Finance Bill 2024-25 Committee Stage – MPs vote to put VAT on school fees

The government’s clauses on these parts of the Bill passed without amendment.

The remaining clauses will be considered in Public Bill Committee in late January and early February 2025.

Documents related to the Finance Bill are available to view on the House of Commons website.

The CIOT produced four briefings for MPs on the clauses under discussion:
Finance Bill 2024-25 briefing - Capital Gains Tax rates and reliefs
Finance Bill 2024-25 briefing - Oil and Gas Taxation
Finance Bill 2024-25 briefing - VAT: Removal of exemption for private school fees
Finance Bill 2024-25 briefing – Stamp Duty Land Tax (to be uploaded shortly)

Points from the CIOT briefings were raised in three of the four debates by the shadow minister.

Finance Bill 2024-25 Committee of Whole House Debate

Day One: Tuesday 10 December 2024

Group One - Capital gains tax (CGT) rates and reliefs

Clause 7 and Schedule 1: Main rates of CGT for gains other than carried interest gains

Clause 8: Business asset disposal relief: increase in rate

Clause 9: Investors’ relief: increase in rate

Clause 10: Investors’ relief: reduction in amount qualifying for relief

Clause 11 and Schedule 2: Sections 7 to 10: transitional provision

Clause 12: Rate of CGT for carried interest gains

Three new clauses were tabled (read them in full here):

• Lib Dem new clause 1 would have required the government to produce a report setting out the impact of changes to CGT made in the Bill on investment and the disposable income of taxpayers across different income deciles;
• Conservative new clause 4 proposed a review of the expected impact of the carried interest change, including on the timing of asset disposals, tax planning and migration;
• Conservative new clause 5 would have required an assessment of the expected impact of the change to Business Asset Disposal Relief.

Debate

The Economic Secretary to the Treasury, Tulip Siddiq, led debate on these clauses for the government. She explained that clauses 7 to 11 will retain the UK’s competitive investment climate and clause 12 would make the tax treatment of carried interest fairer. The minister considered the increase in the main rates of CGT a “balanced and responsible” approach to raising revenue.

The Shadow Financial Secretary to the Treasury, Gareth Davies, led for the Conservatives. He thanked the Chartered Institute of Taxation (CIOT) for their “invaluable support” and highlighted several issues raised by the institute. Warning that it is too late to change the format of the relevant 2024-25 tax return pages to accommodate this in-year change, he asked the minister to provide the following assurances to HMRC: “first, that it will be properly equipped to implement this measure; secondly, that the changes will be published as widely as possible; and, thirdly, that an appropriate level of understanding will be shown to taxpayers contending with these complications.”

On Clauses 8 and 9, Davies cited the CIOT’s observation that the immediate increase to main CGT rates creates a window until April 2025 for business owners to save up to 14%, incentivising early sales. He argued this could have been avoided, along with administrative challenges, if clause 7 measures had been implemented from the start of the financial year. He added: “if hon. members are not satisfied with the minister’s explanation, I encourage them to vote for new clause 5, which would require a proper assessment of the impact of this perverse incentive”.

The Shadow Financial Secretary quoted the CIOT once again in relation to the anti-forestalling provisions in clause 11 and schedule 2. The institute, he said, “notes that the anti-avoidance measures risk being “unfairly retrospective”, capturing those who entered into commercial contracts in good faith before the Budget, on the grounds that they do not satisfy the stringent requirement put down by the Treasury to be “wholly commercial”.” He asked the minister for the rationale behind the ‘tight’ wording.

Davies concluded his remarks by criticising clause 12, claiming that: “The Treasury’s own Red Book says that the measure will not raise a single penny in revenue”.

A member of the Treasury Committee and Labour MP, Yuan Yang, welcomed the CGT increases. She reminded members that in 1988 former Chancellor Nigel Lawson equalised the rate of CGT with income tax due to tax avoidance concerns. She provided an example that some self-employed individuals or consultants channel their income through personal companies, ‘avoiding’ income tax on income-like activities. When such businesses are sold, CGT applies, which is “much lower” than income tax, creating a gap.

