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Labour’s private school fees pledge requires lesson in VAT

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Labour’s general election pledge to end the VAT exemption for private schools has sparked debate across the political spectrum, but as Jason Croke highlights, the detail and complexity of the plans are getting overlooked.

4th Jun 2024
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One of Labour’s flagship policies if it wins power on the 4 July General Election is to impose the standard rate of 20% VAT on private schools.

The policy has created a lot of debate across the broadsheets, television, radio and social media channels, and not least from independent schools who have raised concern about the timeline of the proposals.  

However, the debate around ending the long-standing VAT exemption requires a little more nuance. As always with VAT, the rollout of the policy will not be straightforward.

Lesson 1: VAT 101

From a legislation perspective, the law may need to change. Currently the supply of education when provided by an “eligible body” is exempt. In this instance, an eligible body is a charity (or a not-for-profit entity limited by guarantee). Colleges and private schools are examples of “eligible bodies” as are universities and academies.

Any law change would need to differentiate between a college, university or academy – which all will remain VAT exempt – and a private school which will become taxable.

Labour leader Keir Starmer previously said that he does not intend to remove charitable status from private schools. Removing charity status would not in itself stop the exemption as an eligible body doesn’t have to be a registered charity.

Lesson 2: What is a private school?

HMRC Notice 701/30 section 4 covers eligible body definitions, amongst the list of definitions there is this “a non-profit making organisation that meets certain conditions”, those certain conditions are the non-distribution of profit clause.

Starmer recently stated that VAT will be applied “straight away”, although he perhaps means the law may need changing which may take some time. But it also suggest any changes will be with retrospective effect.

The other approach is to not change the law, but the interpretation of the existing law. HMRC has a history of re-interpreting its own guidance or public notices. That may be the approach taken with private schools, and it would be much quicker than changing law.

But how do you discriminate between a state funded school, a private funded school, a university and not forgetting hundreds of charities which provide education for those within specific targeted sectors such as disabilities and religion?

It may be a simple solution, such as removing the exemption from not-for-profit schools where they teach children from the ages of four (primary school up until 18). In doing so, that keeps nursery schools exempt under welfare services and colleges/universities exempt as they’ll cater to the 18-plus sector.

All of this is pure conjecture, but it explains the balancing act that is to come if the exemption targets private schools only. As exemptions are meant to be narrowly defined, it’ll be interesting to see as this plays out.

Lunchtime: What price is knowledge?

Whatever the price of the fees, it’ll cost 20% more for those who are not swayed by a VAT increase. However, the actual increase may not technically be a full 20% for parents. Schools can now reclaim some input tax on overheads and property maintenance, potentially off-setting a lower cost base against a slightly higher term fee. Some schools with critical mass might manage this balancing act more effectively than the smaller, more popular schools.

Another emerging strategy involves pre-paying term fees in advance, often for multiple years rather just one. 

Whether any changes will have an anti-forestalling device attached to it will depend on whether the law is changed or the guidance re-interpreted, but a one year advance payment seems the least risky approach.

But any strategy to side-step the VAT increase will be risky on the basis that nobody knows what form the change will actually take. So private schools are in the realms of deciding whether to do nothing, try a lowish risk advance payment for a year or anything else will start shifting to risk adverse strategies.

Other strategies doing the rounds include parents making donations rather than paying term fees, schools loaning money to the parent who then pays term fees using the loaned money plus a small uplift for commission/interest, while most private schools have payment plans already. All of which come with risk and the trustees or governors are there to ensure risk is reduced – not forgetting reputational risk, too.

While paying one year ahead might avoid a VAT increase this year, it raises even more questions.

What becomes of the parents who cannot afford to pay a year (or even two) in advance? Furthermore, what if parents have more than one child at the school: how will that affect the mood amongst the PTA where some benefit at the expense of others?

What if a parent pays two years in advance and then wants to withdraw their child? How does a school price the cost of a term two years from now? If a parent pays in advance for a year, but then inflation drops to 2%, does the parent get a refund? What if costs go up the next year? Can the school ask for some extra funds? And does that bring the extra funds into VAT or the whole pre-payment?

Lessons 3 and 4: Politics of envy or logic?

The Institute of Fiscal Studies (IFS) indicates charging VAT on private schools would generate revenue of £1.6bn per year. It may not seem like a great deal but cumulatively over future years, the revenue raised could help build towards the overall pot of tax.

The same report indicates the average number of children in private schools has remained steady at 7% for the last 20 years despite real-term fee increases year-on-year. The taxation would therefore only target a small proportion of students/parents.

However, many private schools are small, in terms of overall student numbers, and are often faith-based. Whilst the media has focused on the headline 20% VAT, Labour has not talked about the wider implications this might have to local fee-paying faith schools or specialist schools dealing with disabilities. Not all private schools are as famous or as wealthy as Eton.

