As of next year, private schools will no longer be exempt from VAT.
Current Status of Private Schools
Currently, private schools have a legal exemption as organisations providing education, which means they don’t have to charge VAT on their fees.
Additionally, around half of private schools in England are charities, meaning they get an 80% reduction on business rates. They can claim gift aid on donations and avoid paying tax on their profits, which must then be reinvested in education.
VAT Now Added
Under the new Labour Government, private schools will retain their charitable status but the standard rate of VAT will be added to private school fees starting from 1st January 2025. This means that those paying for private education will have to pay an additional 20% on schooling fees.
Private schools which aren’t already registered for VAT should not apply to HMRC to register yet, as further guidance will be published in the future on what steps to take.
Estimated Gain or Cost
Under Labour Party estimates, the policy would raise £1.7 billion, with 65% of revenue being lost as a result of more children entering state schools, which would mean an overall gain.
Under Conservative Party estimates, the policy would raise £950 million, with 123% of revenue being lost, acting as an overall cost.
In 2023, the Institute for Fiscal Studies (IFS) estimated that removing tax exemptions from private schools would raise around £1.6 billion a year in extra tax revenue. They predicted that even if demand for private schools decreases due to price-increases from added VAT, spending elsewhere on other goods or services would likely increase.
“If parents decided to stop paying for private school fees as a result of the extra VAT, this would release spending on fees that would likely be spent on other goods and services, thereby generating extra VAT revenues.”
The IFS predicted that if private school attendance drops as a result of these price increases, state schools will then require additional funding in order to accommodate the extra students.
“Our best judgement is that it would be reasonable to assume that an effective VAT rate of 15% would lead to a 3–7% reduction in private school attendance. This would likely generate a need for about £100–300 million in extra school spending per year in the medium to long run.”
Therefore, the IFS overall estimate an overall net gain of £1.3-1.5 billion per year to the public finances in the medium to long run. Based on these figures, this would allow for an increase of around 2% in state school spending in England.