Yang emphasised the importance of the tax system being ‘efficient’ in raising revenues, adding: “The tax system must also be principled in ensuring that the tax purposes to which we have allocated certain measures raise the right taxes and are targeted towards the kinds of activities that are meant to be taxed”.

The Liberal Democrat Treasury spokesperson, Daisy Cooper, considered the current CGT system ‘unfair’. “Most people already pay too much CGT when they sell a property or a few shares because the system does not account for inflation over the time they have owned them.  At the same time, a tiny number of super-wealthy individuals—the top 0.1%—are able to exploit the capital gains system as effectively one giant loophole to avoid paying income tax like everyone else.”

Cooper explained that the Lib Dems’ proposals would have separated out CGT from income, raised the tax-free allowance, provided a new allowance for inflation and had three different rates of CGT. She suggested that with this approach the government could raise £5.2 billion, more than twice as much as Labour’s proposals. She emphasised that a key to their proposal is the reintroduction of indexation for inflation — “that would be fair for ordinary people selling a family home or a few shares, but it would also incentivise long-term investment by ensuring that taxpayers are not penalised due to inflation if they hold their assets for a long period of time.”

Labour MP Jim Dickson supported the changes, saying UK CGT rates, even with these changes, still compare well with our European neighbours.

SNP spokesperson Dave Doogan criticised the government’s approach to reforming CGT, suggesting that they could have worked with economic experts – he quoted the IFS extensively – to create a more “growth-friendly” CGT. He said: “Taxing unearned wealth more fairly and efficiently is a legitimate long-term ambition in a state where the economy is on life support”.

Doogan cited a Centre for the Analysis of Taxation's proposal that by aligning CGT rates with income tax rates, introducing allowances to incentivise investment, taxing the increase in an asset’s value when it is inherited, and implementing an exit tax to prevent individuals from dodging UK taxes on gains made while residing in the UK, the government could generate £14 billion in revenue.

“I note that tax is always something to be ‘hit by’ in politics—it is violent; we are ‘hammered’ by it—so the debate ends up focusing on who is deserving or undeserving of such punishment, said Lib Dem Bobby Dean. He argued that by not talking about tax more publicly “we end up with a dysfunctional tax system that is neither efficient nor equitable” and where we are with CGT is a good example of that.

A member of the Treasury Committee, Dean said that while CGT does not affect many people in society, it plays a key role in investment in the economy. He identified a number of changes to CGT which he felt were essential and, without which, the system would continue to disproportionately benefit the wealthy. These were:

• ‘Sorting’ the tax base by indexing capital gains for inflation;
• Raising the CGT allowance;
• Targeting CGT at those making larger gains as investment decisions could be at ‘risk’ where gains are only small;
• Tackling the unfairness – raised by Paul Johnson of the IFS when he appeared before the Treasury Committee – that someone can simply leave the UK for a few years and dispose of assets overseas.

Responding to the shadow minister's concern about the revenue impacts of the carried interest, Tulip Siddiq answered that the Office of Budget Responsibility (OBR)-certified costings demonstrate that this measure raises revenue over the ‘scorecard’ period. Overall the tax measures are expected to raise over £1 billion.

On the rationale behind the changes being made in-year, the minister told MPs that the in-year rate changes were made to protect Exchequer revenues from forestalling.  She explained that the government does not expect the anti-forestalling provisions to apply to an ordinary commercial sale of an asset where the contract was entered into before 30 October.

In regards to inflation indexation, Siddiq told Daisy Cooper that indexation previously existed when CGT rates were charged at income tax levels with a top rate of 40%. “A rate schedule of 18% and 24% is significantly below those levels, so for the important reason of simplicity, indexation is not a part of the system.” She rejected the Lib Dems’ new clause, arguing that the government already publishes the amount of CGT paid annually and the OBR assessed the CGT package to have no measure-specific macroeconomic impact.

The minister also rejected the Conservatives’ new clauses, claiming the reforms to carried interest would deliver increased ‘fairness’ and place the tax rules on a more sustainable footing while preserving the UK’s position as a global fund management hub. The government “will also be undertaking extensive technical consultation ahead of legislating for the revised regime in a future finance Bill, which the House will of course have the opportunity to scrutinise.”