Many parents sacrifice elsewhere to fund their child’s schooling, which is of course optional, but often aspirational for most parents, as validated by the IFS study showing no drop in pupil numbers despite rising costs each year.

Perhaps Labour is counting on parents choosing to pay rather than withdrawing their child, but this feels like a tax on aspiration, which smacks of desperation.

From a purely tax perspective, it is logical to tax optional services like private education which the state education system already provides and affects a relatively small group of taxpayers, as opposed to raising VAT to 22% which would generate more revenue but impact more citizens.  

From a moral standpoint, the idea of taxing education seems regressive. Education is the foundation of the future, and the notion that the government should benefit financially from an individual’s decision to pay for their children’s education is at odds with the wider consensus that colleges and universities are exempt from VAT because education should not be taxed. Pricing potential students out of education is not something society should really be aiming for.

I don’t believe this election pledge is necessarily a vote winner as there are far more important policies for all parties to address. The VAT on education is a distraction compared to the other problems the UK faces. But as we saw with Brexit, we seem to obsess on the small details rather than the bigger picture.

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By Justin Bryant
04th Jun 2024 16:01

"From a purely tax perspective, it is logical to tax optional services like private education which the state education system already provides and affects a relatively small group of taxpayers, as opposed to raising VAT to 22% which would generate more revenue but impact more citizens."

Come off it Jason, it's purely ideological/political (like with the non-doms, where there is little if any evidence that extra tax will be raised overall) and the 22% VAT comparator is not necessarily a valid/relevant comparator (I've not even seen a politician cite that to justify it).

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Replying to Justin Bryant:
By Ruddles
04th Jun 2024 20:50

Did you miss the first 5 words of Jason’s quote, especially the third?

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Replying to Justin Bryant:
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By FactChecker
04th Jun 2024 22:14

If you'd ignored the final portion of Jason's sentence, you're left with:
"From a purely tax perspective, it is logical to tax optional services like private education which the state education system already provides"

... at which point the thought crossed my mind:
1st they come for Education ... then it'll be Medical services ... eventually anything for which a State alternative is available (Cars or Pensions or ...)?

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By ireallyshouldknowthisbut
04th Jun 2024 17:22

I hear a lot of wolves being called, just the same as the non-dom stuff.

My experience of dealing with clients with privately educated children which they cant quite afford, is they tend to pay whatever is asked of them to finish off the job as the thought of little johnny at the state school is impossible to comprehend.

Its also odd those same clients, often have extensive works on their house and have several expensive forign holidays a year etc etc and yet a are magically hard up. Its all relative.

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Replying to ireallyshouldknowthisbut:
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By DJKL
05th Jun 2024 10:14

Not always

I attended a grant assisted school from 1965 to 1975 when it shut after Labour removed the grants.

Nice friendly small school (circa 450 pupils covering P1-s6) It is now the Gallery of Modern Art in Edinburgh. It was run by the WS society (Writers to the Signet, my father was one), and had been originally created in circa 18th century as an institution for children who had lost a parent , it thereafter evolved into a school- it was not for profit.

https://en.wikipedia.org/wiki/John_Watson%27s_Institution

The grant paid to the school by the state was lower than the cost of local authority having an extra child in a state school.

Of the four of us who attended JWS two had already finished school, I did get shifted to another private school, Stewarts Melville (which cost far more) for two years to complete my Highers and for my little sister, who was just at end of primary seven, my father decided timing convenient, the state system would work and she spent six years at our local secondary school , Broughton. (Along with Shirley Manson but different years, my sister is older)

Net result UK plc saved a grant but picked up costs of an extra child to teach ( and it also got me for a year to teach as I attended Broughton for my sixth year)

Of my year of circa 20 boys fropm JWS, about 5 ended up at Stewarts Melville, 5 at George Watsons (Both Merchant Company schools , who on our closure had agreed to take all who wanted) , the rest hit the state system, not so sure re the girls in my year as lost touch with most- my guess closure had 50% going into state system

Now this could be fascinating in Edinburgh, we have a very high percentage of children educated at private schools (we are awash with private schools), maybe the highest city percentage in UK (Am sure it used to be about a 30% but Edinburgh has grown so maybe now nearer 25%) if private numbers were to drop with parents requiring the state system to absorb them then new schools would need to be built/existing state schools enlarged, there is currently not much extra capacity (Source my wife who up to last year worked at an Edinburgh state school in an admin role)

If cost increases push fee increases/closures this is certainly going to be robbing Peter to pay Paul (though of course UK Gov gets the vat and local authorities pay for the state schools up here)

(For historical context, circa 1970 ,when all four of us were at JWS ,the fees per year were £150 for first two and half price, £75 ,for younger two, so £450 a year- for family of four, when I went to Stewarts Melville in 1975 the fees, for me alone, were nearer £750 a year)

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Replying to DJKL:
By ireallyshouldknowthisbut
05th Jun 2024 11:40

Whilst at the margins there will be some familes who, on a financial basis decide little johnny will have to go to state schools, I dont think its really a price decision. Schools have pushed up fees hugely in the past 5-10 years to little effect on numbers. They seemed to have worked out its not a price sensitive purchase.

