How will Labour's plans for imposing VAT on private schools work?

Who should read this?

This article focuses on the clear path to changing the VAT liability of fees charged for private education, which was confirmed in the Labour Party Manifesto published on 13 June 2024.

Labour Party plans

The Labour Party Manifesto makes it clear that VAT will be imposed on private school fees. We understand that the change will be made as soon as parliamentary time allows and will apply to full-time education provided to children of compulsory school age, in line with the Department of Education’s definition of regulated independent schools. Page 10 of The Labour Party Manifesto lists “Labour’s first steps for change” and includes a pledge to “recruit 6,500 new teachers in key subjects to prepare children for life, work and the future, paid for by ending tax breaks for private schools.”

• It seems clear that the imposition of VAT will be a priority in Labour’s first budget, should it win the election on 4 July.
• We assume that the VAT changes will include some element of anti-forestalling measures, designed to limit prepayments of fees.
• We will wait to see the effective date for the introduction of VAT.

The Labour Party has previously made it clear that VAT will be imposed on boarding fees. It would be reasonable to conclude that VAT will also be imposed on other services which HMRC already consider are closely related to the provision of education. This would include:

• Catering
• Transport
• School trips
• Field trips

Although The Manifesto does not go into detail on the legislative changes required to impose VAT, it does endorse the calculations undertaken by the Institute for Fiscal Studies (IFS) in its report published in July 2023.

Page 127 of the Manifesto states that this measure, together with removal of business rates relief will raise £1.51bn per year, close to the IFS assumption of £1.6bn. The IFS report assumed that VAT would be imposed on boarding fees.

Education, health, and care (EHC) plans

EHC plans are for children and young people aged up to 25 who need more support than is available through special educational needs support. EHC plans identify educational, health and social needs and set out the additional support to meet those needs.

The Labour Party has confirmed that the changes to the VAT treatment of private school fees will not apply to children and young people with EHC plans in place.

How would the change be made?

Any changes must unpick the current VAT exemption. Private schools secure exemption for education and the provision of related goods and services because they are “eligible bodies”, as defined by the VAT Act.

A private school may be an eligible body for either or both of the following reasons:

• It is a school. HMRC use various Education Acts to support the use of that term.
• It is a charity.

Revised VAT law will need to:

• Remove independent schools from the Education Acts currently used a reference tool for eligible body status in the VAT Act.
• Remove the VAT exemption from a defined cohort of independent schools which are also charities. This must be achieved without the unintended consequence of the loss of VAT exemption for other charitable and third sector organisations.

Once these changes are made, private schools can no longer rely on the VAT exemption for the fees charged for the provision of education.

To achieve the intended outcome, HM Treasury solicitors should specify that closely related goods and services are included in any legislative changes as specifically liable to 20% VAT. This additional change matters because several closely related supplies may otherwise qualify for VAT relief. For example:

• Boarding fees may be exempt from VAT as the provision of welfare services.
• Coach transport would be zero-rated.
• School trips and field trips could be liable to a reduced rate of VAT as a packaged travel service.

Finally, the law will need to preserve the VAT exemption for children and young persons with an EHC plan in place.