Tax treatment of private schools – an explainer

This explainer is part of a series produced by CIOT for the 2024 general election

What is a private school?

Private schools (also known as independent schools) charge fees to attend them instead of being funded by the government.  They may also get funding from donations, endowments and returns on investments.

Around half of private schools are charities. (Source).

How are private school fees treated currently for VAT?

They are exempt, as currently all schools are eligible bodies based on the definition in the Education Act. The law (specifically the VAT Act 1994) states that the provision of education or vocational training by an ‘eligible body’, and goods or services closely related to the supply of education or vocational training, are exempt from VAT.

How are other parts of the education system treated for VAT?

Most, but not all, education is not subject to VAT.

Where education is provided for no charge by schools and further/higher education establishments, for VAT purposes, this is deemed to be a non-business activity and their government funding is outside the scope of VAT.

Education provided for a charge by eligible bodies such as private schools, universities and further education colleges is exempt, as are ‘closely related’ services such as school dinners, transport, field trips and accommodation. Private tuition in a subject ordinarily taught in schools is also exempt (see ‘implications for private tuition’ below for qualifying criteria), as is the teaching of English as a foreign language by commercial providers. Non-profit making bodies who re-invest any surpluses from education back into education are also exempt.

The list of bodies not normally eligible for VAT exemption for the supply of education (unless they are charities or otherwise non-profit making) includes GCSE crammers, secretarial colleges and providers of professional development courses, so their fees will be subject to VAT. Nursery fees are not exempt as education suppliers unless the nursery is attached to a school. However, nursery fees are generally exempt because they are deemed to be the provision of care by a regulated body.

What are the consequences of being exempt from VAT?

Most obviously you don’t have to add 20% VAT to your fees.

But it’s also the case that being VAT-exempt means you can’t reclaim VAT on expenditure. For example, if you are putting up a new building and this costs £10 million plus VAT the total cost to you is £12 million.

If you lose the exemption you need to start charging VAT on your fees. But on the upside, you can start reclaiming VAT on expenditure so now the new building only costs you £10 million in total. However, a typical school spends more than half its money on teachers and other staff – and there is no VAT to reclaim on salaries.

According to estimates from the Institute for Fiscal Studies the net effect of this is that removing the VAT exemption for private schools would be roughly equivalent to putting 15% on fees (though this does not include the impact of additional business rates).

What is the current treatment of private schools for business rates?

If the school is a registered charity – as around half of them are – and in England or Wales it is eligible for an 80% discount on the business rates liability of its property, provided that that property is used wholly or mainly for charitable purposes. The half of private schools which are not charities do not receive this discount.

The situation in Scotland is different as the 80% charitable discount was removed from private schools in 2022. There are a few exceptions to this, including private special schools.

Are there any other tax breaks private schools get?

Private schools which are charities benefit from reliefs for a variety of taxes in the same way as other charities. These include relief from income tax on donations (known as Gift Aid) and from inheritance tax on legacies they receive, as well as relief from stamp duty land tax on property they buy.

What changes are Labour proposing?

Labour’s manifesto states that the party would “end the VAT exemption and business rates relief for private schools to invest in our state schools”. The costings attached to the manifesto anticipate revenue from applying VAT and business rates to private schools of £1,510 million in the year 2028-29.

Labour have said they would keep the VAT exemption for the fees of pupils with special education needs (SEN) that have an education, health and care plan (EHCP) saying private schooling is needed, though we note that there are many disabled and SEN children in private schools that do not have an EHCP who will be affected by the change in tax policy.

There is no suggestion that Labour would change the tax treatment of private schools beyond VAT and business rates.

What are the arguments for Labour’s changes?

The main argument made by Labour for putting VAT on school fees is that it would be progressive, raising more than £1 billion a year from a group that is mostly well-off (wealthy parents and their children) in order to spend it on improving the lot of an on-the-whole-less-well-off group (children in state education).

“[T]he nub of this debate… is about the quality of education received by the 93% of children who attend state schools in relation to the quality of education received by a privileged 7% of children,” Labour’s spokesperson told a House of Commons debate in February 2024.  The spokesperson said that, in 2022-23, average independent school fees were £15,200, but average state school spending per pupil was £8,000.

What are the arguments against?