A lot of it it is about what happened to the parents and their views. There seems to be a high correlation between going to private by parents and sending the children (often granny will pay if the parents cant) and also self made who went state and feel let down by the patchy education they received.

I would suggest the overall drop out to be low.

My kids are state schools, they run the thing on the shoe string. Rock at some of the local private schools as we did when considering that route, and its like a country estate. Huge room for cut backs if they want to. But they wont, as parents will pay the money.

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Replying to ireallyshouldknowthisbut:
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By DJKL
05th Jun 2024 12:43

Not the ones scrambling for the cash at say £15,000 a kid already- a lot of parents scrimp to send, and of course up here most private schools have bursary schemes, these will likely need curtailed re numbers supported if fees go up.

When my former school closed, and was sold, the funds realised were placed into a charity that provides educational support for those less fortunate, but also fair number of schools (and universities) have such endowments, to assist the education of those less fortunate)- Higher fees these funds cover fewer.

I have two kids in our street that go private , not that affluent as far as I can observe, double upper property like mine at the £575k mark, the couple in question run a pretty old car . I suspect 20% on top to them will make a difference.

Maybe they decide Trinity High School (local state) will need to suffice, two more for the state to pay for.

And as I said, there are vast numbers in private schools in Edinburgh and they cannot all be rich as croesus- there are not enough truly wealthy in Edinburgh.

(I used to live near Alister Darling, he moved house in Edinburgh close to time his kids starting secondary- school catchments and houses locations rule when private is not an option)

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Replying to DJKL:
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By GDavidson
19th Jun 2024 10:21

I think ending Edinburgh's castle system will be welcomed by all its citizens.

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By FactChecker
04th Jun 2024 22:34

Interesting piece Jason - although one that could (and should) be written about any number of the 'proposed' (aka election promise) policies being floated without any attention to the practicalities.

But I'm intrigued by one aspect:
"The same report indicates the average number of children in private schools has remained steady at 7% for the last 20 years."
7% of what?
The total population of UK children of school-age? or The total population of school attendees?

I don't have any of the key figures but, having done work in that sector, I'm aware of two potentially contradictory factors over those two decades:
- the number of 'private school' establishments has increased far faster than state schools
- the % of places in private schools taken by the children of non-UK families has risen sharply

Aside of any tax implications (or even general social morality), that means the result of imposing VAT may have a range of unintended consequences - such as:
- even further reliance for the survival of private schools on attracting non-UK pupils
- further increases in fees (as foreign payers absorb the cost more easily than UK taxpayers)
- a trend to reduced demand from the cohort of UK school-age children (unaffordability)
- subsequent increase in demand for State school places (particularly the 'desirable few')

Given the problems in the general estates of existing state schools (Raac anyone?), a policy that leads to a requirement for more building (let alone more teaching staff) doesn't have a bright future.

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By listerramjet
05th Jun 2024 09:21

You make an interesting point about HMRC “re-interpreting”, or what should more properly by termed an abuse of power and process. Only one type of institution, a Court, should be able to “interpret” the law.

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By evildrome
05th Jun 2024 09:32

Pointless window dressing.

The purpose of taxation is not revenue.

You are a new government. You have £0.

What do you have to do to create money?

You take zero and split it into +1 & -1.

You create £1 and £1 of national debt.

You spend £1 into the economy.

You decide to tax back the £1.

How much money do you have?

£0.

No liability survives contact with its issuer.

What do you have to do to spend £1?

You need to create £1 and £1 of national debt.

All tax is destroyed. All spending is new.

It doesn't matter if its £1 or £1T. All tax received cancels an equal amount of your liability.

OK, you could create an accounting fiction where you *pretend* that tax receipts go into a special account you can spend from but its simply not true.

You're kidding yourself on and in point of fact that is *not* how the UK accounts for tax.

All tax receipts go into the Consolidated Fund and at the end of the day the balance of the Consolidated Fund (whether positive or negative) is swept into the National Loan Fund (which is essentially the national debt).

The National Loan Fund is ALWAYS NEGATIVE. Positive balances from taxes and fines merely reduce the total outstanding in the NLF.

All tax is destroyed.

