Is your school doing enough to prepare for VAT on school fees?

Schools need to start planning their response now as the prospect of VAT on school fees looms, writes Richard Harman

Richard Harman, chief executive of school governors association Agbis, worried about hybrid meetins

With spring in the air, and with pupil numbers in many of our schools looking strong, governors and senior leaders might be forgiven for thinking everything in the independent sector garden is rosy. But chill winds of change are blowing, and we need to be preparing for more challenging times ahead.

After 13 years in opposition, the Labour party is riding high in the opinion polls and starting to look and sound more like a government in waiting. Attention has turned to the likely key points of their manifesto for the next general election, to be held by the end of 2024.

Declared intention

One clear, specific education policy they have articulated already relates to independent schools. It is their declared intention to remove “tax breaks” from charitable private schools at the same time as imposing VAT on school fees.

This has been challenged robustly, both behind the scenes and in Parliament. The sums they claim it will raise to plough back into the state system (£1.6 billion per year, assuming a VAT rate of 20 per cent), do not really add up, since there would be significant displacement of pupils into the state sector that would end up costing the taxpayer money over the medium term. Not to mention the detrimental effect in local communities and economies of some private schools closing.

“Senior figures in Labour have reiterated the policy at every opportunity.”

What is depicted by Labour as a policy of fairness is, to others, a punitive approach to a sector that currently offers excellence and choice to the UK’s educational ecosystem. It could also end up piling more pressure onto beleaguered state schools and representing a net loss for the Exchequer.

In the face of this pushback, though, senior figures in Labour have reiterated the policy at every opportunity – including at PMQs and in an opposition day debate. What this tells us is that it is a high political priority for them. If they achieve a majority, it could well be enacted early in their time in office.

Charitable status

Some have reported this as being a threat to charitable status of independent schools itself, but it is worth making two points here.

“The proposal is to remove the tax benefits that go with charitable status, not charitable status itself.

Firstly, there is no proposal to legislate for the removal of that status per se, and indeed that would be difficult to achieve and open to significant legal challenge. Instead, the proposal is to remove the tax benefits that go with charitable status, whilst keeping in place the charitable duties and responsibilities of governors (where they are also trustees). As a reminder, tax benefits that might be at risk include Mandatory Business Rate Relief, exemptions from Corporation Tax, the ability to reclaim Gift Aid on donations, Capital Gains Tax and Stamp Duty in certain circumstances.

Secondly, the proposal to impose VAT on school fees would apply across the piece, both to those schools that are charitable (or to put it more accurately, are owned and operated by charities) and to those that are “for-profit”. So, in essence, this would be a double whammy.

VAT and charity law are both highly technical and complicated areas but, to cut a long story short, it looks likely that it would be possible for a new government to enact these policies, introducing the measures in a Finance Act and withdrawing existing VAT exemptions from schools quite speedily, in order to hit their intended target(s).

What should we be doing now?

On the basis that we should always hope for the best but plan for the worst, what should governors and senior leaders be doing now, in response to this clear threat?

Heads, bursars, and governors need to collaborate on timely and effective planning. Governors need to give their executive teams the necessary support and encouragement to continue delivering effective financial management alongside high-quality education over this period of change.

“All members of the governing body and SLT must be fully aware of the issues at stake.”

They should ask themselves some key questions: What impact would Labour’s proposed tax changes have on the school? How would they prepare for it and deal with it? Have they undertaken parental affordability analyses or recently assessed the local market in which they operate?

Schools need to ensure that all members of the governing body and SLT are fully aware of the issues at stake and the nature of the threats. They should all have read the joint ISC/Association Executives’ letter sent in October 2022. Governors and senior leaders should be attending relevant events (webinars, seminars, conferences) put on by AGBIS, ISBA and the heads’ associations.

Scenario planning

Have the governors asked the SLT to do scenario planning as to what the impact might be if Labour’s tax policy were implemented in the next two or three years? Are the risks identified in terms of timing and effect?

For example, do risks combine to make a particular year, or part year, more difficult than others? Also, how well does the school know its current and future parents and how they might pay fees? Leaders will need to assess what impact 20 per cent VAT (and higher fees more generally) might have on affordability and consequently on pupil numbers, fee income and the school’s financial reserves.

“Do risks combine to make a particular year, or part year, more difficult than others?”

An important question is whether the school would need to pass on the full VAT rate to parents or whether it could absorb some of the burden, and if so, how? What impact would the loss of charitable reliefs (aside from VAT) have on fees?

Charitable schools should consider potential restructuring that might assist them ahead of any changes and will need to take legal advice as appropriate. Five-year forecasts will need to have been stress-tested against a range of scenarios.

Then, consideration must be given to what actions are needed to mitigate the risks, immediately and in the medium term. For example, reviewing the reserves and investment policies, levels of surplus, fees in advance schemes (noting the risks) and fee remission levels and policies. Careful cost management, TPS membership, staff/pupil ratios, class sizes, curriculum and the number and the staff establishment all need to come under review.

Strategic plans

Schools will need to review how Labour’s tax policy, if implemented, would affect their five- to ten-year strategic plans. Do they need revisiting? If Governors are also charity trustees (ie, the school has charitable status), they will need to consider what is in the best interests of its assets, reputation and beneficiaries in terms of planning for the impact of Labour’s policy.

“In business, cash is king.”

Have governors and the SLT discussed a near-term sustained, strategic communications plan to build understanding and support among internal and external stakeholders? Leaving it until the changes come to pass will be too late.

Bursars and heads can use the ISC’s excellent local economic impact tool which allows them to quantify the school’s local economic impact (an ISC member login is required).

And always remember that the school is also a business, and, in a business, cash is king.

This article first appeared in the latest print edition of Independent School Management Plus magazine, out Monday, May 1.