Rejecting new clause 5 she said that the government publishes the number of business asset disposal relief claims for each tax year with claims in 2024-25 (compared with upcoming tax years) becoming public in due course.

Clauses 7 to 12 and Schedules 1 and 2 were agreed without division. Conservative New Clause 5 was defeated by 340 votes to 105. The other two new clauses were not moved.

Group Two - Oil and gas taxation

Clause 15: Increase in rate of energy (oil and gas) profits levy

Clause 16: Relief from levy for investment expenditure

Clause 17: Extending the period for which levy has effect

Clause 18 and Schedule 3: Decommissioning of carbon storage installations

Two new clauses were tabled (read them in full here):

• Lib Dem new clause 2 would have required the government to produce a report setting out the fiscal impact of the Bill’s changes to the Energy Profits Levy (EPL) investment expenditure relief;
• Conservative new clause 3 sought a review of the expected impact of these clauses on employment and capital expenditure in the UK oil and gas industry, on UK oil and gas production and demand, and on the Scottish economy.

Debate

The Exchequer Secretary to the Treasury, James Murray, began his remarks by recognising the role that oil and gas companies have played in the energy mix and saying that the government consider the proposals to be ‘balanced’.

Murray reiterated that the government is committed to protecting billpayers by securing a sustainable, home-grown energy supply. He said the government plans aim for 95% clean power by 2030 and advancing net zero goals, adding that the measures in clauses 15 to 18 will generate an additional £2.3 billion over the scorecard period.

Dave Doogan (SNP) and Harriet Cross (Con) both challenged the minister on whether the government believes that the oil and gas sectors are still making “extraordinary profits” – seeking clarification about the duration of these measures. Murray responded with reference to the energy security investment mechanism (ESIM) put in place by the previous government but retained by Labour, explaining that  it means that “if prices drop below a certain threshold for six months, the energy profits levy ceases early”.

The Shadow Financial Secretary to the Treasury, Gareth Davies, disapproved of the government’s approach, highlighting that the sector supports more than 200,000 high-skilled jobs in the UK. He expressed concern that, due to these proposals, these jobs could be under threat. “The Government should be not ideological but empirical in their approach,” he continued, “which is why we have tabled new clause 3, which would require a review of the impact of these measures on employment, investment, production, demand and the whole Scottish economy.”

Davies defended the Conservative government for taxing “extraordinary profits in extraordinary times”. However he claimed that those extraordinary circumstances had now ‘subsided’, yet “Labour is ratcheting up the levy”. He asked about the government’s vision for the taxation of oil and gas in the UK, accusing Labour of having a preference for permanent climate levies.

For the Lib Dems Daisy Cooper welcomed the abolition of the investment allowance and asked the minister how much money would be raised as a result of this.

Harriet Cross, who represents a seat in northeast Scotland, noted that 82% of direct jobs in the oil and gas sector are located in Scotland. She cited Aberdeen and Grampian Chamber of Commerce which predicts 100,000 jobs would be at risk because of the changes, adding that Apache (a US oil firm) has ceased their operations in the North Sea following the Budget.

Cross expressed concern that global companies would take their investment abroad leading to unemployment and opportunity loss. She said: “This industry is blatantly a net benefit to the UK and the Exchequer, and one in which we should encourage investment and capital expenditure, not an environment where the returns do not justify the risk of investment.”

“More than £400 billion has flowed from our waters to the Treasury over the years, with very little coming back in the other direction,” said Dave Doogan. “Rather than reverse the train, the Labour government have, with this increase to the EPL, chosen to accelerate it”, he stated. He accused the government of ‘abandoning’ Scotland's existing energy sector, arguing that the UK cannot achieve net zero or green growth if Labour's policies to reduce investment in the domestic workforce and energy sector proceed.

Yuan Yang (Lab) suggested that much of the profits in the oil and gas industry go to share buybacks rather than funding decarbonisation. She accused the Conservatives of focusing on “the industries of the past”, arguing that the EPL will raise £2.3 billion which will support GB Energy.

“Have the government gone mad?” asked Sammy Wilson (DUP), suggesting that policy in this area was being driven “more by green ideology and by prejudice against some high-earning companies than by any economic logic”. The only logic Wilson could see is “that the oil companies are seen as bad so the government have to tax them, even though they are taxed heavily already.” He echoed other members' concerns about job losses resulting from the changes.