In 1945, NY Fed Chair, Beardsley Ruml made a famous speech to the ABA, asserting that since the end of the gold standard:

"Taxes for Revenue are Obsolete".

The real purposes of taxes were: to "stabilize the purchasing power of the dollar",
to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security".

Basically, the monetary purpose of taxation is the control of inflation.

Not revenue.

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Replying to evildrome:
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By Justin Bryant
05th Jun 2024 10:13

But that's just a function of the fact there is huge government (national) debt in the first place. If a brand new country with no debt (Scotland?) decreed that it would have no government debt, then tax would be revenue i.e. it's just different nomenclature but the same basic, overall economic effect (i.e. for the UK, tax allows more government borrowing and hence spending than would otherwise be the case, and so it is revenue in that basic sense).

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By Self-Employed and Happy
05th Jun 2024 09:46

I used to take an active interest in politics (not anymore) I think the main issue is this...

Every election cycle Westminster release a report called the "Socio-Economic Background of MPs"

Over the last 30 years is has shown as 25%+ reductions in the amount of doctors, solicitors, and accountants. Over the same period in an almost perfect negative correlation there has been a 25%+ increase in the amount of MPs who list their profession as "politician".

That is the issue, skilled, intelligent people with ability are fed up of working with morons and all the hassle that comes with being an MP, whilst morons that could never get the same package in the private sector are left to run the country.

I saw a Japanese program a few years ago, it said the world thinks our people are on the whole more intelligent, they are not. We put the one intelligent person out of 10 in a position to lead the others, whereas you let anyone be a leader.

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Replying to Self-Employed and Happy:
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By DJKL
05th Jun 2024 10:39

Do not disagree- I have a meeting later this month with quite a few all together (First meeting of this series of meetings ( I missed ) in the Minutes had one MSP, one MP, three Councillors and apologies from two other MSPs and another councillor)

Apart from licensing board meeting have never been exposed to lots of politicos at the same time, only ever dealt on a more one to one basis, so will be interesting to observe them in their more natural habitat. (David Attenborough Style)

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By AthenaSolutions
05th Jun 2024 09:55

Where I live (the far North of the UK) there are no private schools. The only option to the state sector is private boarding school. As an ex-private schooler myself, i was full of foreboding as my wee Janes headed off into the wilds of state education.

My thoughts - why is private school "aspirational"? Surely a good education for all is "aspirational". If moneyed and influential parents have to participate in the same system as the other 93%, then they work to make it work. No buying your way out.

And my observation, as my Janes head off to Russell Group universities to study so-called "proper" subjects, is that where parents are educated, engaged and involved, children learn at whatever educational establishment they go to. Enabling parents to support children's learning by ending inadequate and temporary housing, child poverty and the need for foodbanks would do a sight more for educational attainment than a tax system which continues to enable relatively wealthy parents to shell out on school fees.

Private schools are an unnecessary distraction from the societal goal of good education - in well-funded estate - for all. 14 years of UK government induced cuts to state education can't be fixed by VAT on private education. But at least it's started a debate.

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Replying to AthenaSolutions:
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By DJKL
05th Jun 2024 11:00

The debate has gone on for years, and you on paper might drag schools up with different parents , but reality is we all chase the postcode lottery, we buy houses in good school catchment area if we can afford to so do.

Private school fees were not really a financial option for us (£10k a year when son went to secondary, more now), so we did what all middle class Edinburgh parents who cannot afford school fees do, we got the school reports, studied them, visited the state schools , got our son into a good out of catchment primary, sold our central Edinburgh flat and bought a property slap bang beside that school so his sister was then in catchment, we had already checked the secondary it fed, they both went on to that, I hired tutors for maths and physics, we shouted at them a lot, both then grabbed the necessary Highers etc and went to St Andrews (and a lot of the universities positively discriminate for state pupils over those that went private and even reduce entry chances if parents themselves attended university (Edinburgh asked)). Daughter then did her MSc- but you need to be able to buy the house in the school catchment, prices are far higher in good school catchments, so your aspirational middle class kids improve matters argument just means the better state schools get them, the schools out near some of the more dodgy estates do not.

Daughter has closing date offer in for a property today (High Noon), they have no children (may never have, she claims she hates kids) , notwithstanding they checked schools before offering because even if they never have kids a good school nearby will hold up the price when they eventually come to sell. And how will she get on housing ladder at near £400k (we actually think they will be outbid), combination of them saving and parents offering a decent lump sum to make it happen- middle class money works system

At the end of the day your aspiration of dragging up the schools is laudable but unlikely to be broadly effective , you are back in Grammar School/Secondary Modern territory.

