Steve Hodgetts

Written by: Steve Hodgetts and Rachel de Souza

Steve Hodgetts

Partner

The impact of removing tax breaks for independent schools

Last week, the Daily Telegraph reported on a leaked shadow Treasury document which revealed Labour proposals to impose VAT on independent school fees and remove their discounted business rates. 

To some extent, this should not come as a surprise. The 2017 Labour manifesto promised to introduce free school meals for all primary school children paid for by removing the VAT exemption on private school fees.

If the VAT-exemption for independent schools were removed, the key question would be whether VAT were applied at a reduced rate or at the standard rate (currently 20 per cent).

Regardless of the rate applied, not every school would be impacted in the same way, as VAT is recoverable on costs. For the larger independent schools with significant capital spend on buildings and facilities, the impact may not be as severe as on smaller day schools and prep schools. 

The extent to which schools passed on the additional cost of VAT would also vary. Some schools could decide to reduce the base level of fees so that the impact of VAT on the end consumer, the parent is reduced.

As regards business rates, charitable business rates relief currently equates to an 80 per cent discount. The cost of the loss of this relief would vary from school to school. Again, each school would need to make a decision as to how much of the cost could be absorbed and how much would be passed on to parents in fee increases.  

What will be of greater concern to independent schools is the suggestion that the party could look at abolishing private schools altogether and redistributing their assets. That this is even being discussed could feasibly encourage more independent schools to seek to separate aspects of their charitable education services from their property assets.

So what might the options be for parents faced with higher fees? 

Short of applying for bursaries or scholarships, there is little parents would be able to do to ease the financial strain. 

One option could be to consider paying several years of fees upfront in advance of any changes coming into force. Aside from needing to have the cash available, this approach would be risky, as there could be any number of reasons why a child would need to move school. 

Asking grandparents to help out is another option. If grandparents have excess income, paying the school fees would be efficient from an inheritance tax perspective. Alternatively, they could set up a UK trust for the child. Any investment income would be taxable but when the trust pays the school fees, the child could claim back the tax paid on the investments. This could be worth considering where grandparents have spare capital to give away.

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