What will happen when VAT is added to private school fees?

Big changes are coming for the UK’s private schools.

From January next year, they will no longer be exempt from paying 20% VAT, and the 80% business rate discount will also be removed for independent schools in England and Wales that operate as charities.

It’s hard to know quite what will happen because there’s no real precedent for such a move.

Two central questions are how big a reduction in the numbers of children going private will be and whether the state sector is ready to provide for those who would otherwise have gone private.

Nowhere is the debate fiercer than in Edinburgh. It has one of the highest concentrations of privately educated children in the country - 21% of secondary pupils, by one measure, well above the 5.9% UK average.

One of them is George Heriot's School. Squint and it could be Hogwarts. Long believed to have been the inspiration for the school in Harry Potter, George Heriot’s has stood for nearly 400 years, commanding spellbinding views of Edinburgh Castle and accruing an impressive alumni.

The building's imposing façade and domed turrets may make it seem as though the school is impervious to change, but today it’s in the crosshairs of the plans by the new Labour government to raise taxes on private schools.

“It is keeping people awake at night, for sure,” explained Louise Gibson, who has three children at Heriot’s, where senior school fees are currently £17,426 a year.

Mrs Gibson, who is self-employed and runs her own recruitment company, will have to pay an extra £700 a month if the school passes on the full VAT rise to parents.

“I’m not pretending we are one of the families worst affected, but we’ll have to massively reduce our consumer spending,” she said, and added that she’ll be cutting back on holidays and paying into her pension.

George Heriot’s had already increased fees by 6% for the 2024/25 year, and while it’s unclear what will happen with the VAT increase, the last letter it sent to parents suggested the school won’t absorb all of those costs.

Mrs Gibson set up a Facebook group for parents concerned about the fee hike, which attracted more than 1,000 followers in the first day. It’s littered with comments from parents despairing at the policy and wondering how they will afford the increase.

“I’m realistic, I don’t think there is much sympathy for people in this situation, but there is a real lack of understanding of private schools and the people who go there,” she said.

“There are plenty of families at these schools who don’t go on foreign holidays, who scrimp and save to pay for children go to them because they feel it is the right thing for them – and that choice is now under threat.”

Research by the Institute for Fiscal Studies (IFS) think tank in 2022 said 75% of children at private school came from families in the wealthiest 30% of households, with most of those coming from the richest 10% of households.

Despite parents' concerns, the IFS has this year said predictions the VAT policy spells the end for independent schools are wide of the mark.

The IFS predicts the VAT hike will lead to a reduction in private school attendance of somewhere between 3% and 7%.

But this figure is disputed. The Independent Schools Council points to a 2018 report, drawn from surveys of tens of thousands of parents in around 150 UK private schools, which suggested 10.7% of pupils were likely to be withdrawn by the end of the first year of VAT being introduced, with a further 6.4% drop-off over the next four years.

In truth, it remains unknown just how many parents will pull their children out of private school or will be put off sending their children to them in the first place.

The IFS report found the number of private school pupils has been largely stable in recent years despite what it says was a 20% real-terms increase in average private school fees since 2010, and a 55% rise since 2003.

In Edinburgh, many of its private schools have put their fees up at above-inflation rates in recent years. George Watson’s College, Scotland’s largest private school, is one high-profile example, after it announced a 9% rise in May.

However, this has not deterred many parents. Fettes and Merchiston, Edinburgh’s most expensive schools, have boarders and attract both UK and international students. Around 20% of pupils at the schools are from neighbouring local authorities and commute to Edinburgh - with some filling coaches of pupils every day.

A decade ago, warnings were being issued about how private school was an increasingly unaffordable option for many in the UK, with increasing numbers of students coming from overseas and fees have continued to climb ever since. In 2021, figures showed that school fees had grown 20% beyond inflation since 2009. However, student numbers have not diminished as a result.