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Replying to DJKL:
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By AthenaSolutions
05th Jun 2024 16:28

If we all give up on the aspiration for good schools for all, then we end up where we are. Other societies have managed this - its lack of aspiration and delivery of that goal that is holding us back.

As individuals we make the best choices we can for our children. As a society we need to make the best choices we can for everybody's children. Investing in education is the most important choice for our collective future.

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Replying to AthenaSolutions:
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By dwgw
05th Jun 2024 21:34

AthenaSolutions wrote:

If we all give up on the aspiration for good schools for all, then we end up where we are. Other societies have managed this - its lack of aspiration and delivery of that goal that is holding us back.

As individuals we make the best choices we can for our children. As a society we need to make the best choices we can for everybody's children. Investing in education is the most important choice for our collective future.

A frequently cited counter argument to VAT on school fees is that the state system would be "swamped" by children whose parents couldn't afford the increase.

Apart from the fact this is statistically improbable (parents seem to have managed to pay for above inflation fee increases in recent years and only a minority of the 7% would be priced out by VAT), the obvious riposte is that state education should then be better funded to accommodate everyone. It's not a profit and loss exercise; the VAT take doesn't have to be greater than any increased state school spending.

If governments don't aim to give everyone the same opportunities, regardless of ability to pay, then we'll always have inequality of opportunity, and the social and economic limitations that brings.

It's about aspiration on this side of the argument as well, but it's about aspiring to be a better society, not just the aspirations of some for their own children.

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By anneaccountant
05th Jun 2024 09:56

Labour need to give the full picture of the financial impact of their intention to impose VAT at 20% on private school fees. Assuming 500,000 (an optimistic 90% of private sector pupils) stay in the private sector then the likely VAT take (net of input VAT that schools will be able to reclaim on costs) will indeed be approximately £1.6 billion as claimed. However 55,000 (10% of pupils) will be forced into the state sector. The teacher pupil ratio is currently about 18 so an extra 3,055 teachers would be needed to teach these extra pupils at an average cost per teacher of £50,000 (including salary, NI and pension contributions) so a total cost £1.53 billion. So there would be virtually no benefit to the state sector at all. If more than 10% of pupils leave the private sector then the policy would actually cost the government!!

It is argued that the current VAT exemption is a subsidy to the private sector but this is nonsense as it costs the general tax payer nothing. Indeed it is the parents of private sector pupils who pay at least £2,500 a year each (as part of their annual tax bill) towards their childrens’ state education, which they do not then take up, who are contributing over £1.2 billion a year in taxes to subsidise the state sector.

I fear sadly it is the politics of envy and not Labour’s new found sense of financial responsibility that is driving this policy.

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Replying to anneaccountant:
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By Jumbo
05th Jun 2024 13:06

Of course the current VAT exemption is a subsidy to the private sector. The default VAT status of services is standard-rated, so if you grant a sector exemption from VAT you are subsidising it. The VAT foregone as a result of the subsidy means the general taxpayer is paying more.

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Replying to Jumbo:
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By Hackey100
07th Jun 2024 12:03

It is ignoring the very fact that it simultaneously unburdens the state sector to a sum much larger than the hypothetical VAT that the government is being "deprived" of.

The current situation with private schools is the equivalent of private medical users forgoing any entitlement to the NHS, something that clearly does not happen. Private medical patients often mix and match treatment. If anything, private medical insurance is a greater candidate for full VAT than private education. 22% of UK adults have that, watch Labour come for it next.

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Replying to Hackey100:
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By Jumbo
09th Jun 2024 18:56

The point at issue was whether the current tax exemption was a subsidy or not. It clearly is, and that subsidy is applied regardless of the impact of private schools on the cost of state schooling.

As has been pointed out elsewhere on the thread, parents do not opt for private education because they want to reduce the burden on the state, they do so because they want to purchase the benefits they believe it gives. Whether it helps the state or not does not come into their thinking. I'm struggling to see then why they should feel that the state owes them something.

If you do wish, however, to look at the whole picture, then you will need to include the social cost of private education - the inequality it leads to. The case for a subsidy on fees or a credit for the saving to the state weakens further.

You suggest that users of private education forgo their right to state education. They do not. They can request state education whenever they wish and the state must provide it.

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Replying to anneaccountant:
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By rmillaree
05th Jun 2024 16:15

" Assuming 500,000 (an optimistic 90% of private sector pupils)"

The teacher pupil ratio is currently about 18 so an extra 3,055 teachers would be needed to teach these extra pupils at an average cost per teacher of £50,000 (including salary, NI and pension contributions) so a total cost £1.53 billion

well you decide to presume 10% leaving is on the lower end of the expected scale (some are saying 5% top provide balance) and then get your maths wrong by a factor of 10 !! - your calcs are clearly nonsense of the highest order !

