Applying VAT to independent school fees could actually cost rather than raise money and even harm underprivileged children, a new report from the Adam Smith Institute (ASI) claims.
The think tank says that applying VAT could raise “no money at all” and even – in a less optimistic scenario – end up costing £1.6bn.
The report finds that the policy could also harm other children by creating a mass exodus to the state system, intensifying competition for the country’s best state and grammar schools.
It could also reduce bursary and scholarship opportunities for talented youngsters, it adds.
ASI’s head of research, Maxwell Marlow, warned that Greece, which levied 23 per cent VAT on private schools in 2015, was “already suffering the numerous economic and social consequences of applying VAT to school fees” and urged policymakers “to exercise caution.”
“Under the IFS’ optimistic scenario, only a limited number of parents will no longer be able to afford fees, and will move their children to the state sector,” a press release from the ASI says.
It adds: “But the ASI’s research shows that there’s a reasonable chance that many more children will have to migrate to state school.”
Mr Marlow, the report’s author, has calculated that every parent who earns money, pays tax at a 40 per cent rate, and sends their child to an independent school, generates £28,000 every year for the Exchequer.
The ASI’s report looks at the many potential economic effects of the tax, including schools closing down, and teachers leaving the workforce.
It found that, if between 3 and 7 per cent of children left for the state sector, it could raise a net £1.02 billion.
If between 10 and 15 per cent of children left to be state educated, it could raise no money at all.
If a quarter of all children moved to the state sector, which other research has suggested is a possibility, it could actually cost the Exchequer £1.6 billion, the report says.
The ASI also notes that, in 2015, Greece applied a 23 per cent VAT charge on independent school fees, which led to schools closing, teachers being made redundant, and an overwhelmed state sector.
Mr Marlow said: “Britain’s independent schools are good for the economy- taxpaying parents who send their children to one are removing extra costs and burdens from the state sector, and are contributing to public finances.
“But applying VAT to school fees puts all this at risk, and counter-intuitively may not raise any money at all. In fact, this might actually cost taxpayers.
“Our new report shows that, not only is there a chance it won’t raise money for state schools, it could harm underprivileged children by further overwhelming the already struggling state sector, reducing bursary and scholarship opportunities for talented youngsters, and pushing others out of popular state and grammar schools.
“And we risk staff redundancies and the closure of small, local independent schools who cannot absorb the costs.
“Greece is already suffering the numerous economic and social consequences of applying VAT to school fees we warn about in this paper. We urge policymakers to exercise caution.”