Leading private schools are telling parents they can pay tens of thousands of pounds in advance in the hope of avoiding a new VAT charge that a Labour government would introduce on fees.
Sir Keir Starmer has said he would swiftly end the tax exemptions enjoyed by the sector if he becomes prime minister. Private schools would be hit with a 20 per cent VAT bill within the first year of a Labour government. An election is expected by the end of next year.
The policy could mean that fees at the most expensive boarding schools, which are more than £50,000 a year, would rise by £50,000 over five years if they passed the full increase on to parents.
Schools and legal experts are telling parents that existing schemes, which allow them to pay fees for several years in advance, could enable them to avoid the tax rise. The Independent Schools Council denies such pre-payment schemes, which have other financial advantages, are tax loopholes.
St Dunstan’s College in southeast London, where annual fees are nearly £20,000, sent a note this year to “concerned parents”.
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“The school has recently received many inquiries from concerned parents asking about the likely financial impact of a change in government following the next general election,” said the head, Nick Hewlett.
“We responded ... by sending a note to parents explaining our current understanding of the situation and the steps we are taking to manage the impact. A potential form of mitigation is for parents to make use of our existing fees in advance scheme. This is not a new initiative, having been in place for many years and the discount offered remains the same as previously.
“We did not encourage parents to use the scheme and we did not give either financial or legal advice.”
Merchant Taylors’ School, in Hertfordshire, which charges £25,000 a year, said in a newsletter to parents: “Efforts will continue so that the school is prepared for the political and economic changes that are now emerging, whilst maintaining the high standard of education and facilities that you expect from Merchant Taylors’.
“Our fees in advance scheme may provide parents with a degree of long-term assurance in the current climate.”
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Neil Walne, bursar at Pangbourne College in Berkshire, where day fees are about £28,500 a year, said: “Some schools have seen a number of parents pay in advance [to try to avoid VAT].”
He added that at Pangbourne, which has had a pre-payment scheme for several years, two parents had recently asked the school whether if they paid fees in advance it would avoid them paying VAT in future.
“We said we were happy to go down the road of the existing [pre-payment] scheme with you but that we could not guarantee the situation going forward. It has been reported that Labour says that if they come to power they will introduce legislation that levies VAT [on fees].
“We have been told to say to parents that under the current rules if they gave, for example, £200,000 now to the school for fees in the future, that that money is outside VAT [constraints]. That would be allowed under current rules.”
But, Walne added, schools are understood to have received new advice from the Independent Schools’ Bursars Association (ISBA) that recommends telling parents that a new government could also change the rules to levy VAT at the point at which the money is spent rather than when it is handed over, which would mean VAT could become liable even if fees had been paid in advance.
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Walne said schools typically offered discounts of between 0.5 per cent and 4 per cent on fees paid in advance. Schools with charitable status can earn interest tax-free on fees paid in advance and some schools share the interest with parents.
Last month, Starmer scrapped his policy to abolish the charitable status of private schools. Labour has cited a study by the Institute for Fiscal Studies claiming that VAT on fees could raise as much as £1.5 billion a year. However, some parents say the fee increase could push them back into the state sector.
The Private Education Policy Forum, which has advised Labour on its VAT policy, says a next step for a Labour government could be to pay struggling private schools to become state schools.
Francis Green, a professor of work and education economics at University College London, and a board member of the forum, said: “I would not expect many schools to struggle, purely as a consequence of having to pay VAT on their fee incomes. But it would be good all round if a future government could facilitate an easier path for private schools to transfer to the state sector whether or not they are struggling to meet their VAT bill.”
It was a policy advocated by the former education minister Andrew Adonis who oversaw the transfer of about 50 private schools into the state sector, including Liverpool College, now a large coeducational comprehensive school.
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ISBA said: “Fees in advance schemes are perfectly legitimate and have been used for a number of reasons through the years — for example, when a family has been left a legacy. It’s right that parents know all their options for paying fees and these sorts of advance payments are very explicitly not being marketed as a tax loophole. There is still a lack of detail around Labour’s policy and so schools cannot yet advise parents on any specifics.
“In any case, the number of parents who can afford to use fees in advance schemes is very limited. Most of our parent base are dual-income households who pay each year from taxed income and it is those families who should be focused on: these are the people Labour’s tax on children’s education would hit hardest.”