3,055 * 50,000 = £150 million not £1.5 billion.

note it looks like as recently as 2022 that numbers in private education were at record levels this is a not a sector dying a death prospects wise.

thankfully no one is forcing anyone to put themsleves in this position where they have to go down this route of funding others this is ultimate 1st workd gripes plus some !!

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Replying to rmillaree:
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By anneaccountant
05th Jun 2024 19:47

Thanks RMillaree for pointing out my calculation error .. embarassing indeed! Wish I had gone to private school!! Glad I retired 3 years ago .. clearly out of practice!!!

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Replying to anneaccountant:
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By rmillaree
05th Jun 2024 20:39

no worries we all get our maths wrong at times part of the fun of the game

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By petestar1969
05th Jun 2024 10:01

Paying up front to avoid the VAT is what happened years ago when they started charging VAT on domestic fuel. It was messy but it sort of worked.

This is more complicated though and smacks of leftie jealousy-based politics, which is, frankly, sad.

People pay tuition fees to go to university, how is that different from little Johnny going to a prep school?

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Replying to petestar1969:
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By Jason Croke
05th Jun 2024 19:40

There is a certain irony of parents complaining they cannot afford a VAT charge on school fees, but at same time can find 12 or 24 months of cash to pay for the next couple of years tuition in advance.

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Replying to Jason Croke:
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By Justin Bryant
06th Jun 2024 09:02

But that's not much of an argument or irony is it? There are all kinds of ways of raising cash if you hope to save 20% on it.

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Replying to Justin Bryant:
VAT
By Jason Croke
06th Jun 2024 09:57

It's not meant to be an argument, more an observation, that parents and schools are considering payments in advance (and other tax strategies) in order to avoid a future tax whilst at the same time saying they can't afford it and yet you and I agree that parents will find a way, so if they can find a way to afford it, then VAT on school fees is therefore affordable and I suspect that this desire to obtain the best for our children, is what Labour are counting on.

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Replying to Jason Croke:
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By twisted_fool
06th Jun 2024 19:20

More an assumption than an observation - an assumption that those two groups of people are the same (they probably aren't). There are lots of different scenarios and there will be people that can afford the VAT but will pay upfront to avoid it, but there will also be people that cannot afford the VAT and cannot afford to pay upfront to avoid it either. Sadly it is this group of people that are most impacted by this change as this group is (I would assume) the group that send their children to private school for reasons that would gain much more sympathy (their children were being bullied, or struggling for some other reason, in their particular local state school)

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Replying to Jason Croke:
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By Hackey100
07th Jun 2024 12:09

Jason Croke wrote:

There is a certain irony of parents complaining they cannot afford a VAT charge on school fees, but at same time can find 12 or 24 months of cash to pay for the next couple of years tuition in advance.

And here in is the clue, in practice, the people who fundamentally can afford to pay the increase with no care in the world can actually also afford to avoid or forestall it.

Maybe we would be better off targeting income and asset taxation and council tax in such a way that the extremely well off cannot avoid it? Simpler legislation, full alignment of capital gains with income tax bands, council tax that more accurately reflects property valuations are just a few areas?

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By rmillaree
05th Jun 2024 10:20

From a moral standpoint, the idea of taxing education seems regressive.

imho one is not taxing "education" as such - one is is taxing someone making the choice to choose a superior service with bells and whistles (that keeps out the commoners) - in that regard its education but not as we know it at the necessity level. Probably similar to the line taken with chocolate - its a foodstudd similar to cake - but do we really need outr chocolate fix one would probably say no.

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By Ian McTernan CTA
05th Jun 2024 10:25

The major issue not even mentioned in the article is those sending their children ALREADY PAY FOR THE STATE PROVISION through their taxes, so in effect Labour now want them to pay twice over.

The Govt should be giving parents a refund on their taxes for not using the state system, not doubly penalising them.

Same with private health insurance: doubly taxed for not using the state system.

It's little wonder the UK is in such a mess with backwards, envy driven policies such as these in place.

Also no mention of all the other research into how much this policy would actually raise: most other analysis shows the net overall tax gain would be almost zero to negative, only the IFS thinks otherwise.

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Replying to Ian McTernan CTA:
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By unclejoe
05th Jun 2024 11:02

To be fair to IFS they do consider changes in behaviour. The £1.6bn that the Labour party have latched onto is the IFS baseline figure assuming no behavioural changes. Just one of gazillions of lies that our politicians expect us to believe. The IFS think that the reduction due to behaviour changes (e.g. kids being moved to the state sector would be very small - they estimate 0.1 to 0.3bn reduction. That assumes a very inelastic demand curve for private education. I have seen other estimates that suggest 20% of privately educated youngsters may be transferred to the state. At that level I believe the net effect would be negative. It is all in the assumptions - essentially a guess. From my own experience I suspect the 20% figure is nearer. It is "woke" politics of envy!

