What are the potential consequences of Labour’s commitment to levy VAT on independent school fees?

The possibility of a future Labour government means the party’s commitment to ending tax exemptions for independent schools is generating some debate.

The detail of the proposal is currently unclear, but the proposed change and focus appears to be the VAT treatment of school fees. It is estimated that such changes would generate an estimated £1.6 billion for the Exchequer.

If there is a political willingness to apply VAT to the supply of education it is relatively simple to do so. The provision of education is currently an exempt supply, but it is not inconceivable that legislation could be drafted to make independent schools fees subject to VAT.

The impact of the proposal could include further rising school fees and the closure of some independent schools that would no longer be sustainable. The proposals could make independent schooling an unaffordable option for some families who would otherwise consider it.

How might schools mitigate the effects of any change?

There would be very few remedies for schools, other than to look at the VAT that can be recovered so that only the net cost is passed on to the parents. Nevertheless, for many schools, it would represent a significant increase in the fees charged.

A measure that could be possible would be to utilise a ‘fees in advance’ (FIA) scheme. Many schools have these in place already. Parents pay a lump sum to the school and in return receive a discount on the fees charged by the school.

It is important to note that the school would be unlikely to fix the fees charged for future periods, so the fee inflation risk would remain with the parent. The physical receipt of fees paid in advance of educational services being provided would crystallise a tax-point for VAT purposes for the school. This means if the VAT rules were to change in the future, the amount received in the fee in advance scheme prior to any announcement of a change would not be subject to VAT. There is a risk that ‘anti-forestalling’ legislation may be introduced which may affect FIA schemes, if that happens, parents will be informed.

What can parents do?

As of today, the proposal is just that, a proposal. It is also true to say that there will be hurdles prior to enacting any such change. However, for families considering independent schooling for their children, now might be the time to revisit and assess funding plans.