A number of arguments are made for retaining the current VAT exemption for private schools. Some are around the core principle that education should not be taxed – if government wishes to tax high earners or the wealthy more it should tax their earnings or wealth rather than taxing their use of private education as a proxy.

There are also a group of more practical arguments about the impact of the change. These include:

• Imposing VAT on school fees will lead to significant numbers of parents withdrawing their children from private schools, which will have a detrimental effect on these children by removing them from friendship groups and badly disrupting their education.
• These parents will be disproportionately less well-off, meaning the effect of the change will be to make private schools more elite than they currently are.
• The children taken out of private schools will need to be found places in state schools and much of the revenue raised from the change will need to be spent by the state on providing this.
• Adding these pupils to state schools will raise class sizes and put more pressure on teachers and pupils in those schools.
• Many private schools are small and operate on tight margins and this change threatens their existence, which would in turn push still more pupils into the state sector.

Additionally there are a series of arguments that challenge the characterisation of private schools as elite institutions, pointing out, for example, the existence of small faith schools and specialist schools that educate children with special needs but who do not have an EHCP (an MP in the February debate suggested there were 96,000 pupils in this category). Advocates for private schools also highlight the benefits that some private schools bring to the communities they are in and, as a result of their educational excellence, to wider society.

What do the supporters of change say to these arguments?

They say that not levying VAT on education is not an absolute principle (see ‘How are other parts of the education system treated for VAT?’ above) and that there is a distinction between putting VAT on school fees, where there is a free-at-the-point-of-use alternative, and putting VAT on university fees, where there is not.

On the practical arguments the advocates of change point to analysis suggesting there would not be a mass exodus from private schools if VAT were placed on fees.

In an analysis published in July 2023 the IFS note that the share of pupils in private schools across the UK has hardly changed at all over time, despite a 20% real-terms increase in fees since 2010 and a 55% rise since 2003. They estimate that an effective VAT rate of 15% (see ‘What are the consequences of being exempt from VAT?’ above) would lead to a 3–7% reduction in private school attendance which would generate a need for £100–300 million in extra school spending per year in the medium to long run.

The IFS and others have also pointed out that pupil numbers in England are currently in decline for demographic reasons, to the extent that in even the most pessimistic scenarios for private schools the number of children in state schools would continue to fall – though of course particular areas could see pinch points, especially where a private school closes, and demand may increase still further for the best state schools.

There is also a lively debate about whether private schools benefit society as a whole or whether the benefits accrue to those who attend them at the expense of those who don’t.

In practice, how would VAT and business rates be applied to private schools and are there any difficulties that might arise?

One possibility would be simply to remove private schools from the list of eligible bodies for VAT exemption. However private schools which are charities or non-profit making bodies which invest surpluses back into education would retain another route to exemption unless this was closed down too (which it surely would be).

There could well be challenges around the boundaries of what VAT would apply to. For example, boarding schools raise the question of whether they are only in the business of educating or whether, in fact, they are also providing care. This can also be VAT-exempt and it is unclear whether this aspect of their supply would be covered by Labour’s proposed change.

Additionally, what will happen where a private school is part of another eligible body (for example a university or further education college)?

The position with regards to children with special education needs but who do not have an EHCP can also be expected to be controversial.

Are there likely to be implications for private tuition?

Private tuition is currently exempt from VAT if two important conditions are met:

1.           It is given in a subject ordinarily taught in a school or university.

2.           The tuition is given by either a sole trader or member of a partnership in a personal capacity.

Where those conditions are not met, and the income is above the VAT registration threshold (currently £85,000), then VAT is chargeable.

There is no indication that Labour plan to change this.

Where can I find further information on this topic?

CIOT/IFS debate – Should VAT be charged on private school fees? (Apr 2024) (NB. There is a link to video of the debate after the report)

Tax, private school fees and state school spending | Institute for Fiscal Studies (Jul 2023)

Charitable status and independent schools - House of Commons Library Paper (Jun 2023)

Labour will not raise taxes on working people – The Labour Party (Jun 2024)

CIOT report on parliamentary debate on VAT on school fees (Feb 2024)

This explainer was written by:
Jayne Simpson, Technical Officer, Chartered Institute of Taxation
Richard Wild, Head of Tax Technical, Chartered Institute of Taxation
George Crozier, Head of External Relations, Chartered Institute of Taxation