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Replying to Ian McTernan CTA:
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By rmillaree
05th Jun 2024 11:34

The major issue not even mentioned in the article is those sending their children ALREADY PAY FOR THE STATE PROVISION through their taxes, so in effect Labour now want them to pay twice over.

well no they are not - people who choose private education made that choice in the knowledge that that will save the state money - thats always been clear and transparent. all we are doing is upping that actual cost being charged by 20% - i dont see how on any planet this specific 20% extra cost cant been seen as "doubling anything" - thats a ridiculous statement imho when the cost is only going up 20%.

note many of this prfivate schools probably qualify for soem decent tax breaks on profits and donations too.

proof of then pudding here is if fee costs have gone up 20% over the last couple of years and people have not left en masse to go back to tyhe state system thats uggests these people are very much bleating for bleating sakes saying people will leave en masse when they wouldnt.

pretty similar to any other unfortunate error where vat comes into play - one may not like it but it aint really going to move the gaolposts much and life will go on regardless whatever nonsensical projections some may have made.

" envy driven policies such as these in place."
its very little different to the current conservatives not increasing the the vat threshold - is that envy driven politics - or simpoly necessary way of raising extra taxes to cover shortfall elsewhere.

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Replying to Ian McTernan CTA:
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By Jumbo
05th Jun 2024 11:44

There are lots of state systems we may not all use but we do not expect or receive a refund. State services are there if we need them or choose them and must be paid for by all.

The IFS is a respected independent economic research institute. What is this "other analysis" you refer to? Please don't say Tufton Street!

As for envy politics, whenever someone squeals "You're just jealous", you know they have lost the argument.

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Replying to Ian McTernan CTA:
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By Jumbo
05th Jun 2024 11:44

There are lots of state systems we may not all use but we do not expect or receive a refund. State services are there if we need them or choose them and must be paid for by all.

The IFS is a respected independent economic research institute. What is this "other analysis" you refer to? Please don't say Tufton Street!

As for envy politics, whenever someone squeals "You're just jealous", you know they have lost the argument.

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Replying to Ian McTernan CTA:
Ray McCann
By Ray McCann
05th Jun 2024 12:21

The argument that it will not raise much is open for debate although it is clear that in the overall scheme of things it will not. However the argument that those who choose private are taxed twice is just puff. I would bet that there is not a single parent in the whole of time who ever sent their children to private school to save the State money, not one.

And anyone who does not think that private schools leverage their status into higher fees is kidding themselves. The private schools near me, and there are many, are opulent and never ever seem to need to watch the pennies. They have ample scope to absorb any net VAT in whole or large part.

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Replying to Ian McTernan CTA:
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By dwgw
06th Jun 2024 11:50

Ian McTernan CTA wrote:

The major issue not even mentioned in the article is those sending their children ALREADY PAY FOR THE STATE PROVISION through their taxes, so in effect Labour now want them to pay twice over.

The Govt should be giving parents a refund on their taxes for not using the state system, not doubly penalising them.

Same with private health insurance: doubly taxed for not using the state system.

It's little wonder the UK is in such a mess with backwards, envy driven policies such as these in place.

Also no mention of all the other research into how much this policy would actually raise: most other analysis shows the net overall tax gain would be almost zero to negative, only the IFS thinks otherwise.

We don't have hypothecated taxes, so that argument is spurious.

Childless adults pay tax for other people's children to be educated. People with no car pay tax for roads to be built. Opponents of nuclear weapons pay tax that supports our retention of nuclear weapons.

We don't choose how our tax payments are spent, that's delegated to the governments and councils we elect. Taxes are not personal expenditure, they're the price of a civilised society.

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By Jumbo
05th Jun 2024 11:01

In truth, the changes needed to legislation are relatively minor – a tweeking of the exempt supply list. There could be challenges as the new legislation beds down but that is par for the course.

“From a moral standpoint, the idea of taxing education seems regressive”. Some would argue that private education is divisive and promotes inequality – why then should taxpayers effectively subsidise private education by not giving it default standard-rated status? As to the point that “Pricing potential students out of education is not something society should really be aiming for” – surely a state education would still be available to those who could no longer afford to go private?

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Ray McCann
By Ray McCann
05th Jun 2024 11:07

This proposal did leave me feeling somewhat negative when it was first announced since whatever happens it will not raise a huge amount of revenue. However the gulf between what is spent per pupil in the private sector and the State sector is expanding so much on the back of huge increases in private school fees.