Adrian Ramsay, co-leader of the Green Party, welcomed the increase in the rate of EPL and the reduction of investment allowances. He criticised the extent of government support for carbon capture and storage (CCS), arguing that public funding should prioritise R&D and projects that decarbonise hard-to-abate sectors, not enable business-as-usual fossil fuel expansion.

Responding to members' comments, the Exchequer Secretary re-confirmed that the ESIM will remain until March 2030, adjusted for inflation, alongside the EPL. He continued that the OBR has forecast £12.6 billion will be raised from the levy over the forecast period.

Murray acknowledged members’ concerns about the long-term stability and investment of the oil and gas sector, but highlighted that the sector continues to benefit from an £84.25 relief for every £100 of investment.

Regarding the new clauses requiring reports on impacts, Murray said he considered them both ‘unnecessary’, arguing that impact details are outlined in the published tax information and impact note.

Clauses 15 to 18 and Schedule 3 were agreed without division. New Clause 2 tabled by the Lib Dems was defeated 74-350 in a vote. New clause 3 tabled by the Conservatives was defeated 184-359.

Day Two: Wednesday 11 December 2024

Group One: Value added tax on private school fees

Clause 47: Removal of exemption for private school fees

Clause 48: Charge on pre-paid private school fees

Clause 49: Sections 47 and 48: commencement

Two new clauses were tabled (read them in full here):

• Conservative new clause 8 would have required the Secretary of State to make a statement about the impact of charging VAT on private school fees, including specifically the impact on pupils with special educational needs and disabilities, small rural schools, faith schools and the impact of the removal of the exemption on schools that take part in the music and dance scheme;
• Lib Dem new clause 9 would have required the government to produce an impact assessment of the effect of the VAT provisions in the Act on pupils who have special educational needs but do not have an Education Health and Care Plan (EHCP).

Debate

The Exchequer Secretary to the Treasury, James Murray, emphasised the importance of investment in education and said that ending the VAT exemption for private school fees helps (alongside ending their business rates tax break) to raise £1.5 billion in the first full year and over £1.8 billion a year by 2029-30. He said that, as a result of the policy, the government estimated that there would ultimately be around 37,000 fewer pupils in the private sector. That includes pupils not entering the private sector as well as those expected to leave it. He said local authorities and schools already have processes in place to support pupils who move between schools.

Simon Hoare (Con) intervened to say that the government is wrong to refer to the policy as ending a “tax break”. “This is the first time that any government in a civilised democracy has imposed a tax on learning and education,” he claimed.

The minister responded that the government has to make a ‘difficult but necessary’ decision to fund its priorities. He argued that the policy does not mean that schools must increase fees by 20%, as many can absorb the cost and are able to claim VAT paid on inputs.

Dr Luke Evans (Con) expressed concern about the issue of combined fees, which include items like meals. He suggested that Treasury guidance doesn't clarify whether these fees must be separated for VAT purposes, creating potential accounting challenges. He asked if the minister could provide clarity claiming that this would affect a school's accounting approach and whether fees need to be divided into separate blocks.

The minister explained that “the VAT treatment of a particular supply is determined by the predominant supply, so there are options available to schools”.

Asked about the impact of the policy on armed forces and diplomatic families, the minister said that the Ministry of Defence and the Foreign, Commonwealth and Development Office have increased funding for the continuity of education allowance to address the impact of rising private school fees on the percentage covered by the CEA. To protect pupils with special educational needs in private schools, he explained that local authorities and devolved governments funding these places will be compensated for VAT on fees.

The Shadow Exchequer Secretary, James Wild, considered the policy ‘cruel’ and believed that it would damage the education of thousands of pupils. Moreover, he said, it would hurt parents on modest incomes who saved to send their children to private schools, and particularly impact pupils with special needs, small rural and faith schools. Wild accused the government of hiding behind the cloak of saying, “If you have an EHCP, everything is okay,” arguing that around 100,000 children in schools across the country will be impacted.

