The UK government will introduce a 20% VAT on school fees midway through the 24/25 academic year. The government has stated that the revenue will help to fund 6,500 new teachers in England. This change will affect affordability, enrollment, and school operations.
What are independent schools?
Independent schools, also known as private schools, charge fees averaging around £15,000 annually, though some, like Eton and Harrow, can charge up to £50,000. There are around 2,500 of these schools in the UK, educating around 7% of pupils (570,000 in England). These schools are also not required to follow the national curriculum and some enroll students with special educational needs funded by local authorities.
Private schools don’t have to pay VAT on their fees because they provide education, which is exempt from VAT. About half of England’s private schools are also charities, so they get an 80% discount on business rates.
What is VAT?
Value Added Tax (VAT) is a tax added to most products and services sold by VAT-registered businesses. The standard rate is 20%. A business must register for VAT if its taxable turnover exceeds the £85,000 threshold. Businesses below the threshold can also choose to register – this can be advantageous if the business deals with VAT-registered suppliers or customers and wish to reclaim VAT on purchases.
What’s Changing?
The Labour Party has pledged to end the VAT exemption and business rates relief for private schools, but not to remove their charitable status; this means they are still eligible for some tax breaks. Legislation will be introduced to remove their business rates relief from April 2025. The government expects the policy to raise £460m to spend in state schools next year, and £1.7bn by 2029/30. The removal of the VAT exemption will be UK-wide, but education is devolved, so each nation’s government will decide how to spend the additional money received.
How will this affect independent schools?
The impact of removing the VAT exemption will vary depending on the school. Some schools may choose to pass on the full 20% VAT to parents, while others may absorb some or all of the cost.
The elasticity of demand for private schools will also play a role. If the price of a service rises, you would expect the demand for this service to fall. However, parents may choose to keep their children at these schools due to prestige and for their children’s future prospects. Additionally, there is also the chance that some private schools may not increase their prices significantly.
On average, the government expects fees to increase by around 10%. The average cost of private school fees has risen by 55% since 2003, even without VAT. However, the proportion of children being privately educated over the period has not fallen.
Cairneagle, a consulting firm that specializes in the education and childcare sectors, reported that enrollment figures for the 23/24 academic year are already showing declines, particularly among new entrants, for e.g., Reception: -4.2%, Year 7: -1.2%. Total enrollment could drop by 7-13% by the 29/30 academic year. Last-minute withdrawals for the 24/25 academic year are also likely if fee increases are steep.
How can independent schools adapt to this
Independent schools can adapt to the changing landscape by optimizing their current configuration, reconfiguring and diversifying their offerings, or merging with other schools:
- Optimisation: Optimizing their current configuration could involve refining their core value proposition, increasing their marketing efforts, and reducing overhead costs.
- Reconfiguration and Diversification: Reconfiguration could involve expanding their student base by becoming co-educational, offering different boarding options, or adding new age groups. Diversification could involve creating new revenue streams, such as nurseries, summer schools, or online learning programs.
- Mergers: Merging with other schools could provide economies of scale and help schools weather the storm.
How will this affect state schools?
The government expects that the increase in private school fees will lead to a small number of students moving to state schools. They believe that state schools will be able to accommodate these 35,000 students without any significant impact on class sizes.
According to this Channel 4 fact check, adding VAT to private school fees could overwhelm state school classes in some areas, but not in others. The report acknowledges that in some areas there are enough spare places to accommodate all of the pupils who might move from private to state schools. This is because the overall student numbers are set to fall by 700,000 between now and 2030. However, pupil numbers are not falling by the same amount everywhere. So, some state schools could face pressure on class sizes, particularly in areas where there already aren’t enough spaces. The report also highlights that some councils are confident that they will not be oversubscribed, while others are concerned that the policy could lead to overcrowded state schools.
The influx of students from private schools could have a number of academic impacts on state schools. On the one hand, it could lead to higher academic standards, as students from private schools may bring higher expectations and work habits to state schools. On the other hand, it could lead to increased class sizes, which could make it more difficult for teachers to give individual attention to each student.
Looking Ahead
The UK government’s decision to introduce a 20% VAT on private school fees will have a significant impact on the education landscape. While the government aims to use the additional revenue to fund state education, the policy will likely lead to increased fees, decreased enrollment, and potential school closures in the independent sector. Additionally, the influx of students from private schools into the state sector may strain resources in certain areas, particularly where student populations are already large.
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Néos Economist 