Private schools will pay VAT. How will this affect families and Britain as a whole?

What’s going on

The Labor Party plans to introduce VAT (VAT) of 20% on tuition fees at private schools. More precisely, to abolish the “exemption” of these organizations from paying the tax, which is in effect now. In effect, private schools will have to pay VAT like sellers of other goods.

There are also plans to abolish the “exemption” of private schools from paying local taxes (business rates) – Labor has been talking since 2017 about removing their VAT-exempt status, and that the party will do so once it has a majority in Parliament. This summer, Labor, led by Keir Starmer, won the general election, and in a speech in July 2024, King Charles III noted, among other things, that this long-planned reform would now move forward aggressively.

Most likely, most schools will shift the burden of increased costs to the parents of their students (there is no one else). This means that the education fees, which have been quite high up to now and have eaten up a significant part of the budget of those families where children receive private education, will increase significantly.

The changes will not affect children with Special Education Needs – schools will still not have to pay tax for them.

Important figures

The average private school fee today is £18,063 a year for incoming pupils and £42,459 for full boarding, Independent Schools Council figures show. If VAT is shifted entirely to parents, fees would average £21,675 and £50,951.

There are about 594,000 young students in private schools across the country – that’s 6.5% of the total school population.

Around 95% of the country’s private schools plan to raise fees next academic year, according to a survey of 350 school heads conducted by Censuswide on behalf of The Daily Telegraph.

The Labor Party believes that by imposing VAT on private schools, the government will be able to raise about £1.6 billion a year for the Treasury. This money could be used to create about 6,500 jobs for teachers in public schools in England.

What supporters and opponents of the innovation say

The debate about taxes for private schools has been going on for years, but it was particularly intense in the last few months before the general election. And it was not always about taxation: Labor’s proposed measure touched on a sensitive area of British society – class stratification. Private schools in Britain continue to be considered one of its pillars. Children from these schools go on to prestigious universities and then get better-paid jobs than their peers from state free schools. And that gives renewal advocates reason to say that privileged families will not be poorer if they pay a couple or three thousand more next year than they did last year.

Opponents of the abolition of this tax break argue that the Labor Party’s program not only fails to take into account the interests of private schools and parents of children, but exaggerates their “privilege”.

For example, Tony Ulton, headmaster of Hulme School, a private school in Oldham, a poor suburb of Manchester, told Sky that most private schools are not like Eton or Harrow, where the children of Britain’s elite attend, and where a year of study costs more than £50,000. Much more often they are children from middle-class families, who often have to choose whether to go on vacation this year or leave their child for another year in a private school.

Parents and school leaders like Hulme will face tough times after the new rules are passed. Parents will have to pay more. And schools will probably have to increase the number of children in their classes (private schools usually have fewer children in their classrooms, and parents pay for more attention to their child, among other things).

In addition, schools may have to cut scholarships and discounts. This means that for many parents who will be deprived of school support, the costs will increase not by 20%, but much more. Opponents of the reform say that these changes will only exacerbate inequality: children from wealthy families will remain in private schools, while children from ordinary families who counted on bursaries and discounts will be forced to leave them.

However, Rachel Reeves, Chancellor of the Exchequer in the new Labor government, believes that the introduction of VAT will not necessarily lead to a reduction in scholarships. She recalls that such concerns have been voiced before, in 1997, when the Blair government abolished the scheme of so-called “assisted places” – places in private schools subsidized by the state. But not only did bursaries not disappear then, they continued to grow.

In addition, Reeves believes that schools do not need to pass VAT onto parents at all: they can find alternative ways (with most private schools already intending to raise fees, see survey results above).

Opponents of VAT on private schools have another argument: educational services in the UK as a whole are not subject to VAT: neither universities nor private teachers of school (or near-school) subjects pay VAT, and it is simply unfair to exclude only private schools from this benefit.

Can private schools find alternative ways to supplement their budgets?

Depriving private schools of VAT-exempt status will, on the one hand, oblige them to pay the state an additional 20 pence on every pound they earn. But, on the other hand, it will allow them to return VAT from those accounts that they pay themselves (for example, these may be the accounts of construction companies that repair school premises). Because of this, according to the calculations of specialists from the Institute for Fiscal Studies, the total net balance after the introduction of the rules will be not 20% upwards, but about 15%. However, this applies only to VAT, but not to business rates, from which private schools are also exempted so far, and which Labor also plans to introduce for them.

Prepayment may not help

When Labor floated the idea, many schools and parents started talking about maybe paying up front before the rules were introduced. And in that case, Labor would allegedly not be able to tax the payment retroactively.

But is this definitely the case? The Times quotes Jas Dillon of accountancy firm Lubbock Fine. He warns that paying for private school tuition in advance may not guarantee that those parents won’t have to pay VAT later.

He said: “Labor is likely to try to charge VAT retrospectively to parents who have paid the fees in advance. Those parents should put money aside in case this happens.”

Dillon also warned that schools may be too careless in promoting prepayments and should be careful with their assurances. Because if the government does decide to tax these payments retrospectively, it could trigger claims from parents, and they may well demand that the school that misled them reimburse them for the unexpected costs.

When will the new rules be implemented?

The Labor Party’s plan to introduce VAT on school fees (if they win a parliamentary majority) was announced back in September last year. On the eve of the election, Rachel Reeves said that the changes would appear in Labour’s first budget, which would be drawn up in the fall and would come into force in April 2025. On this basis, many have assumed that the direct introduction of VAT and, as a consequence, the real price increases will not start until the beginning of the next (2025-2026) academic year.

However, in recent days newspapers, citing their sources in the government, have written that it is quite possible that schools will be obliged to pay VAT as early as January. This means that parents can expect a price increase already in the middle of the school year.

The exact date of the new rules will not be known until the fall budget (which in turn will be announced by the end of July).