Citing the CIOT’s call for delaying the implementation of the policy, Wild raised the Institute's concern that “neither HMRC nor the private schools will be ready to implement the change in VAT liability effectively”. He continued that, in order to meet the deadline, HMRC has to register schools for VAT in just five working weeks.

The shadow minister suggested that the change would complicate the tax system and that “even HMRC seems confused”. “The guidance on VAT registration for private schools has undergone seven technical updates since its publication, and there is confusion … about the meaning of ‘closely related supply’”, he observed.

Liberal Democrat Spokesperson for Education, Children and Families, Munira Wilson, labelled the policy “unnecessary, unfair and counterproductive”, stating that her party is opposed to taxing education. She referenced their manifesto which, she said, had set out “a whole host of fair tax rises” that could support opportunity for all children instead of ‘penalising’ parents for choosing to invest in their children’s education.

Wilson said the Lib Dems “are opposed on principle to the imposition of VAT on school fees, but if the government insist on pursuing this damaging and counterproductive measure, they should do so with their eyes open.” Her new clause 9 aims to ensure that “by laying bare the impact of this measure on those families and children, who are already struggling with a broken SEND system. It would also require consideration of the additional children who will be coming forward to apply for an EHCP, so that their parents may be spared the fee hike the Government are imposing on them for trying, as any parent would, to do the very best for their child.”

Wilson’s arguments were echoed by another Lib Dem, Edward Morello, who added that the wealthiest family would be able to absorb the additional cost while middle-income families would be impacted.

A Conservative MP, Damian Hinds, challenged the government about its estimates, arguing that while the government expects private school fees to rise by 10% on average due to these measures, the actual impact of 20% VAT is a 15% increase after accounting for recovery of input costs. However, he added, schools also face other pressures including business rates increases, higher contributions to the teachers' pension scheme and a hike in national insurance.

Hinds, who is a former education minister, concluded by saying: “There is no need to set one part of our education system against the other, and this tax will be bad for both”. He suggested that if Labour wants to tax the wealthy there are more ‘efficient’ ways of doing so.

“We do not have hypothecated tax or spending in this country. Money from road taxes goes on things other than roads, and our national insurance payments do not get put into a pension pot,” stated Dr Kieran Mullan (Con). “The government know that, so to suggest that someone spending money on their own child without being taxed is taking money away from other children is completely and utterly wrong.”

Sarah Olney (Lib Dems) cited a survey conducted by The Times that suggests that 25% of private school parents may withdraw their children due to the government's proposal. She warned that this could impact communities significantly and also that taxing some forms of education but not others risks creating loopholes. “Creating accountants will find ways of delivering education services that fall outside the VAT legislation while other education providers that the government did not intend to tax will unwittingly find themselves caught up in it”, she predicted.

Responding to the debate, and in particular to Wild’s concern about HMRC readiness, James Murray assured him that HMRC “stands ready” to support schools and that they have already published bespoke guidance to support schools.

On the VAT treatment of combined fees, the minister elaborated that if a school supplies a package of education for a single fee, that would normally be a single supply for VAT, including several other elements such as transport or meals. He provided an example that if a school offers school meals alongside education for a separate charge, those will normally be two different supplies, and they may have different VAT liabilities. The education would be subject to the standard rate of VAT, the school meals may be exempt, if they meet the conditions.

Rejecting the new clauses tabled, Murray claimed that the government has ‘carefully’ considered the impact of this policy as well as ensuring that children with an EHCP are not subject to VAT on any private school fees. He added that evidence suggests small faith schools won’t be more affected by the policy than other schools.

Damian Hinds intervened to ask the minister why families who send their children for an hour or two a week for academics or extra-curriculars get tax exemption, while full-time schooling does not. The minister did not directly answer this point, saying only that the Bill focuses on schools providing full-time education. He continued that, following consultation feedback, clarifications have been made, such as ensuring stand-alone nurseries are exempt.

The House divided on clauses 47 and 48, but the clauses passed 338-170 and 332-170 respectively. Clause 49 was agreed without division. The Conservative new clause was rejected 167-329. The Lib Dem new clause was not moved.

