This article was published in The Guardian, by Rebecca Boden.
Tories insist private schools need tax breaks – but take it from an expert, they’re raking it in
One of Labour’s few firm policy commitments is to start charging VAT on Britain’s fee-paying schools, and full business rates on those in England as already happens in Scotland. This has generated a loud but often poorly informed debate as the Conservatives, ever-enthusiastic advocates for the independent sector, defend its tax breaks.
The UK has about 2,600 private schools (for-profit and charitable), and they are all exempt from VAT. Additionally, the 1,300 schools with charitable status pay no corporation tax, capital gains tax or stamp duty. They also benefit from capital gains and inheritance tax relief, and gift aid on donations. Records from 2020 show that Rishi Sunak and his wife, Akshata Murthy, have donated more than £100,000 to his old school, Winchester college. If they donated this from their own funds, and depending on how much UK tax they had paid, the school could claim an extra £25,000 in gift aid from HMRC, and Sunak and Murthy could claim back the difference between the basic rate and their higher rate of tax. Charitable schools also benefit from a minimum 80% rebate on business rates in England – Scotland recently changed its law and now charges schools the full amount.
These tax breaks, estimated to be worth more than £3bn a year, are termed “tax expenditures” by economists. These are a type of public expenditure: in public finance terms, they have the same effect as taxing the schools and the government then handing the money back as a grant. However, this expenditure is largely hidden from taxpayers because tax expenditures continue from year to year, and are not part of the annual parliamentary budget process. We don’t know the precise value of these tax breaks because there are no official published figures quantifying them.
The National Audit Office states that the government does not publish the information needed to scrutinise the value for money of this type of public expenditure. Social justice aside, the evidence suggests that taxpayers’ money is being spent very inefficiently because the private sector is extraordinarily well-funded compared with state schools. The Institute for Fiscal Studies (IFS) estimates current average fees for each private student to be £15,200 a year, compared with only £8,000 funding for each state sector pupil – a gap up from only £3,500 in 2009-10.
Many charitable schools have existed for centuries, but these tax breaks are relatively new. While the nine so-called “great schools” (including Eton and Winchester) were always exempt from taxes, the 19th century saw the emergence of newer private schools, which were liable to taxes. From the late 19th century, these made a series of unsuccessful legal challenges seeking the same tax privileges. Then, in 1927, their alumni in parliament successfully lobbied the then chancellor, Winston Churchill (an Old Harrovian), for all charities to be tax-exempt. This approach to tax law remains in place, and this history demonstrates that the schools’ tax breaks can be relatively easily wound back, independent of any inevitably complex changes to their charitable status.
Withdrawing tax expenditures can change consumer behaviour if the associated increased costs are passed on to them. The Independent Schools Council lobby group has argued that the imposition of VAT would be self-defeating, as significant numbers of parents would withdraw their children from private schools, with consequent unmanageable increases in state school rolls and reductions in anticipated tax revenues.
There are about 560,000-570,000 children in fee-paying schools and about 24,000 state schools in England (where most of the private schools are situated). Recent IFS research indicates that private school rolls might eventually fall by between 3% and 7% if the cost of VAT and business rates were passed on. That would add £100m to300m to the state education budget, and an extra 0.7–1.7 children for each state school. State schools in London and south-east England, where private schools are concentrated, are experiencing falling rolls at present. The IFS concludes that withdrawal of the VAT exemption and the relief for business rates would raise an estimated £1.7bn net a year, which Labour says it would put towards state school funding.
Of course, schools are not legally obliged to actually pass on the cost of the VAT or any other tax to parents via increased fees. School fees have risen by 20% in real terms since 2010 and many schools appear to be engaged in a luxury facilities arms race. Staff-student ratios have not changed, suggesting base costs are reasonably static. It therefore seems that the private sector has plenty of capacity to absorb the costs of VAT, business rates and other taxes.
Finally, it’s long been argued that tax breaks are justified because fee-paying parents save the state money by not using state schools. However, mainstream taxes are contributions to the commonwealth, not fees for individual services; the childless cannot get a tax rebate for not using schools.
These tax breaks are a largely hidden public subsidy to a sector already significantly better funded than state schools. Labour’s plans are a good first step, but there is now an indisputable case for removal of all tax privileges. In the long term, reform of these schools’ charitable status could ensure that their sizeable charitable assets are used to benefit all children, not just those whose families can afford to pay the high price for access to private education.