CIOT/IFS debate – Should VAT be charged on private school fees?

With Labour planning to remove the exemption from VAT for independent school fees if it wins the general election, and also end business rates relief for independent schools, the debate explored how private education should be taxed in principle and practice. 

The event on Monday 15 April was chaired by Charlotte Barbour, Deputy President of the Chartered Institute of Taxation and featured speakers:

• Stuart Adam, Senior Research Economist at the Institute for Fiscal Studies
• Sam Freedman, Senior Fellow at the Institute for Government and Senior Adviser to Ark Schools
• Julie Robinson, Chief Executive of the Independent Schools Council
• Kerry Sykes, Director of Big for Tax and Technical Adviser to the Charity Tax Group

Introducing the debate, Charlotte Barbour said most people think of prestigious institutions like Eton or Winchester with fees of “up to £30,000 a year” when they hear about private schools, but there are “many different types” including religious schools, foreign language schools and schools for children with particular needs.

“There’s quite a wide range of schools that could be affected by this,” she added.

Kerry Sykes said that, because not all education is VAT exempt, “we don’t even start from a position where we’re excluding private schools from something which is accessible to everybody else”. “It’s more nuanced than that,” he added. He explained that you have to be an “eligible body” to benefit from the exemption, while “closely related supplies” such as school dinners and accommodation are also exempt.

Private tuition can also be exempt from VAT provided it's a subject ordinarily taught in school, he continued, while nursery fees are exempt, but only as they are deemed to be the provision of care, not for educational reasons.

Kerry said that private schools which are charities have a second route to VAT exemption, which could complicate any future policy to remove their eligibility. This is because non-profit making bodies which reinvest their surpluses back in to education are also exempt.

Likewise, there may be other considerations when discussing the removal of VAT exemption, such as whether boarding schools are providing care in the same way as nurseries do, or private schools which “merge” with other eligible bodies such as universities.

Stuart Adam provided an “economist's point of view”, exploring Labour’s prospective policy and the arguments for and against that. He said the party’s proposals could raise more than £1 billion, which is “not negligible” but is also “not going to be transformative revenue for the state system”. “It’s tiny compared to the public finance challenges facing the next government,” he added.

Looking at the objectives of Labour’s policy, Stuart questioned if we should tax those who buy private education more or less than those with the same, above-average income who use their money in different ways. “That’s not an easy question,” he said.

He also asked whether private schooling should be seen as a consumption good or as an investment for the public purse, via creating higher earning. He argued that it could be seen as an investment generating higher earnings which get taxed in turn – in which case arguably it should not be taxed twice - or saving the state the cost of educating people.

Stuart then explored the counter-arguments around whether private schools have wider costs to the public purse, such as poaching the best teachers, or creating higher-paid jobs only at others' expense.

Sam Freedman said he is in favour of Labour’s policy “not as a class warrior but for pragmatic reasons”. He noted that private schools already pay VAT on the things they buy, but these costs are passed on to parents through fees.

Also looking at whether private education is a consumption or investment, he opted for the former, citing OECD PISA studies. “Private school is a luxury good”, he said, and most benefits are “social and personal” rather than educational. The countries around the world which have the most successful education systems are not heavy users of private schools, he added.

Sam said that New Zealand already charges a similar levy, Goods and Services Tax, on private school fees at 15% and it hasn't changed the take-up of pupil places much. He added that the number of pupils in the UK private school system has stayed broadly the same for 60 years, with private schools controlling demand by raising prices above inflation consistently for decades. The Office of Fair Trading (OFT) has even fined bigger schools for colluding to fix prices.

Sam added that the main reason to extend VAT to school fees is that “we need the money”. He said if Labour aren't willing to go for the “big pots”, such as income tax or National Insurance, then they'll need to target more of the little ones.

He predicted private schools will handle demand by reducing their prices, while the much bigger state sector will easily absorb slightly increased numbers if that happens. Labour should go ahead with this, he said, adding: “The arguments against it feel pretty weak to me.”

Julie Robinson began with some “mythbusting” over independent schools, explaining that more than half have fewer than 150 pupils and a third have opened since 2010. Only eight schools are exclusively boarding.

She said she has concerns over what Labour’s policy will mean for those smaller specialist schools, such as Jewish or Islamic schools, who won’t have the capacity to cut running costs by a fifth. It will mean cutting staff, she said, and we can't assume those staff will move into the state sector. “Smaller schools will be lost,” she warned.

Julie added that these effects could be felt the strongest in less wealthy areas of the UK, such as Wales and the north of England, where headteachers are already reporting lower numbers of registrations. “It will hit hardest those schools and parents who are least able to afford it,” she added.

She said realising that most independent schools are not “the stereotype”, it is clear there “more reliable ways” to raise the money, adding that applying a tax to education would make the UK an “outlier”.

Moving on to questions, the speakers agreed the state sector can mostly absorb additional pupils who may move from private schools in coming years in response to the plans, in part due to falling birthrates. Arguably a pupil bulge has been masking a waning appetite for private schools, added Julie Robinson.

Questioned on the timing of a new tax, Kerry Sykes said it would be “very difficult” to introduce VAT retrospectively, but it would likely be in “an early Budget” if Labour wins the next election.

On whether Labour might compromise on reduced rate, Kerry said doing so alongside the ability to reclaim is likely to result in something broadly cost-neutral. If the party wants to raise £1 billion or more to reinvest, it would need to make use of the full 20% VAT. Sam Freedman added it could be introduced transitionally if Labour was worried about the impact, but this is unlikely.

Asked whether private education is “better” than state, Sam said that parents with children at private schools are often buying a better “experience” in terms of facilities and networking, rather than a better education per se. The panel said studies on this often contradict each other, with Julie Robinson adding that the schools system is an “ecosystem”.

Kerry Sykes said if you were simplifying the system you would probably remove many of the exemptions, but it is unlikely to mean there would be similar taxes on university fees. The key difference is that there isn't a free alternative to university, and tuition fees are basically dictated by the Government.

On international students, Julie Robinson said that only 5% of ISC pupils have parents who live overseas, explaining that schools charge the same fees for those student, unlike universities which charge foreign students more.

Watch the full debate. The next CIOT/IFS debate will be on the evening of Wednesday 3 July at 10-11 Carlton House Terrace, London, on the topic of tax and the housing market. It will also be broadcast online.