Group Two: Stamp duty land tax (SDLT)

Clause 50: Increased rates for additional dwellings: transactions before 1 April 2025

Clause 51: Increased rates for additional dwellings: transactions on or after 1 April 2025

Clause 52: Contracts substantially performed before relevant rate change

Clause 53: Purchases by companies etc

Two new clauses were tabled (read them in full here):

• Conservative new clause 6 would have required the Chancellor to review the impact increased rates of SDLT for additional dwellings are having on the private rental sector in England and Northern Ireland.
• Conservative new clause 7 would have required the Chancellor to review the impact increased rates of SDLT for additional dwellings are having on the housing market in England and Northern Ireland.

Debate

Leading for the government, the Economic Secretary to the Treasury, Tulip Siddiq, said that these clauses support home ownership and would raise £310 million annually by 2029-30. She added that increasing the higher rates for additional dwellings would also ‘rebalance’ the housing market in favour of first-time buyers and those moving house.

She said that based on the OBR-certified costings, raising the higher rates for additional dwellings by 2 percentage points is expected to result in 130,000 additional transactions over the next five years by first-time buyers and others buying a primary residence.

Luke Evans (Con) intervened to suggest that first-time buyers would be hit by the government’s changes to SDLT. The minister responded that the government would build more houses and ensure the buyers do not face any additional barriers.

Kit Malthouse (Con) expressed concern that the proposals would deter people from becoming landlords and impact the rental market, especially in London. “How many people are likely to either exit being a landlord or, particularly in somewhere like London, not bother being a landlord at all? What will be the wider impact given that in the capital, such as where she represents, lots of people have no option but to rent, because they are unable to accumulate the deposit required to buy a property at an inflated value?”

Siddiq disagreed, suggesting that “we are more resilient than that”.

James Wild, for the Conservatives, criticised the proposals claiming that the impact assessments are “incredibly thin” and do not get into the details of the measures and the complications that arise. Citing Nationwide, he estimated that clauses 50 and 51 would bring an extra cost of £4,000 on the purchase of a typical rental home. He said experts have warned that the changes could have damaging effects on the rental market, making it less attractive to provide homes for private rent, as a result of which rents could increase.

The Shadow Exchequer Secretary thanked CIOT for drawing attention to some structural tax issues that the clauses create. He explained: “There is now a top residential rate of 19%, compared with a top rate of 5% for purchase of non-residential or mixed property, so taxpayers may be incentivised to argue that the property that they are buying is non-residential or mixed-use—for example, it may have a paddock that they would use—to take advantage of the lower rate. A number of those cases have come to the first-tier tribunal and higher court”. Wild asked if the minister could address this risk and whether increased compliance costs will arise as a result of the divergence.

Kit Malthouse suggested that when stamp duty reaches “penal rates”, it discourages landlords and could lead to many London properties being owned by foreign corporations. “That would mean that no stamp duty was payable at all on the transfer of the property”, resulting in a large number of UK properties being owned by overseas entities. He repeated his concerns that there has been no assessment of the impact on the rental market and future behaviour of this tax change.

Lib Dem Treasury spokesperson, Daisy Cooper, considered the increase of the SDLT surcharge on second homes “an easy way” of raising revenue but one which does not tackle the ‘root problem’ of too many second homes in some areas. She explained that the Lib Dems have called for measures including local authorities having the power to levy higher council tax for newly bought second homes, with an additional surcharge on overseas residents.

Responding to the debate, and to the new Clauses tabled by the Conservatives, the Economic Secretary acknowledged that it is important to understand the impact the measure could have on rental costs and the housing market. However, she argued that the Ministry of Housing, Communities and Local Government publishes regular updates, as well as the English private landlord survey, which provides data on supply in the private rented sector. Moreover, HMRC publishes statistics and data on property transactions and SDLT receipts.

On housing supply, the minister said that the Budget outlined investments to drive the largest increase in social and affordable housing in a generation. She recognised the rented sector's role in the path to home ownership and claimed that the Renters’ Rights Bill would improve conditions for 11 million private renters and 2.3 million landlords in England.

She did not respond to the shadow minister’s point about incentives to claim a property is mixed use or non-residential.

Clauses 50 to 53 were agreed without division. Both Conservative new clauses were rejected in votes, 105-314 and 104-313 respectively.