4 July 2023

Would charging VAT on private school fees really raise £1.6bn?


I doubt the authors of the 1994 Value Added Tax Act would have imagined that this legislation could end up at the centre of a political storm two decades later, yet here we are. 

Both the 2017 and 2019 Labour Party manifestos claimed they could raise £1.6bn a year from adding VAT to independent school fees. This claim has since been repeated many times by senior Labour figures after Keir Starmer adopted the same policy as party leader. 

In the last few days, the Labour Party again drew on this newly created £1.6bn pot to fund their proposal to pay £2,400 to newly qualified teachers who stay in post for two years, at a cost of £56 million. 

Given its political salience, our recent EDSK research paper decided to investigate this issue, with the aim of answering one question: is £1.6bn a credible number?

The initial signs were not encouraging. The figure originates from a Fabian Society magazine article in 2011, which claimed that if you multiplied the number of children in ‘independent schools’ by about £2,500 (which was, very loosely, a 20% margin on top of the average school fees at the time) then you get somewhere near £1.5bn in new government revenue.

Only you don’t. As our research paper explains, this 2011 article accidentally included over 50,000 pupils who attend schools which are categorised as ‘independent’ but funded by the state and around 60,000 children who attend nursery classes offered by independent schools in their calculations. If you excluded these individuals, £300m a year of predicted VAT revenue vanishes straight away.

And it gets worse. VAT would presumably be charged at the standard rate of 20% on school fees, but as soon as an organisation becomes registered for VAT then they can start claiming back any VAT that they pay on their own purchases. As a result, the net VAT rate would be more like 15% of school fees rather than 20% – representing another significant hit to the original calculations.

The next question – and no doubt the hardest – is how many pupils would be forced to leave independent schools because the addition of VAT made the fees unaffordable. Two estimates have been previously published, one from either side of the debate. First, the Labour Party has stated that only 5%t of pupils would have to leave, whereas a report commissioned by the Independent Schools Council suggested that 25% of pupils may be pushed out. 

This difference of opinion is hugely consequential because for every pupil that leaves an independent school, the government would no longer receive the VAT that was added to their fees and the government would also now have to pay for that pupil to be educated in a state school instead. This explains why every percentage point increase in the proportion of pupils who leave the independent school sector would hit the government finances twice.

If you take the original methodology used in 2011 and corrected its errors as well as incorporating the average independent school fee and total pupil count from 2022, a 5% reduction in pupil numbers after adding VAT to fees would generate about £1bn a year for the government. However, a 25% reduction in pupil numbers would essentially raise no money at all.

The bad news does not stop there. Our research paper found that forcing independent schools to charge VAT on fees may lead to several unintended consequences. For example, some wealthier parents may choose to pay their school fees in advance (something that many schools already permit) to try to avoid incurring VAT after a change of government.

Moreover, if independent schools had to charge VAT on fees then they may become eligible to reclaim any VAT that the school incurred on recent large ‘capital’ (building or refurbishment) projects. Those independent schools that have built new swimming pools, sports halls, music rooms, drama studios, laboratories or lecture halls over the last decade could be in line for an unexpected tax windfall, which could make for some politically awkward headlines.

The truth is that no-one knows for sure how much revenue could be raised by adding VAT to independent school fees, and our EDSK paper did not set out to produce a definitive answer on this high-profile issue. That said, even some basic sums and a bit of VAT research suggest that the £1.6bn figure looks far too optimistic. If the Labour Party or any other political party wants to ‘spend’ this £1.6bn before it even materialises then they could be in for a nasty surprise if they form the next government.

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Tom Richmond is Director of EDSK.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.