And there has been too much reference to aspiration, envy etc in the debate. I don’t have a problem if anyone wants to have their child privately educated, that’s a choice. I simply don’t want to pay towards it through favourable tax status whilst my grandchildren’s school is at risk of collapse due to RAAC.

The real debate should about how we raise the State system to the highest possible level.

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Replying to RayM55:
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By Justin Bryant
05th Jun 2024 11:29

But that RAAC and ruin school is already being more than paid for by the rich private school parents as explained above (even ignoring the fact there is no good evidence more tax will be raised overall).

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Replying to Justin Bryant:
Ray McCann
By Ray McCann
05th Jun 2024 12:14

No, it’s not, it’s being paid for by tens of millions of people who have no choice but to use the State system.

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Replying to RayM55:
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By Justin Bryant
05th Jun 2024 12:55

But if one of those tens of millions of people today changes their mind and starts going private, why aren't they still paying for the State system i.e. what's changed?

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Replying to Justin Bryant:
Ray McCann
By Ray McCann
05th Jun 2024 14:48

We can’t pick out amounts of tax and say well I am paying for that. Of course I agree that all the tax goes into a pot but even if you were able to isolate it, the individual amounts would be no more than a few quid each at best. Or more precisely they are not paying in tax anything like the cost of State education. Individuals who don’t have kids would have more reason to grumble.

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Replying to RayM55:
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By Justin Bryant
05th Jun 2024 15:50

So you agree they are in fact paying for it, as do taxpayers generally (and rich people more than most of course, all else being equal).

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Replying to RayM55:
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By twisted_fool
06th Jun 2024 19:28

It's a bit of a stretch to think that you are paying for private education because it doesn't qualify for VAT

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By GMTax
05th Jun 2024 11:29

There are lots of useful points in this article - as Jason says, VAT for charities (and other non-profits) is a very complex area and people often jump to the wrong conclusions.

As he says, there will be considerable scope for these schools to reclaim input VAT, and those with extensive building projects may be able to reduce the VAT-excl amount of their fees quite a bit because they will no longer have masses of irrecoverable input VAT. So, I imagine in some cases the total fee incl VAT may go up no more than 10%.

But in terms of the proposed revenue raised, bear in mind that Labour are also proposing to remove charitable rate relief from independent schools in England so they have to pay business rates (as is already the case in Scotland).

Another dimension that I haven't seen discussed is what happens when the school fees are paid by a business - e.g. for an employee who is posted overseas the employer pays for residential schooling of their children in the UK. Is there any reason to prevent the VAT-registered employer reclaiming the VAT on the school fees as a business expense? I'm not sure how often this applies, but if so, this would reduce the total revenue to the Exchequer.

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Replying to GMTax:
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By Jason Croke
05th Jun 2024 19:46

As the recipient of the service (education) is a child, then there would be no direct links to the business, the supply is not for a business purpose and therefore not recoverable.

But the business cannot employed staff if they did not provide education to their children? Well try and reclaim VAT on an MBA as a business owner, duality of purpose, yes the businesses benefits, but so does the person individually.

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By Mallock
05th Jun 2024 12:34

I have knowledge of two private schools which are very fearful of the proposed VAT changes. These schools already exist on donations from wealthy benefactors, the goodwill of teachers and parents and the write off or renegotiation of loans. The majority of the pupils come from families where real sacrifices are made to pay the school fees. An additional 20% in fees would be unaffordable for many.

These aren't large schools with less than 400 pupils each but projections indicate that a reduction of any more than 10% of pupils would result in the financial position becoming untenable. They are both having precautionary discussions with their advisers on the potential of having to close their doors. How exactly are the local authority going to accommodate another 700 or 800 pupils at short notice?

As a boy, I was sent 25 miles to a private school for most of my secondary years because I was beaten up twice and had my coat stolen due to our far from salubrious home being considered to be in the posh part of town. My Mum who was a teacher did private tuition at night and at weekends and my Dad used to come home from work and then drive taxis at night to bring in enough money to pay the school fees. For this I will forever be grateful.

According to a recent survey I saw, up to 30% of private schools are suffering financial problems, so this may turn out to be a much bigger issue.

These really are the politics of envy and demonstrate a huge lack of understanding from the Politicians involved.

There are plenty of other similarly poorly thought out policies in place. We have had several NHS consultants moving to 3.5/4 days a week and refusing all additional shifts and out of hours because they are not prepared to pay 60% tax (67.5% in Scotland) between £100K and £125,140. I know others (not in NHS) who are ploughing everything they have in to pension to avoid paying at these rates and consequently doing without the expensive holidays/new car etc etc.
Others won't move house because the Stamp Duty rates are too high (especially in Scotland) so the property market has restricted supply.

All of these are politically constructed obstacles with unintended consequences.

With VAT on school fees, I think we are creating another!

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