC), said: “These calculations show what we have been saying all along: Labour’s policy will not raise the money it claims.
“We would welcome the chance to work with all politicians to build on the good work already being done by our schools instead of penalising parents for making the choice of an independent school for their children.”
Francis Green, co-founder of Private Education Policy Forum (PEPF) and professor of work and education Economics at UCL, said: “While raising some valid points, there are a few question marks over this analysis.
Labour does not recognise the numbers cited in this report, which rest on flawed assumptions and leaves more questions than it answers— Labour source
“Among these is the fact that the author seems to assume that many private school parents will pay upfront fees, which is in fact only possible for the very richest. It also fails to note that switches into the state sector are unlikely to happen immediately, with additional tax being paid in the interim.”
He added: “On balance, scrapping tax breaks for private schools would amount to a small, somewhat symbolic but overall positive step towards addressing the educational inequality caused by the two-tiered education system in England and Wales.”
A Labour source said: “Labour does not recognise the numbers cited in this report, which rest on flawed assumptions and leaves more questions than it answers.
“We do not accept that the numbers of students leaving the sector would be anywhere near those cited in this report, something which previous research from the respected Institute for Fiscal Studies has also been clear about.
“The report also assumes that money not spent on private schools would not be spent on other VAT-able goods and services: that shows that this is simply not a serious piece of research.
“Labour’s position, and our policy, remains clear: we will invest in our state schools by ending the tax breaks private schools enjoy.”
