The threat of VAT being applied to independent school fees is a very significant one to the sector and something to which schools are responding in a variety of ways.
To quite considerable fanfare and no shortage of national press coverage, some organisations have announced that they will not be passing on VAT to their parents. Is such an option possible and if so, what does this mean in practice?
It is important first of all to establish the facts and clarify rhetoric from reality. The Labour Party’s proposals contain exceptionally little detail and the drafting of the legislation has obviously not yet begun; nevertheless, there are some points which we can say with confidence.
The first of these is that VAT is a consumption tax, which is borne by the final consumer and not a charge on businesses. This means, of course, that it will be a legal requirement for VAT to be added to the fee.
The idea therefore, suggested both by Bridget Phillipson, the shadow education secretary and from a handful of schools that VAT will not be passed on, is not technically accurate. What they mean is that schools could choose to reduce their fees by 16.6 per cent in order for the implementation of VAT not to lead to a net cost of independent education for the consumer.
There are a number of important questions which arise from this, all of which relate to the general theme as to whether some independent schools may be overpromising.
“The vast majority of independent schools run on very narrow margins.”
Are schools that are pledging to reduce their fees by 16.6 per cent disproportionately overpriced at present with such a large margin of surplus that a one-sixth reduction in the price of their service is possible?
Is the quality and breadth of provision offered by such schools going to reduce in line with the fee reduction, for example, fewer subjects offered in the curriculum and fewer extra-curricular opportunities?
Are such promises risking the medium to long-term future of schools in order to achieve a quick win with current or prospective parents?
The vast majority of independent schools run on very narrow margins and a visit to Companies House and a poring over the publicly available accounts shows that very clearly. In other words, it would appear impossible for virtually every independent school to reduce their fee by over sixteen per cent and continue to remain a going concern without making significant changes in other parts of their operation.
“It is possible that some institutions decide to offer a budget independent education.”
This would imply that the answer to question one is “no” but the answer to question two is likely to be “yes”. With the single largest cost to any school being staffing, this means job cuts and it is teachers who represent the most expensive part of any school’s wage bill. Fewer teachers presumably mean larger class sizes, unless of course a proportionate number of pupils also leave, although that would consequently reduce revenue as well as expenditure and not result in a net cost savings.
It is possible that some institutions decide to offer a budget independent education – a no-frills, lite approach, in sharp contrast to the wealthier, grander public schools whose names often unrepresentatively serve as synonyms for the sector. Whether there is sufficient demand for this remains to be seen and whether such a business model is viable is also an unknown; in any case, transitioning to this approach would not be without significant upheaval and institutional upset.
“Few are queuing up to make such bold commitments.”
This brings us onto the third and final question around whether or not announcing a decision to absorb VAT risks sacrificing the future in an act of short-term panic or desperation. Being at the vanguard of fee announcements with the threat of VAT looming is a courageous – or perhaps foolhardy – place to be. It provides an opportunity to grab the headlines but seems out of sync with the rest of the sector.
Of course, in the unlikely event that a significant number of schools do decide to absorb all of the VAT bill, then the public declaration of said position deserves credit for the courage exhibited, so long as they survive long enough to receive the plaudits and so long as history proves them right.
Given the less-than-enthusiastic response from others in the sector to such announcements, it would suggest that few are queuing up to make such bold commitments. Governing boards, heads and CFOs are all too aware that the majority of VAT must be passed on in order to maintain the appropriate levels of positive cashflow, free cash reserves and operating surplus for reinvestment in the educational provision.
“We are in a strong financial position but we can’t simply absorb all of VAT.”
At Hereford Cathedral School we have sought to be as transparent as possible, running exceptionally well-attended information and Q&A sessions with current parents, those who have signed up for September 2024, and prospective families for 2025 and beyond.
As anyone can see from our publicly-available accounts, we are in a strong financial position but not so strong that we can simply absorb all of VAT. We are working assiduously to be as efficient as we can be, to diversify income and to keep our educational offering as affordable as possible.
Yet as the steward of a venerable organisation with over a thousand years of history, I cannot and will not risk the future of the school by looking for short-term, headline-grabbing quick wins, which would have potentially perilous long-term ramifications. Our commitment is that we will always seek to be as transparent as possible, striving for the best possible opportunities at the most affordable level, while stewarding the school in a financially prudent and responsible fashion.
A response to this opinion piece from Sam Hart, headmaster of Giggleswick School, North Yorkshire:
“It is imperative that schools take proactive measures to address this imminent threat. Giggleswick School stands as one of two schools that have publicly announced to absorb VAT costs, demonstrating a commitment to protect our current and future families.
“We have outlined a strategic restructuring plan to ensure that the quality of education remains uncompromised. As head, I agree with the statement that not all schools will be in the position to absorb VAT. Equally, I fully accept that each school will need to devise their own strategies to mitigate this financial threat, and I will not criticise others for the pathways they choose. This is because each school is fundamentally different with their own context and unique factors: a blanket approach is neither possible nor appropriate. No decision of this magnitude is taken lightly.
“Our board have held the SLT to account as we have completed rigorous planning to ensure that our strategy is not only viable but wholly deliverable and, importantly, does not compromise the school’s educational offering.
“A clear strategic plan, combined with active and detailed planning should not be viewed as ‘foolhardy’. Instead, it is a prerequisite to support our parental body, provide certainty and protect the future of our 500-year old school. At its core, our strategy is designed to mitigate the inevitable narrowing of those parents who can access this form of education.
“In my humble opinion, waiting is no longer an option when you are responsible for the stewardship of an institution; however, once more, I refer back to the point that every context is different; understand yours and let others deal with their own.”