After-school clubs and long-term boarding rules could provide loopholes that would allow private schools to lower their tax burden if a Labour government were to impose VAT on fees, sector experts have told Tes.
And one independent school head told Tes she was feeling “optimistic” that a Labour government’s VAT policy would not have “as bad” an impact as first feared, as legal options have emerged that could mean a proportion of fees could be exempt.
Sir Keir Starmer confirmed last week that a Labour government would remove private schools’ VAT exemption in order to provide more funding for state schools.
The announcement was widely condemned by the private school sector.
Libby Nicholas, director of Dukes Education, said the move could be seen as ”an attack on aspiration and social mobility”, while David Walker, director of the Boarding Schools’ Association, told Tes the policy could “threaten the viability of hundreds of UK independent schools”, harming local economies, with some schools even at risk of closure as a result.
VAT ‘loopholes’ for private schools
But Christine Cunniffe, principal of LVS Ascot, an independent school in Berkshire, said she now feels “quite optimistic” about the prospect of policy, which could result in independent schools being charged 20 per cent on their fees.
Tax specialists are advising that there are a number of “recoverables” that mean schools could avoid having to pay VAT on all fees, Ms Cunniffe said.
These include exemptions for activities that are held outside of core school hours and legal rules that apply to boarders who stay in accommodation for longer than 28 days.
Kevin Hall, tax specialist at Wright Hassall, said that after-school care is currently exempt from tax if it meets certain guidelines. These include if the service is “looking after young children” and is run by qualified teachers, he said.
After-school clubs are exempt from VAT charges as they provide a “welfare service”, according to HM Revenue and Customs (HMRC). These services must involve “care or protection of children and young persons”, rather than an activity-based club like dance classes.
Mr Hall said it is possible that Labour could choose to just charge private schools VAT for their teaching and overlook other welfare services like the “after-school club”, which would “remain exempt”.
Private schools routinely provide breakfast and homework clubs on top of core teaching timetables.
However, creating such a complex system, where some parts of the school day are taxed and others are not, may cause problems for Labour when deciding how broad the policy will be, experts have warned.
Richard Staunton, a partner at chartered accounants Gerald Edelman, said Labour’s policy could result in “unrealised consequences” that lead to any law becoming “extraordinarily complicated” due to the different legal categorisation of after-school care.
One independent heads’ leader said this proposal could become “tricky” for Labour in terms of the “legal nitty gritty” of the policy.
“As with all of these policies, it’s all about the detail. It’s all about how it’s going to fall,” they added.
Reduced rates for boarding students
Boarding student fees are another “grey area” that could be exempt from VAT, Mr Staunton said.
Under HMRC’s 28-day-rule, hotel or similar accommodation will only be charged “a quarter of the value” after the 28th consecutive day a person occupies a room. From that point, VAT drops from 20 per cent to 4 per cent.
Mr Staunton said this means that fees for boarding students would only be subject to full VAT for the first four weeks, and then a quarter of that rate for the remainder of the school year, as long as no one else occupies the room during their stay.
It is unclear whether this would renew for each school year or would apply to the whole time the child is boarding.
As well as claiming reduced VAT on boarding fees and exemptions for after-school clubs, there is also the option of delaying capital projects, such as large works on school buildings, under the Capital Goods Scheme.
Under the scheme, if an organisation acquires or creates an expensive capital asset, or already has one when it is registered for VAT, the amount reclaimed may have to be adjusted using the Capital Goods Scheme, which allows the initial tax bill to be spread over a number of years.
Julie Robinson, chief executive of the Independent Schools Council (ISC), said that it is not possible to speculate on what schools can do given the “lack of detail” provided by Labour on its “proposed tax on children’s education.“
However, she confirmed that “schools will be considering a variety of options” in terms of easing cost pressures on parents.
Ms Cunniffe said schools will need to get “creative” to ensure that they are “not passing on too much to the parents”.
“The smart schools will be ones that will start looking ahead, delaying particular projects until the election is gone by and looking at how services are packaged,” she added.
If Labour wins the next election, it will need to bring in legislation to change the status of VAT in order to tax private schools, and this could clarify the grey areas surrounding the potential policy.
Labour was approached for comment.
