All Governments have to raise tax to pay for public services. In the year 2023/24 the UK Government spent £1,189 billion. Looking at the raising of tax revenue in purely practical terms, any tax needs to have number of attributes. It needs to generate significant tax revenue, it needs to be easy to administer, it needs to be difficult to avoid and it needs to cause as little disruption to the economy as possible. The tax should produce as much milk as possible without killing the cow.
There are approximately 2,600 independent schools in the UK providing education to approximately 620,000 students. The turnover of such independent schools is approximately £8.35 billion, so the average annual fees per student is approximately £13,468 and the turnover of an average school is £3.2 million. The average annual spend of State schools per student is approximately £7,460. If provided for by the State, 620,000 students would cost over £4.625 billion per annum. How they would be accommodated is unclear. Significant capital costs would be involved.
While it is easy to picture all independent schools as being Eton, the reality is that most are not. My school was founded in 1868 under strict Church of England principles specifically to provide a local middle-class alternative to the more illustrious Public Schools. It was always at the “value for money” end of the market and remains so proudly. Most independent schools are. This end of the market is the most competitive. The vast majority of independent schools are charities. Whatever surplus is produced in any year is ploughed back either into improvements to the buildings or into scholarships and bursaries. There are no shareholders to pay. As charities, their annual accounts are published. Virtually all revenue is spent on salaries either for teachers or for welfare and support staff. By their very nature, boarding schools employ many types of staff not employed in State schools. In my time, my school was able to provide generous scholarships. This has now gone due to the competitiveness of the market. On average, each person employed by my school costs £41,000 per annum.
For many parents, boarding schools are the only viable means of schooling. Members of the armed forces stationed overseas and those who have to travel extensively for business do not want their children to have to change school every year. Children need a constant base. For parents who could use State schools, there will be at least one significant reason which makes them put their hands in their pockets. One such reason may be special educational needs. There is a higher proportion of pupils with special educational needs in independent schools than in State schools. Indeed, the Government pays independent schools to take in pupils with special educational needs where it lacks the capacity to do so.
The Government contends that there is deficit in annual expenditure (which it describes as being “a black hole”) of £22 billion. This is an unverified figure and I doubt that it is correct. Even if it were, such a deficit would amount to 1.85% of annual spending. This is hardly a “black hole”.
Any normal Government might take the view that any institutions which were able to relieve it of annual expenditure of over £4.625 billion should be cherished and encouraged. The Blair Governments did not take this view completely. However, they were at least pragmatic enough to enjoy the savings brought and to realise the inevitable difficulties involved in changing the status quo.
It is notoriously difficult to estimate the effect of tax changes in advance. An increase in the rate of income tax of 1% might well give rise to a yield of an additional 1%. The assessment of any other change would need to take into account the effect of attempts to avoid and the consequences on job losses of the tax itself. The effect of a wholly new tax is particularly difficult to estimate. I have explained elsewhere the errors made by the Treasury in estimating the effect of the removal of 100% APR and BPR.
VAT was introduced as a result of the entry of the UK into what became the EU. It commenced in 1973. It applies to most services. However, it has never applied to fees paid to educational establishments including independent schools, universities, or the providers of vocational courses (including Bar School). It is wrong to refer to the recipients of any service to which VAT has never applied as enjoying “a tax break” particularly where no comparable service is subject to VAT.
It is interesting to note that the turnover for the supply of books in the UK is £7.1 billion. This is not far from the turnover of independent schools. If VAT were charged on the sale of books, it would generate something close to that generated from independent schools with no obvious downside. Middle class people read books. Why should they enjoy the “tax break” which is the result of VAT not being applied to such sales?
The Government claims that the VAT revenue will pay for 6,700 new teachers in State schools. How these will be recruited and how they will be accommodated in current State schools is anyone’s guess. Recruitment and retention of teachers are problems at the moment. I think that there is about as much chance of recruiting 6,700 new teachers as there is of building 1.5 million new homes.
The Institute of Fiscal Studies produced a report in July 2023 in relation to the application of VAT to independent schools. It concluded that 37,000 students would leave independent schools and would need to be accommodated in State schools. The annual VAT to be raised would be £1.67 billion but £325 million of this would be reclaimed and £276 million would be lost as an addition to the education cost. The report did not consider the effect of the closure of independent schools.
VAT applies to all supplies made after 1st January 2025. It is particularly cruel and disruptive to bring in such a change in the middle of an academic year. This might be a GCSE or “A” Level year. The recipient State school might not provide the same options or teach subjects in the same order.
When the proposed change was announced in October, I suspected that there would be little exodus of students before the end of the current academic year and that parents would be able to cope until then. However, nearly all independent schools have passed on at least 15% of the VAT charge to parents. The remaining 5% will be found from reducing scholarships and bursaries or failing to complete capital projects. Few schools have the ability to pay the VAT from reserves. The most recent evidence is that 5,500 students have left already notwithstanding the obvious difficulties and that as many as 150,000 may do so in the long term. As many as one in five independent schools may have to close.
Losses of students at such levels change the whole economics of the tax change. The net tax revenue decreases to £819 million and the cost of providing schooling increases to £1,119 billion. 520 schools will close. If the average cost of employment is £41,000, then just under 41,000 people will lose their jobs. Many will not find another and will need to receive benefits. There will be no income tax or national insurance receipts for these people.
The imposition of VAT on the fees of independent schools became Labour Party policy in April 2024. The Labour Party became aware of the alleged “black hole” in Government finance on or about 27th July 2024. Accordingly, it cannot be suggested that the imposition of VAT on the fees of independent schools is a response to the finding of the “black hole”.
It might well be argued that parents knew that the Government intended to impose VAT on independent school fees before the start of this academic year and should have planned accordingly. After all, this was in the manifesto. However, the budget speech bore little or no relation to the manifesto. The removal of the winter fuel allowance, the removal of 100% APR and BPR, inheritance tax on pensions and the increase in national insurance were not in the manifesto. Why should anyone take a Labour Party manifesto at face value?
Has the Government just miscalculated the effect of the new tax? It is difficult to believe this. Many commentators suggested what might happen if the change were made. At best, the net return from the change would have been marginal in the context of total Government spending. In reality, the imposition of VAT on school fees is just a means of settling old scores. This Government should not be confused with the Blair Governments. It is Socialist at heart. Just look at the number of former trade unionists in the Cabinet. Traditional Labour voters have always had a chip on their shoulder about independent schools. The Government is having a tough time with traditional Labour voters. Yesterday, 20 councillors in Browtowe defected from Labour claiming that it had “abandoned traditional Labour values” particularly as regards the winter fuel allowance. To be fair to Sir Keir, an attack on independent schools is about as traditional Labour as is gets.
Sean Kelly (Secretary) 3rd January 2025