Labour may be gaining a reputation for policy shyness, but one of its ideas is already having an impact. The party’s plan to introduce a 20% VAT tax on private schools to better fund state education seems to have spooked the sector, which has increased fees by 8% this year. Meanwhile, the Independent Schools Council has reportedthat admissions this past year have fallen 2.7%, and earlier this year the FT reported that private schools are aggressively recruiting wealthy international students in anticipation of Labour’s proposals.
Why is that important? Because taxing private schools is not like taxing private tennis clubs. With schooling, every domestic child who opts out of the private system to avoid about £3,000 of VAT will then need about £8,000 in taxpayer money annually to fund their state education. The potential result? A substantial threat to the Treasury’s ability to fund improved state education outcomes.
Many argue VAT will not threaten demand, as domestic private school enrolment was unchanged despite a 55% real increase in tuition costs since 2003. This may be true but demand for private schools does not defy economics – it is sensitive to pricing. This is shown by the fact that state school enrolment grew in these years, meaning private schools lost market share to state schools. While school fees have not risen in real terms since 2019, price sensitivity to an inflation-driven 8% fee rise this past year, and fears of future VAT, are now driving enrolment down.
So what will happen in the first years of a Labour government in what is likely to be a post-VAT-rise world? Existing students may stick and hence VAT receipts may remain high as parents will not want to disrupt their children’s lives. Yet parents of future students, who have never started in the private system, will find it easier to choose state schools, potentially creating a drag on enrolment and VAT receipts for years. A London independent primary school notes open day attendance from parents with newborns has fallen more than justified by demographics, while a greater share of their graduating students this year are attending high performing state schools over private schools.
There are differing opinions as to how much the tax rise is likely to affect demand for private school places. The Institute for Fiscal Studies (IFS), which implausibly argues VAT receipts will remain unchanged as impacted families spend elsewhere, expects a 3-7% enrolment decline. I have heard that a leading industry consultant advises schools to budget for a near 25% decline by 2030. Notably, at a 25% decline, the net impact becomes negative as the cost of educating private school leavers in the state system would exceed all VAT gains.
There are also ways private schools will look to minimise the amount they pay in tax – and frustrate the Treasury. Richer private schools investing in new facilities pay considerable VAT to contractors, but as VAT is a tax on value added, they will be able to deduct this from the VAT they pay direct to the Treasury. While parents will pay a headline 20% VAT rate, after deductions the IFS assumes net VAT receipts will be 15%. Boarding schools will probably find it possible to avoid VAT on lodging. This will motivate them to shift more of the total fee from taxable tuition to lodging, minimising how much VAT they pay. Expect private school bursars to become “VAT mitigation specialists”.
There may also be counterproductive social implications. Up to 50,000 households may decide the cumulative £80,000 in VAT for two children over the age of 13 is better spent moving near a great state school rather than as a gift to the government. Labour’s well intentioned effort to lift state education will exacerbate the trend that crowds out less affluent students from higher performing state schools.
Another Labour goal is to use education to “smash the class ceiling”, which will mitigate the sizeable advantage privately educated pupils get in lifetime earnings. But part of that advantage must be due to the UK’s high-quality talent pool attracting high-paying employers. Closing the gap by elevating state-sector outcomes is healthy, but doing so by hurting private schools may eventually reduce the pool of higher paying jobs.
While Labour’s current policy gets low marks, VAT on private schools is not a bad idea – it is an incomplete one. Education outcomes would be definitively more positive if private schools were given the simple choice between imposing VAT and offering low-income students full bursaries equal to 20% of revenues. If all schools choose the bursary option, it would directly benefit about 100,000 low-income students, improving education outcomes for many. As the number of low-income bursaries exponentially rises, it will meaningfully improve social and demographic balances of the UK’s exclusive private schools and, in time, society as a whole.
For those schools that don’t want to diversify beyond the elite, let them choose VAT, as they know best what impacts their demand. But for those that want to do what is best for their enrolment, their communities and society, let them offer bursaries over charging VAT. That is a policy that deserves high marks.
Mike Harris is the founder of Cribstone Strategic Macro, and an adjunct professor of finance, economics and management for Syracuse University in London