Stuart Adam, a senior economist at the IFS, said most people paying school fees have simply been able to absorb these increases as they are wealthy.

He said: “We have seen this huge rise in fees and we haven’t seen a massive shrinkage of the sector which might suggest that the price of private education going up does not drive people out in large numbers."

The IFS estimates the policy will generate an extra £1.3 to £1.5bn for the UK government. Mr Adam says it reached this figure by calculating that parents who stop spending their money on private school fees will eventually spend the extra money on other goods and services, generating extra VAT revenue.

The spectre of state schools unable to absorb an influx of children who would otherwise have been at private school has been raised by some of those critical of Labour’s policy.

According to the IFS, an ongoing decline in birth rates means there will be fewer children who need to fill school places - this is predicted to be a drop of 700,000 pupil places between now and 2030.

“The birth rate and the number of kids at school is going to fall by quite a bit in the coming years so actually even if there is a large number of people moving from the private to state sector then that’s only going to fill in a fraction of the gap in state school places caused by the previous fall in the birth rate,” he said.

Mr Adam acknowledged the one big caveat to this drop is the reduction will not fall evenly across the UK, adding “geographically there might be pinch points where it is an issue”.

It is this issue of pinch points which will be the acid test of the VAT policy in Edinburgh.

The city’s most in-demand state schools are in catchment areas with significant numbers of children who attend private schools. So if even a modest number of the 9,310 pupils privately educated in Edinburgh move to the state sector, would it bring more pressures than in an area with a smaller population of private school kids?

Louise Gibson says she enquired about spaces at her local state school but was told there is no room.

But according to the minority Labour administration which runs the City of Edinburgh Council, a capacity review of its school pupil numbers published in April found the equivalent of an additional 3,700 places which can be created, with overall capacity for 12,700 more pupils across the city.

The methodology for this review included space-creating ideas such as an end to the traditional ‘one classroom, one teacher’ approach” and it has been met with scepticism by the teachers and parents at the busiest of schools.

The local authority has started on extensions and planned new-builds to create extra space in areas where people are moving into new housing developments. It’s unclear exactly how many children will be able to be absorbed as a result of these changes.

The school Mrs Gibson was trying to get her children into currently does indeed have no spaces and a waiting list. However by the start of the 2025 academic year it is theoretically meant to have 140 extra spaces. It is not known how many of those extra spaces will immediately be filled.

Her experience would suggest there are pinch points where local state schools are not able to easily absorb any extra pupils who would otherwise have gone to private school.

But there is going to be more overall space in state schools in the coming years as the effect of the ‘baby boom’ of the early 2000s peters out.

The row over VAT on private school fees will likely be a worry for some, with a legal challenge to the policy expected.

But Francis Green, professor of work and education economics at University College London, said the “hullabaloo” about the policy is out of kilter given the amount it is projected to raise - 2.6% of the £57bn England schools budget.

“The policy has acquired a symbolic significance, almost beyond its practical impact,” he said.

Chancellor Rachel Reeves has said the money raised will be spent in the state education sector across the UK, including funding 6,500 new teachers in England.

The extra levies on fee-paying schools mean most will put their fees up - and by how much is up to them. Eton College, arguably the most famous private school in Britain, has announced it will pass on the full 20% increase to parents, making its annual fees £63,000. But other organisations have opted to pass on a lower proportion of the cost to parents.

At George Heriot’s School – which was founded in the 17th century to provide for some of Edinburgh’s poorest children – Mrs Gibson claimed a “pain point where people will not be able to afford to go beyond” will arrive with the fee increase.

Edinburgh’s status as Scotland’s epicentre of private schools, and the prestigious people who studied at those schools, have helped it maintain its reputation as Scotland’s place of power and wealth. It’s maintained this for centuries with little disruption, so the VAT change is potentially a challenge.

With the projected fall in the school-age population, it appears the challenge for the state sector to accommodate potential extra children is one, local pinch points excepted, that it can largely manage.

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