Labour’s proposal to introduce VAT on private school fees – what are the potential implications?

A key tax plan of the Labour administration was to impose VAT on private school fees.  Now that the 2024 General Election is behind us and the Labour government are starting to settle into their tenure, what do we know about the proposal and how it will affect the various stakeholders? 

What are the proposed changes?

Labour intends to introduce 20% VAT on education, including vocational training, and boarding services which are provided by private schools from 1 January 2025.  Private schools’ eligibility for charitable rates relief will also be removed. 

The proposed VAT change will not apply to the fees paid in respect of pupils with acute special educational needs (‘SEN’) which can only be met in private schools, nor will they apply to nurseries (whether standalone or attached to a private school).  The government has also confirmed that the VAT change will not apply to education supplied by private tutors, which is exempt from VAT if the tutoring is of a subject ordinarily taught in schools.^[1]

What is the rationale behind the changes?

Labour’s stated intention is to break down barriers to opportunity and level the playing field between state and private education.  In ending tax breaks on VAT and business rates for private schools, the government proposes that the revenue raised will be used to fund and improve the quality of state education, and to expand early years childcare and wrap around care offerings. 

What is the proposed timeline?

Labour has now published its policy advice^[2] and accompanying draft legislation^[3].  The matter is subject to ongoing consultation which will close on 15 September 2024.  The introduction of the changes is expected to be confirmed at the budget at the end of October 2024, with a new Finance Bill incorporating the changes expected to come into force on 1 January 2025.

What is the anticipated income?

The Institute of Fiscal Studies has estimated that the changes would raise around £1.6 billion a year in extra tax revenue.^[4]  The government has stated that it expects the overall net revenue gain to remain substantial, even once schools have reclaimed VAT against eligible expenditure.  Conversely, some opponents have argued that the cost of implementing the changes could potentially cancel out any financial gain.

Are parents able to avoid the tax increase by pre-paying school fees?

Unfortunately not.  Whilst the government has stated that they do not expect the full 20% increase to be passed onto parents, they have been clear that legislation will be introduced with retrospective effect to ensure that VAT liability cannot be avoided by parents pre-paying school fees.  The legislation is expected to provide that fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.^[5]  Some commentators consider that schools which introduced a pre-payment arrangement may well find themselves subject to some form of HMRC inquiry or VAT assessment to ensure that the correct VAT was paid.

What are some of the potential long term impacts we may see?

As you might expect, the significant financial changes may lead some parents to consider alternative options.  Despite the government’s view that the number of pupils that may switch schools as a result of the changes is likely to remain proportionately smaller in comparison to overall pupil numbers in the state sector, there will be parents that ultimately decide to move their children from private to state education, or possibly to overseas educational providers.  We are aware of at least one private boarding school in Ireland seeking to capitalise on the forthcoming VAT changes by marketing itself as a cost-effective alternative to prestigious UK private educational institutions. 

Smaller private schools may find it challenging to absorb the additional costs associated with VAT without passing them on to parents. In some circumstances, providers that would otherwise remain exempt from VAT may find themselves being pulled into the remit of the proposed changes where they provide education or vocational training at a private school.  These financial strains could lead to consolidation in the market, with smaller institutions being acquired by larger educational groups that have more financial resilience and can better manage the increased costs.  We may see an increase in private school providers seeking to convert to academy status, open a maintained voluntary school or sponsor a new free school.  We can also see an increased burden on state funded educational provision as a result of the change in affordability of private education.

Significantly, the changes may negatively impact the service provision for children with SEN.  In order for such fees to be exempt from VAT, it will be necessary for the particular private school to be named in the young person’s Education and Health Care Plan (or equivalent).  The process of securing an educational needs assessment and waiting for the issue of an Education and Health Care Plan can be very time-consuming.  In addition, the limited suitable places in state schools for children with SEN are likely to become even more oversubscribed as a result.

What is the likelihood of legal challenge being successfully brought?

The imposition of changes may face legal challenge from private education providers, who could argue that the imposition of VAT infringes on their financial operations. Institutions might seek judicial review or challenge the policy based on its impact on charitable status and educational provision. These challenges could delay implementation and require significant legal and administrative resources to address.  Ultimately, however, it is open to the government to raise or reduce tax rates as it sees fit and it is therefore difficult to see how such challenges could succeed in a complete rejection of the changes.

Where a challenge presents as a dispute in the amount of tax payable, it should be noted that tax disputes are often both lengthy and expensive, with costs not ordinarily recoverable from the HMRC even where the dispute was decided in the taxpayer’s favour.  Parents are unlikely to be impressed where schools expend resources in engaging in such disputes with the HMRC, which may well lead to disputes over whether this is a proper use of fee revenue. 

In summary

Labour's plan to introduce VAT on private school education is a significant policy shift aimed at increasing public education funding and promoting greater equity. While it is likely to generate substantial revenue, it also poses challenges and potential market shifts that will need to be carefully managed.  It is likely to be met with resistance from educational providers from across the sector and parents alike.  In addition, the impact upon pupils with special educational needs will need to be considered in detail.

We will continue to monitor developments in this complex area. Our team is dedicated to assisting clients in navigating regulatory changes and ensuring compliance.  For more information and support, please do not hesitate to contact us. We are here to help you ensure that your operations meet the highest standards of care and compliance.

Co-authored by Leia Hayes, Solicitor Apprentice at CMS

^[1] Technical_Note_-_DIGITAL.pdf (publishing.service.gov.uk)

^[2] Technical_Note_-_DIGITAL.pdf (publishing.service.gov.uk)

^[3] Draft Finance Bill Measures (publishing.service.gov.uk)

^[4] Tax, private school fees and state school spending | Institute for Fiscal Studies (ifs.org.uk)

^[5] Technical_Note_-_DIGITAL.pdf (publishing.service.gov.uk)