Peers fear VAT on fees will spark big migration to state schools

Short debate - Independent Schools: VAT – House of Lords, 17 October 2024

During a short debate on 17 October, Lord Lexden (Con), who is the current president of the Independent Schools Association, asked about the implications of levying VAT on independent schools from January 2025, claiming that: “Taxation apparently trumps the education and welfare of children in our country’s independent schools”. He referenced the Institute for Fiscal Studies (IFS) report on this area, claiming that the report’s author had now raised his estimate of the number of children who might move to state schools to a number which would ‘wipe out’ the £1.5 billion expected take for the measure. The Conservative peer believed the policy would lead to cuts to school staff and job losses.

Several Labour peers, including Lord Davies of Brixton, Lord Watson of Invergowrie, and Lord Campbell-Savours, voiced support for the government's policy. However, other members, such as Baroness Garden of Frognal (Lib Dem) and Lord Alton of Liverpool (crossbencher), raised concerns, including about the VAT discrepancy that prevents FE colleges from benefiting from the VAT refund scheme available to schools and multi-academy trusts.

A Conservative peer, Baroness Barran, expressed concerns about the implementation time of the policy (in particular for Scotland) and HMRC’s “lack of readiness”. She noted that education unions and the Chartered Institute of Taxation are calling for the introduction of the policy to be delayed. She urged the government to review its decision. Additionally, the Baroness asked for future impact assessments, urging the government to commit to reversing the policy if it fails to demonstrate a net positive contribution to the economy.

Education minister Baroness Smith of Malvern reiterated the government’s view that removing the tax breaks on VAT and business rates for private schools is ‘necessary’ and will generate additional funding. She elaborated that VAT will not apply to boarding fees in a state boarding school for terms starting on or after 1 January 2025, arguing that it is ‘right’ to introduce the policy “as soon as possible”.

Baroness Smith highlighted that HMRC will be providing support to schools and they would be able to register for VAT following the Budget on 30 October. She further added that online support sessions will also be available in the coming months to help schools be ready to charge VAT correctly and remit it to HMRC. The minister reported that the Treasury is assessing the impact of these changes in advance of the Budget and will publish a tax information and impact assessment.

Oral question - Independent School Fees: VAT – House of Lords, 21 October 2024

Four days later Lord Hacking (Lab) enquired about the government's forecast for the number of pupils likely to switch to state schools due to the introduction of this policy.

In response, the Financial Secretary to the Treasury, Lord Livermore, stated that the government expects “a very small proportion” of pupils to make this move. He explained that the government's assessment of the policy's impact will take into account the anticipated pass-through of VAT to school fees. After covering VAT on input costs, schools are expected to bear VAT of about 15% of their fee income. Additionally, the government will consider demand elasticity, using estimates consistent with those applied by the Office for Budget Responsibility (OBR) in their costing of the policy.

Baroness Vere of Norbiton, Shadow Treasury minister, said that according to the government, VAT is a “tax on consumption” and falls on parents. However, the minister keeps suggesting that “this consumption tax will be absorbed by the producer—the schools”. She voiced concerns that schools won’t be able to “magic up lots of cash”, asking if the minister has considered that “he is undermining what a tax on the consumer actually is”.

Lord Livermore said that the government estimates that private schools will absorb a ‘significant’ proportion of the new VAT liability, adding that the way schools fund the additional cost is a “commercial decision” for each school.

For more details please read the 17 and 21 October exchanges.