One of Labour’s key policy commitments is to impose VAT on private schools in the UK, and to enforce full business rates on those in England as is currently done in Scotland. This decision has sparked a spirited, albeit often ill-informed, debate. The Conservative Party, known for their support of the independent education sector, staunchly defends the tax breaks enjoyed by private schools.
Currently, all 2,600 private schools in the UK, both for-profit and charitable, are exempt from paying VAT. Additionally, the 1,300 schools with charitable status are not required to pay corporation tax, capital gains tax, or stamp duty. These schools also benefit from capital gains and inheritance tax relief, as well as gift aid on donations. In 2020, it was revealed that Rishi Sunak and his wife, Akshata Murthy, had donated over £100,000 to Sunak’s former school, Winchester College. If this donation was made from their personal funds, and depending on their UK tax payments, the school could claim an additional £25,000 in gift aid from HMRC, while Sunak and Murthy could reclaim the difference between the basic rate and their higher rate of tax. Charitable schools in England also receive an 80% rebate on business rates, although Scotland recently changed its law, now requiring schools to pay the full amount.
Economists refer to these tax breaks, estimated to be worth over £3 billion annually, as “tax expenditures.” In terms of public finance, they have the same effect as taxing the schools and then granting them the money back. However, these expenditures often go unnoticed by taxpayers because they continue year after year and are not part of the annual parliamentary budget process. The lack of official figures quantifying these tax breaks further obscures their precise value.
The National Audit Office has stated that the government does not release the necessary information to assess the value for money provided by this type of public expenditure. Setting social justice concerns aside, evidence suggests that taxpayers’ money is being allocated inefficiently, as the private education sector is significantly better funded compared to state schools. The Institute for Fiscal Studies (IFS) estimates that the average fees paid by private school students currently amount to £15,200 per year, while state schools receive only £8,000 in funding for each pupil. This gap has increased from £3,500 in 2009-10.
Many charitable schools have a long history, but the tax breaks they enjoy are relatively recent. While the so-called “great schools,” including Eton and Winchester, were always exempt from taxes, newer private schools emerged in the 19th century and were initially liable to pay taxes. In the late 19th century, these schools attempted to challenge their tax liability through legal means but were unsuccessful. In 1927, alumni of private schools in parliament successfully lobbied Winston Churchill, who was an Old Harrovian himself, to grant tax-exempt status to all charities. This approach to tax law remains in effect, indicating that it is possible to scale back the tax breaks received by private schools without substantially changing their charitable status.
The withdrawal of tax expenditures can influence consumer behavior if the resulting increased costs are passed on to parents through higher fees. The Independent Schools Council, a lobby group representing private schools, argues that implementing VAT would be counterproductive, as many parents would opt to remove their children from private education. This could lead to an unmanageable increase in enrollment at state schools and a subsequent decrease in expected tax revenues.
In England, there are approximately 560,000-570,000 children attending private schools, while there are around 24,000 state schools. Recent research conducted by the IFS indicates that private school enrollment could ultimately decrease by 3% to 7% if the cost of VAT and business rates were passed on to parents. This would result in an additional £100 million to £300 million being allocated to the state education budget, along with an extra 0.7 to 1.7 children per state school. Currently, state schools in London and southeast England, where private schools are concentrated, are experiencing declining enrollment. The IFS estimates that removing the VAT exemption and business rates relief could potentially generate a net income of £1.7 billion per year, which the Labour Party proposes redirecting to state school funding.
Of course, schools are not obligated to pass on the cost of VAT or any other taxes to parents through increased fees. However, it is worth noting that private school fees have risen by 20% in real terms since 2010, and many schools appear to be engaged in a competition to provide luxurious facilities. The student-to-staff ratio has remained unchanged, indicating that base costs are relatively stable. Therefore, the private education sector seems capable of absorbing the costs of VAT, business rates, and other taxes.
It has long been argued that tax breaks for private schools are justified because fee-paying parents save the state money by not utilizing state schools. However, taxes are contributions to the collective welfare of society, rather than fees for individual services. Those without children cannot claim a tax refund for not using schools.
These tax breaks are essentially a hidden public subsidy provided to a sector that is already significantly better funded than state schools. While Labour’s plans represent a positive initial step, there is now an undeniable case for eliminating all tax privileges enjoyed by private schools. In the long term, reforming the charitable status of these schools could ensure that their substantial charitable assets are utilized for the benefit of all children, not just those from privileged families who can afford private education.
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Rebecca Boden has recently retired as Professor and Director of New Social Research at the University of Tampere, Finland. Her research on private schools and tax advantages has been conducted in collaboration with Professor Jane Kenway and Dr. Malcolm James.
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