Changes to Schools Charitable Status and Other Tax Breaks – Existential Threat or Paper Tiger?
Craigmyle schools week Day one
This article draws on views expressed in the serious press, views of leading charity lawyers and statistical data from the Institute for Fiscal Studies (IFS).
For anyone involved in educational affairs for many years there is a distinct sense of déjà vu when the periodic threats to charitable status of private schools rear their head. The latest package of such policies from the Labour party only survived a few weeks before being radically recast explaining that ‘removal of charitable status’ was code for revising the position on VAT and Business Rate Relief and did not mean ‘removing charitable status’.
This backtracking or radical recasting is hardly surprising as it has ever been the case that writing the legislation to remove charitable status from private schools has, and always will be, a daunting challenge. The challenge is to distinguish between the targeted private schools deemed to be the preserve of the privileged middle classes and unworthy of their charitable status, and the thousands of other educational fee-charging establishments commonly providing education tailored to children with a vast spectrum of special educational needs. All this against a background of ‘the advancement of education’ being defined in law as a charitable purpose.
The last time that there was a serious challenge to charitable status for private schools was the newly crafted requirement for a charity to demonstrate public benefit introduced by the 2011 Charities Act and which was quite energetically applied to private schools by the Charity Commission. Most private schools had little difficulty in demonstrating their public benefit as most private schools have a tradition of providing a meaningful level of bursaries for ‘poor pupils’, poor pupils being the term of reference adopted at this time by the Charity Commission. The daunting challenge of legislating on this specific is well demonstrated by the successful action that The Independent Schools Council took against The Charity Commission on the prescriptive approach the Commission was applying. The Upper Tribunal of the Tax and Chancery Chamber ruled against the prescriptive approach adopted by The Charity Commission and ruled that the judgement on what is a meaningful level of provision and above de minimis should be determined on a case-by-case basis by local trustees taking into account the unique circumstances of each school.
The new reaffirmed threats remain and relate to the imposition of VAT on private schools and the removal of the 80% mandatory relief on buildings owned by charities and used solely for charitable purposes.
The first determinant will of course be the outcome of the next election.
Assuming a Labour victory, the probability of the eventual introduction of these tax changes is generally considered to be quite high. However, it will not be a simple affair as legislation will still need to distinguish between the targeted private schools and the specialist schools referred to earlier. In many cases fees at specialist schools are actually paid for by local authorities and presumably any future government will not want to increase their costs. There will need to be extensive consultation and planning before changes are implemented.
The impact on private schools – quantitative
The Institute for Fiscal Studies (IFS) estimates that the net cost of VAT to schools, allowing for the VAT that schools would be able to reclaim, would be 15%. IFS further estimates that this is likely to lead to a 3-7% reduction in private school attendance. This is in line with the relatively weak effect of increases in fees on demand for private schools: numbers have held steady over the last 20 years (560,000 -570,000 pupils in England) despite a 20% real-terms increase in fees since 2010 and a 55% rise since 2003.
The general view is that any reductions that do occur are likely to be spread over several years as parents will be reluctant to curtail their children’s attendance at their private schools when they are settled and only partway through a critical period in their education. Most reductions therefore will not be the removal of children from private school, but rather parents deciding in the future not to send their children to private schools.
The impact on private schools – qualitative
While the numerical impact on private schools may not necessarily be fatal, the increasing deterioration in the affordability of private schools will continue the narrowing of the social mix apparent in many schools in recent years: wealthy families who are not price-sensitive and poor families benefitting from bursaries. The comfortably-off middle classes are being priced out of the market. A matter on which my colleague Mark Jefferies will be expounding tomorrow.
The impact on maintained schools
It has been argued by some that vast numbers exiting from private schools will generate an overwhelming demand on places in maintained schools. The reality is that demographic projections predict that pupil numbers in maintained schools will fall by at least 100,000 a year on average up to 2030 freeing more capacity that the total number of children attending private schools. Critics of private education are not concerned with the narrowing of social mix in private schools, but see the move of more middleclass families to the maintained sector as broadening the social mix in maintained schools.
The ability of the maintained sector to absorb any increase in demand arising from pupils leaving or not going to private schools, at relatively low marginal costs indicates that the imposition of VAT and the removal of Business Rates Relief will yield approximately £1.6 billion (IFS) which a future Labour Government has pledged to spend on increased special education provision across the maintained sector.
As already mentioned, assuming the required election result, it will still be some time before the threatened changes are applied. So much detail to sort out. Perhaps there will be a benign regime in which VAT will only be applied to new parents and all those who budgeted on known fees will be exempt for the remainder of their children’s education (hope springs eternal).
Some mitigation options for private schools
- Once the detail of the new tax position is known financial experts will be devising VAT avoidance schemes which may reduce the full impact
- Assuming the net cost to the schools is 15% of an applied 20% rate it would be unfair to levy the full 20% to parents without adjusting the fee base to reflect the actual cost of 15%
- Absorb the increases in whole or part by reducing fees based on internal economies, maybe even the holy cow of class-size
- Recognition of greater importance of part bursaries
- Raise financial threshold for bursary qualification
- Raise more bursary funding to extend affordability further
- Achieve academy status and move to maintained sector
The determinants of parental choice of education for their children are far more complex than just money and far more complex to be explored fully in this article. It is to be hoped that choice will remain as broad as possible for all.